In private equity, 'break-even' sometimes can be a win.
FORTUNE — Sometimes the best private equity strategy is to wait it out.
Several years ago, Madison Dearborn Partners was really sweating its June 2007 decision to lead a $6.4 billion acquisition of Chicago-based mutual fund manager Nuveen Investments. The deal had been done at a 20% premium to where Nuveen was trading, even though the stock markets were at record highs. Soon came the collapse, with financials like Nuveen hit particularly hard. Madison Dearborn would soon write down its investment and discuss strategic options whereby it could minimize its losses. In the end, however, it basically stood pat.
By late last year, Nuveen’s performance had begun to improve. EBITDA had climbed to $404 million, compared to $327 million for 2007 (and $253 million for 2009). It also was profitable.
Most importantly, Nuveen had a suitor: TIAA-CREF,
The two sides quietly discussed a deal for the past four months, without Madison Dearborn hiring a bank to solicit alternate buyers. Those talks culminated in this morning’s announcement that TIAA-CREF will buy Nuveen for approximately $6.25 billion, including the assumption of around $4.5 billion in debt.
Felix Salmon suggested earlier today that this outcome is a major loss for Madison Dearborn, given that it only will get around $1.75 in cash compared to the $2.7 billion it invested back in 2007. But I think his math here is a bit too simplistic.
In addition to its $1.75 billion, Madison Dearborn will receive all of Nuveen’s balance sheet cash. It also had investments in a variety of Nuveen-related “seeding” products over the years, which will get bought out. Those two items come out to a combined $600 million or so. Second, Madison Dearborn will generate returns from another Nuveen-related investment, which was effectively a CLO. Third, Madison Dearborn had several co-investors on the original buyout, including financial institutions like Citigroup and Deutsche Bank. One of its partners — I’m not sure which one — sold its Nuveen stake to Madison Daarborn at a distressed price during the financial crisis, thus lowering Madison Dearborn’s cost basis. Finally, there is a small (and undisclosed) three-year earnout on the deal.
Without the earn-out, Madison Dearborn basically breaks even on Nuveen. If the earn-out is achieved, then it comes out slightly ahead.
To be sure, Nuveen is an overall loss for Madison Dearborn Partners — if only because a “push” on price doesn’t account for all the hours spent both before and after the original investment. But considering that this thing looked like a massive crater just a year or so ago, it’s hard to blame the private equity guys for celebrating their own patience a bit today…
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