“Petco Files IPO, Plans Return to Public Markets” is a Wall Street Journal story about Petco, which keeps going back and forth between private and public. The private equity guys last purchased the company from public shareholders in 2006 for $1.7 billion. Now they will sell it back to the public for $4 billion. So a starting theory could be that they collected $2.3 billion from the public shareholders. “8 Takeaways from Petco’s IPO Filing” is a follow-up WSJ piece noting that “Since TPG and Leonard Green took Petco private, they’ve received two dividends. The first one came in 2010, when Petco made a cash payment to its PE owners of roughly $700 million. Moody’s estimates this payment returned over 85% of the equity invested in the company by its owners. In 2012, the company made another dividend payment of roughly $589 million.” In other words, whatever the private equity guys put at risk has been completely paid back. The money that comes from this IPO and the value of their remaining holdings will be gravy.
Presumably it is successes like this that keep people excited about private equity.
It’s the idiots who participate in the rigged system known as “public markets” that are the real shills in all of this.
That would be marks, not shills.
Private equity is the only game in town, nowadays. It’s much more lucrative to buy back stocks with interest free credit than invest in R&D or hire people.
A lot of my clients are in the private equity business (small caps – under $50 million) and the economics are very attractive. Say you buy a business with 20% equity and 80% a combination of bank debt and subordinated debt (secured by the company’s own assets). In a few years, the value of the business has doubled, so you take out the high interest subdebt with all bank debt at low rate, plus you take out all your original investment plus maybe a couple more million, and you still own all the equity. Then in a few more years it has doubled again and you sell the company and receive many times your original investment and an astronomical ROI. Sometimes the company does poorly and you lose your original investment but 1 success can pay for many flops.
Dunno. Getting an IRR of 26% and me thinks that is a generous number. Don’t get me wrong, 26% is a fantastic return but they were locked in for a good 9 years, were junior on the cap structure, etc. etc.
Here is the math (amounts in mm):
6/15/2006 765
6/15/2010 -700
6/15/2012 -589
8/15/2015 -3000
=xirr(…) = 26.5%
I have subtracted $1B for the debt.
Source: http://www.sbs.ox.ac.uk/sites/default/files/Private_Equity/Docs/petco-b-new.pdf
and NYTimes article.