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voice of the deal economy

vol.

8 no. 22 november 15november 28 2010

Masters of the universe, again


After a two-year drought, JLL Partners is awash in investment gains from portfolio companies
By david carey

Lofty vaLuations, a revival in lending

and an improving, if still fitful, market for initial public offerings have spawned the biggest surge of profit taking in the buyout business since the financial crisis began. Private equity-backed exits in the u.s. topped $210 billion in the second and third quarters combined, the most in nearly three years, according to research firm PitchBook Data inc. Dividend recapitalizations, too, are back in vogue. though the spate of realizations may not qualify as a 2007-style feast, it seems that the dearth of distributions from realizations is over. few buyout firms better exemplify the rush to exit than JLL Partners inc. in a five-week span beginning in mid-september, the new york shop used three techniques to harvest gains from three of its companies: a dividend recap, an outright sale and an iPo. We took advantage of the markets, observes JLL cofounder Paul Levy. first, on sept. 17 Medical Card system inc., a Puerto Rican health maintenance organization that JLL has owned since 2004, took out a $175 million loan and paid $95 million of it to JLL. the dividend boosted JLLs cash return so far on its $66 million equity investment to 130%. JLL still owns just under 60% of MCs, a

lightly leveraged company generating more than $115 million in annual Ebitda. to judge by the numbers, that 60% stake is probably worth more than $350 million. ten days later, JLL struck a deal to sell McKechnie aerospace Holdings inc. to another aircraft parts maker for $1.3 billion. it had shelled out $856 million for McKechnie in May 2007, investing $220 million of equity for about a 60% stake. it stands to collect roughly $530 million at closing. then, on oct. 19, JLL sold down a small portion of its stake in debit-card company netspend Holdings inc.s iPo. the iPo was priced at $11 a share, or more than 3.5 times JLLs cost. Based on netspends recent stock price of $15.85 a share, JLL is showing a $308 million partly realized gain on its three-year-old, $75 million investment. Levy claims most of JLLs other stakes are doing well, saying: the ones that are not shooting ahead are actually holding their own. amazingly, one standout performer, says Levy, is J.G. Wentworth LLC, a specialty finance business that exited bankruptcy just last year. JLL sank $125 million into Wentworth in 2005, and then in 2006 and 2007 extracted $290 million in debt-funded dividends, thereby locking in a profit before the company went under. in 2009, as part of the reorganization, JLL Levy flying high reacquired a majority interest for $110 million, a stake that now may well be worth more than $250 million, based on how well Wentworth is performing. (the companys lenders didnt fare nearly as well, recouping only a fraction of par value in Chapter 11.) the one JLL company that has struggled the most, Levy says, is Build-

ers firstsource inc. a building products supplier whose earnings plummeted in the wake of the housing crisis, Bfs has clawed its way back to cash-flow breakeven, Levy says. JLL, which launched Bfs as an acquisition platform in 1998, made back its original $228 million equity investment long ago and pocketed $178 million more. the recent flurry of profits has Levy & Co. sitting pretty. in contrast to many of the firms suffering midmarket industry peers, JLLs buyout funds are nicely above water. Levy enumerates: JLL Partners fund iv, a $750 mil-

lion pool the firm raised in 2002, is valued at $1.7 billion and shows a 19% annual compound internal rate of return; fund v, a $1.5 billion vehicle raised in 2005, has returned $1.1 billion in cash to limited partners and sports a 16% iRR, while JLLs $1 billion sixth fund, which the firm started to raise in 2008 and which closed in february, has deployed $309 million in equity. already, that fund has paid out $169 million in distributions to LPs and is valued conservatively at double the investment cost, Levy says. Were making a lot of money here, he gushes. i feel good! n

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