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KAI RYSSDAL: As we sit here in early August of 2008 we are plus or minus a year into the credit crunch. You don’t have to look too much further than the news of the day — about auction-rate securities and Fannie Mae’s losses — to know that the damage isn’t done yet. Banks and brokerages are still adding up their losses.
The industry feeling perhaps the most pain, though, is private equity. Those are closely held investment firms that put their money into companies that aren’t publicly traded. ThomsonReuters added it up not too long ago. They said private equity firms invested just $50 billion in the U.S. in the first half of this year. The number last year was more than $300 billion. Private equity is a notoriously private business. But Marketplace’s Amy Scott got a rare look inside one firm to find out how the industry is adapting.
AMY SCOTT: The Manhattan offices of The Jordan Company look a bit like a bunch of ex-jocks took over a fancy law firm.
KRISTIN CUSTAR: This is what we call the dugout. We’re very sports oriented here. And this is where our younger guys all sit.
Kristin Custar is my tour guide. She says the firm’s founder, Jay Jordan, played football at Notre Dame. A motivational sign on the wall reads “Play Like a Champion.”
CUSTAR: This is the bullpen. And this is where a lot of our senior associates sit.
SCOTT: So what happens in the bullpen?
UNIDENTIFIED EMPLOYEE: Work gets done.
CUSTAR: Hopefully, right?
UNIDENTIFIED EMPLOYEE: Yeah.
Custar is in charge of raising money for the company. She gets it from a variety of investors — maybe even you — via your pension fund. But thanks to the credit crunch, private equity firms are finding it harder to get that money. In the first half of this year, fundraising fell for the first time in five years. That’s according to Dow Jones.
Custar says her company was lucky. Jordan closed a new $3.6 billion fund in December. Custar says she’d laid most of the groundwork before the market seized up.
CUSTAR: I don’t want to say it was a cinch for us to raise $3.6 billion, ’cause it took a year to do. But I think we hit our target. We got the money that we wanted, and it wasn’t as if we fell short.
Investing that kind of money is also tougher these days. Private equity firms like Jordan buy companies and eventually sell them. Jordan’s dabbled in everything from chocolates to bicycle parts. One name you might remember is Carmike Cinemas.
But when they buy companies, private equity firms don’t put up all the money themselves. They borrow a lot of it.
Adam Max is a managing principal at Jordan. He says some of the lenders he used to hear from no longer call.
Adam Max: It is much more challenging. The go-to people that we had a year ago, some of them are not really in business — in our business — at least at this point. So financing’s available. Much more difficult. Takes much more time, much more thinking than maybe it did a year ago.
NEWS CLIP: Bankrupt retailer Linens N’ Things will close fewer stores than originally expected. . . .
The news is littered these days with private-equity deals gone bad. In some of those transactions, the firms involved borrowed as much as 70 percent of the money. Private-equity owned retailer Linens N’ Things went bankrupt, in part, because it was saddled with loans.
But Max says The Jordan Company has never used that much debt.
MAX: We’ve just been very conservative in how we’ve structured deals. Part of that is the result of our long history. So the types of businesses that we’re in, the amount of leverage that we have, were all done with the thought that the good times weren’t going to last forever.
The tough economy creates another problem for private equity. It’s a lot harder to sell companies when they’re ready to get out. In the past, private equity firms liked to cash out within about five years. Max says his firm is comfortable waiting longer. A decade or more in some cases.
MAX: We actually refer to ourselves as patient capital. We’ve seen recessions. We’ve seen credit contractions. We’ve positioned our portfolio before this happened in anticipation of what’s happening now.
The dealmaking is by no means dead. Just a few weeks ago Jordan bought a marine transportation company for about $500 million. Max says the bad times have one upside: There’s less competition for the deals Jordan does want to do.
In New York, I’m Amy Scott for Marketplace.