Powered by Private Capital

Equity Funds Are Behind Most Local Deals, and the Buyouts Are Getting Bigger

Washington entrepreneur Ken S. Bajaj owes his career as much to a single Midwest investment firm as to his business acumen.

Chicago private equity firm GTCR Golder Rauner LLC bankrolled AppNet Inc., Bajaj's dot-com-era firm, then cashed out in a 1999 public stock offering and eventual sale of the company in 2000. A year later, GTCR put up $100 million for Bajaj to go into the government computer networking business. With GTCR's money, DigitalNet Holdings Inc. bought two companies, then sold them to defense contracting giant BAE Systems PLC for $595 million last year.

In the case of both AppNet and DigitalNet, Bajaj outlined a strategy to buy companies with the skill sets most in demand at that moment in industries that were hot. GTCR just provided the means to buy them quickly, and GTCR (and Bajaj) profited handsomely from it.

"In any business, it's always a matter of whether you buy or sell," Bajaj said. "If you want to buy, this is just a quicker, faster way."

That churning -- the buying, building and selling of Washington companies by private equity investors -- is on the rise, putting billions of dollars into play to help companies merge or take the all-important step of going public and selling stock.

More nimble than banks, and often willing to invest more in a business's growth than a company's existing owners could raise on their own, private equity funds have been the driving force behind most of the Washington area's mergers, acquisitions and initial stock offerings of the last year. Locally, they have helped companies like United Defense Industries Inc. vault into the ranks of the region's largest. Nationwide, they are pushing the market toward an era when the fates of more and ever-larger U.S. companies will be affected by a select group of money managers who operate largely without government regulation.

"Private equity is getting bigger, stronger, faster, and for the truly large funds they're continuing to move further and further up market," said Philip J. Facchina, a senior investment banker at Friedman, Billings, Ramsey Group Inc. in Arlington.

While the track record of corporate buyouts by private equity funds over the past 20 years is mixed, recent years have evidenced a unique confluence of good fortune. Having largely shed the corporate-raider image, the current generation of private equity funds -- large pools of capital put together by leveraged buyout firms, venture capital funds and, sometimes, hedge fund managers -- is often welcomed into deals by business owners and entrepreneurs. In some cases the funds can be credited with saving companies and jobs from oblivion.

In the Washington area, Connecticut-based First Reserve Corp. and New York's Blackstone Group helped revive more than a dozen coal mines when they teamed last year to form Foundation Coal Holdings Inc. The new company, based near Baltimore-Washington International Airport, bought the dilapidated and unprofitable U.S. mining operations of a German energy conglomerate -- just as the price of coal began to skyrocket.

Blackstone and First Reserve took Foundation public in December, and the company is now profitable. It's also sitting on nearly $500 million in cash and is hiring miners (or trying to, experienced miners being scarce these days) at its mines in West Virginia and elsewhere.

Foundation is just one local example. Other companies that have gone public in the past 18 months, such as Fieldstone Investment Corp., TNS Inc., PRA International, Collegiate Funding Services Inc. and Mercator Partners Acquisition Corp., all owe their new status to private equity firms. And more deals are on the way.

A number of mid-sized local private companies, too, are deep in the private equity cycle. N.E.W. Customer Service Cos. in Dulles last year was bought for $370 million by a group of private equity investors, and Tyco International Ltd. last year sold its Alexandria-based commercial security unit, Sonitrol Inc., for $125.5 million to a private equity consortium that includes Carlyle Venture Partners of the District.