Firms Go Private In Search of Deeper Pockets

The world may be eating more doughnuts now that Jon Luther's firm, Dunkin' Brands, has joined the most prominent trend on Wall Street these days: going private.

Since three private-equity firms bought out the Dunkin' Donuts parent for $2.4 billion in 2005, Luther has doubled store growth, retooled his executives' pay and opened his first branches in Asia. And he did it behind a veil of privacy, away from the glare of analysts and federal regulators.

All of this was made possible by the deep pockets of private-equity firms. "These are not barbarians at the gate," Luther said. "They are more partners than owners."

Not since junk bonds has an alternative form of investment risen to prominence as quickly as private equity, an obscure world where fund managers risk billions to buy and try to turn around slumping companies, and then sell them for a profit.

With unprecedented sums in their coffers, private-equity firms have the ability to buy all but the biggest companies. Among their prize catches are Toys R Us, Neiman Marcus, Hertz, Burger King, Harrah's Entertainment, Clear Channel Communications and HCA, the nation's largest hospital company.

Last year, private-equity firms spent a record $540 billion to acquire companies in virtually every sector, up from $59 billion three years ago, and in the process have been dramatically changing the cast of powerbrokers on Wall Street. Although average investors can benefit from the run-up in stock prices during one of these buyouts, the trend has concentrated control of major swaths of U.S. industry in the hands of a few wealthy groups that do not have to reveal much about their operations.

This year began with the biggest proposed private buyout on record -- for Equity Office Properties Trust, the nation's largest office landlord. Blackstone Group last week put forth a $38.3 billion buyout offer, which would include the assumption of Equity Office's $16 billion debt. That bested a $38 billion bid earlier this month by a group of real estate investors led by Vornado Realty Trust. Today is the deadline for that group to make a counter bid.

The surge in private deals is raising concerns in Washington. The Justice Department is looking into whether some of these buyouts are anti-competitive. Last week, the Federal Trade Commission ordered District-based Carlyle Group, the nation's largest private-equity firm, to give up management control and its board seats at Magellan Midstream because Carlyle is part of the group buying oil pipeline operator Kinder Morgan for $22 billion. The two energy-distribution companies dominate the same 11 markets across the Southeast United States.

Unlike the late 1990s, when founders of Internet start-ups dreamed of seeing their ticker symbol stream across public exchanges, going private is suddenly in vogue.

The success of private equity has drawn the affluent and powerful, including former president George H.W. Bush, former Massachusetts governor Mitt Romney and U2's Bono, as well as such corporate luminaries as Jack Welch, the retired head of General Electric, and the former chief executives of Wells Fargo, IBM and Procter & Gamble.

"Today there isn't a public board out there that hasn't talked once about private equity, whereas five years ago it may have been the exception," said Jordan Hitch, managing director at private-equity shop Bain Capital. "The sexiness of being public has been diluted."

Private-equity firms usually accept money from only super-wealthy investors and huge institutions like pension funds. As massive private funds formed over the past few years and returned about 25 percent annually -- with top performers getting 40 percent or higher -- nearly all major pensions reallocated their holdings, pouring billions into the sector despite the higher risks. These pensions now are tied to how private equity navigates the economy, said Colin Blaydon, director of the Center for Private Equity and Entrepreneurship.