The Post 200: Private Equity Firms

Washington Post staff writer Terence O'Hara was online to talk about the annual Post 200 listing of the top companies in the Washington region. In an article he wrote for The Post 200 package, O'Hara reports on the private equity firms that have profited from buying and selling companies in the region.

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Terence O'Hara: Hello. I'm Terry O'Hara, a local business reporter at the Post. I've been involved as an editor or "reporter/consultant" to the Post 200 for the last six years. The Post 200 not only provides our readers with a comprehensive list of the largest companies and employers in the Washington area, it also provides us with an opportunity to take the pulse of the region's corporate economy. The Post's local business coverage, like all its local news coverage, depends on an ongoing conversation with local readers. I hope in this chat that we can share some ideas about where our region is headed, how some industry sectors are faring, and even about the future of specific companies that matter most to readers. Fire any questions you may have about our business coverage, not just about Post 200. I'll do my best to answer them.

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washingtonpost.com: Terry -- in past years, you were the lead editor on assembling the annual Post 200 index. What's the biggest change you've seen in the index since you first started working for The Post?

Terence O'Hara: The first Post 200 I marshalled was published in in 2000. The biggest change I've seen is the most obvious one: the rise of the technology sector, and the subsequent decline of key aspects of that sector. In 2000, it wasn't difficult to imaging Washington, and especially Northern Virginia, becoming a tech center on par with Silicon Valley. At that time, we had a host of exciting, cash-rich dot-coms, software companies and telecommunications firms. But overcapacity and overexuberance (the irrational kind) made that unlikely in the short run. In the last three years, most local tecnology firms that relied exclusively on private sector business have not done well (many failed). The tech companies that successfully built up a government business fared better. We are a company town, for better or worse. The "company" is the federal government. Luckily for us, the government, unlike many companies, has a great sorce of revenue.

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Washington, D.C.: What gave you the confidence to include Riggs Bank on the Post 200 this year. Aren't their numbers in doubt?

washingtonpost.com: Post 200 Profile: Riggs National Corp.

Terence O'Hara: For all Riggs's troubles, accounting wasn't one of them. The company had valid numbers for year-end, so we included it. This will be Riggs last appearance on the Post 200. Its merger with PNC Financial Services Group Inc. will take place in a few weeks.

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Arlington, Va.: For the life of me, I don't understand why some biotech companies are in your biotech list and some are in your Maryland list. Wouldn't it be better to treat all public cos. the same way, regardless of where they are HQ'd?

Terence O'Hara: The slicing and dicing of the companies on the list is based on several factors. First, we take the public comapnies based in our immediate metro region and lump them together, lising the largest 125 public companies. Within that list, we break it out by industry. We started doing this three years ago, as a way of organizing the companies in the publication. But all public comapnies based outside the area -- those companies based primarily in the Baltimore and Richmond metro regions -- we do not organize by industry. This is largely for lack of space: We can't publish profiles of every single Post 200 company. And, so, a biotech based in the Baltimore area, unless it's a very large company, would not be profiled within the piece, and it wouldn't be included in the biotech section of the Post 200. I hope this make sense.

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Washington, D.C.: How is the Post able to get revenue numbers for private firms like Mars? Did they voluntarily disclose to you, and if so, how do you verify?

Terence O'Hara: Mars this year did something that it has never done for The Post before: it provided a top line revenue figure. Mars is one of the largest family-owned companies in the world, and is famously secretive. Nonetheless, our researchers were able to find someone there who provided us with a number. As with all private comapnies that provide us with financial information, a reliance on their word is necessary to some extent. We make all attempts to verify private-company financial information through independent third parties, however. In Mars case, this was difficult, but the companies revenue figure -- $16 billion for 2004 -- jibed with most external estimates.

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washingtonpost.com: Powered by Private Capital (Terence O'Hara, April 25, 2005)

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Burke, Va.: Looks like many/most of the largest employers are based outside the D.C. area. Why then is the focus on companies with local headquarters?

washingtonpost.com: Major Employers

Terence O'Hara: True, the largest corporate employers in the Washington area are not based here. Our overriding goal with the Post 200, however, is to provide information on local companies. We provide a list of the largest non-headquartered employers for perspective's sake, and because the list provides some interesting information. But our thing, our "value added" as it were, is to provide a comprehensive list of locally based companies that readers can't find anywhere else in one place.

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Baltimore: What are companies telling you about the Sarbanes-Oxley regs? Are the reporting requirements proving less onerous for the big companies than the small and mid-sized ones?

washingtonpost.com: New Financial Reporting Requirements Test Firms (April 25, 2005)

Terence O'Hara: I've begun to hear more about the harmful effects of SOX (doesn't everything in Washington become boiled down to an acronym eventually?) from chief executives in the last six months. I've been hearing it, and Congress has been hearing it. The concerns can be summed up this way: the Sarbanes/Oxley law, among other things, requires chief executives and chief financial officers to certify that the comapny's financial statements and accompanying disclosures are correct in all material respects as far as can be determined. The law provides penalties for executives who don't get this right. The costs of complying with this --the lawyers, accountants and consultants necessary to make a financial disclosure complete to the executives satifsaction -- are onerous on mid-sized and small public companie, some argue.

I'll state my bias in this debate up front: I think any regulation that requires more and better disclosure a good thing, within reason. Surely, complying with SOX is more onerous for a small firm than a large one. Because the SOX-related risks (and costs) are largely the same, the smaller the company, the bigger percentage of its revenue must be directed toward compliance.

More small, private companies are eschewing going public because of the risks and cost involved with this requirement. That's not necessarily a bad thing. I think that any investor in a public company should be worried about retreating from notion that executives should be held accountable for their accounting, but I also think there should be a way for smaller companies to get some relief. That debate, however, would take more space and time than I have here.

Terence O'Hara: I've begun to hear more about the harmful effects of SOX (doesn't everything in Washington become boiled down to an acronym eventually?) from chief executives in the last six months. I've been hearing it, and Congress has been hearing it. The concerns can be summed up this way: the Sarbanes/Oxley law, among other things, requires chief executives and chief financial officers to certify that the comapny's financial statements and accompanying disclosures are correct in all material respects as far as can be determined. The law provides penalties for executives who don't get this right. The costs of complying with this --the lawyers, accountants and consultants necessary to make a financial disclosure complete to the executives satifsaction -- are onerous on mid-sized and small public companie, some argue.

I'll state my bias in this debate up front: I think any regulation that requires more and better disclosure a good thing, within reason. Surely, complying with SOX is more onerous for a small firm than a large one. Because the SOX-related risks (and costs) are largely the same, the smaller the company, the bigger percentage of its revenue must be directed toward compliance.

More small, private companies are eschewing going public because of the risks and cost involved with this requirement. That's not necessarily a bad thing. I think that any investor in a public company should be worried about a retreat from notion that executives should be held accountable for their accounting, but I also think there should be a way for smaller companies to get some relief. That debate, however, would take more space and time than I have here.

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Annapolis, Md.: If you send out a request for information from companies based in the area, but they are privately held and do not respond, do you omit them from your list? There's a few that I can think of that aren't in your list, but are decently sized.

Terence O'Hara: If a private company chooses not to respond to our survey, we make all efforts to obtain financial information from third parties. If we can't do that, we don't include them.

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Arlington, Va.: What industries and companies seem poised for growth in the next five years?

Terence O'Hara: I think any comapny with a credible product in homeland security field, providing services for local as well as federal public safety agencies, is poised for growth.

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Washington, D.C.: Is it difficult to get private equity money? Are they like venture capitalists, who wade through hundreds of proposals, or do they come looking for you?

Terence O'Hara: Now I'll answer a few questions about the private equity world, which is the area I'm most focused on right now.

To answer this question, in my experience corporate buyout firms, as opposed to venture capital firms, largely seek out their own investments. They do their own research on an industry, and identify companies with the right management and prospects, and work closely with that management. You don't see many leveraged buyout pitch-a-thons, like you frequently do with comapnies seeking early-stage venture capital.

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Cleveland, Ohio: For several years now PE and VC firms have had plenty of money but nothing to buy (worth buying). Are US or global government financial policies responsible for all the money available to chase deals?

Second, when there is a capital excess prices will rise and returns fall. Does the long term nature of PE fund investments increase or decrease returns to investors, obscuring the effects of investment bubbles?

Thanks very much.

Terence O'Hara: Good questions. I've not studied wither economic policies have encouraged the rise of private equity funds. My own view is that the largest pools of equity capital -- pension funds, private endowments and super-wealthy people -- are enamored of this type of investing, given the good returns the have experienced in recent years. Right now, it money chasing returns. I don't know at what point it become good money chasing bad, however.

Also, it should be remembered that private equity money isn't long term. Most investment horizons for coprorate buyouts is three to seven years. That may sound like a long time, but it isn't. Any self-respecting private equity investment should have a clear, foreseeable exit strategy at the time it is made. Private equity is notorious for years of abysmal returns followed by years of stellar returns. Bubbles happen, no matter who does the investing, a pension fund or a stock speculator.

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Washington, D.C.: Aside from having gone to undergrad at Princeton with an MD at a private equity firm, how does one obtain employment in this closely knit industry? I understand private equity firms are often small, closely held, and seek top talent, but it seems traditional employment channels are closed to most candidates.

Terence O'Hara: The private equity firms I know confirm your thesis: It's a pretty clubby world, and employment within it depends on long-standing business and social ties. Talent, of course, wins out in the end. And if an investment professional can establish a good track record, he or she will be in demand.

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Alexandria, Va. Hi. How is private equity investment overseas going right now? What are the destinations?

Terence O'Hara: Overseas, it's largely Europe right now for the U.S. private equity firms. Only the biggest PE firms, who can bring the most talent to the region, are investing in Asia right now. Carlyle Group, the biggest, has done some significant deals in China.

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Phoenix, AZ: Allied Capital Corp. (ALD) has been the target of hedge fund short sellers for the past couple of years (to the funds' regret). The SEC launched an investigation last June and the DC Attorney launched one around Christmas. I haven't heard anything regarding the status of the investigations. Have they been closed or are they continuing? Any results? Do you have any information?

Terence O'Hara: Allied Capital is a public company that lends money to companies involved in buyouts by private equity firms. It also does its own direct investing in control buyouts. As a reporter, it grieves me to say that I don't know more than you do with respect to the investigations of that company, other than they are continuing. As soon as I do know more, I'll put it in the paper.

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Re; Mars and other Privates: In considering the health of the true 'privates' in the area, Mars, et al, have you over the years been able to draw a conclusion that the lack of market and wall street distractions have allowed them to focus on the business of their core business--as opposed to say the business of wall street? It would seem to me that the ability to focus on attracting and retaining customers has to of had some long-term benefit.

Terence O'Hara: I think this is firm specific. I think Mars has been able to stay private because its shareholders -- a tight-knit group of Mars family members -- have all been able to agree on the direction of the company, without the "distractions" of being public. For Mars, it works. But private ownership is, by definition, illiquid: it can't be sold or exchanged for cash easily. That's why private, family ownership rarely last more than three generations. Eventually, the heirs want to do something else with their lives besides run a multi-national business. And, eventually, they want to have the cash. The trick for Mars or any other large, family-owned enterprise is to manage that inevitable transition and still stay focused on retaining and attracting customers.

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Alexandria, Va.: Have the venture firms started putting money into early stage/start-up firms yet? Seems like all the VC is going to latter stage firms.

Terence O'Hara: That's true, most VC funding is going into later-stage companies. It's a cyclical thing. You're beginning to see signs that it's turning around, and that a few early-stage investments are being made, but it' nothing like it was in 2000. But it will happen. Early stage venture investing, if done well, is the most profitable kind of investing there is. It has a magic to it that can't be ignored -- fund a new technology that changes the world and become a zillionaire in the process -- and VC investors will keep at it and it will come back.

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Terence O'Hara: My time's up. I hope that you'll read and use the Post 200 all year long. In the meantime, just e-mail me any further thoughts or questions you may have. I'm at oharat@washpost.com. Cheers!

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