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Thayer Capital Partners Makes Its Mark as a New Player Among Old-Time Investment Firms
By Jerry Knight Washington Post Staff Writer Monday, June 29, 1998; Page F12 In an office 31 floors above Park Avenue in New York, a congregation of executives, lawyers and investment bankers is scheduled tomorrow to perform a ritual symbolic of contemporary business trends: the marriage of two companies. If all goes as planned, three hours of voting and affirming, signing and witnessing will join together the two telemarketing firms to create Aegis Communications Inc., a $230 million-a-year business that will have 8,500 employees, offices in 30 cities and shares traded on the Nasdaq Stock Market. Playing matchmaker, as well as mother of the bride and dowry donor, is Thayer Capital Partners, Washington's newest player in the big-money private investment business. Two-year-old Thayer is the newest of the financial powerhouses that have emerged in Washington in the past five years as the mid-Atlantic region has grown into a world-class player in finance and technology. Washington's "old money" institutions, symbolized by Fannie Mae and Freddie Mac, has been joined by a clique of newcomers, including Friedman, Billings, Ramsey Group Inc. of Arlington, one of the nation's largest underwriters of new stock offerings; J.E. Robert Co. of McLean, a real estate investment empire soon to expand into Asia; and Carlyle Group, the merchant banking firm that Thayer resembles on a smaller scale. Thayer, bankrolled by two dozen banks, pension funds and financial institutions that put up $364 million in capital, has invested in businesses as varied as mail-order meat sales, multinational bicycle manufacturing, travel wholesalers and telemarketing. Almost $40 million has gone into the Aegis telemarketing group, one of several Thayer investments that are turning the crucial corner from private ownership to publicly financed companies, allowing Thayer to convert its equity in the private companies into stocks that can be sold. One of Thayer's eight portfolio firms, meat marketer Colorado Prime Foods, has produced no gains after a year, a disappointment in a business in which investors demand a quick payback. Two other deals have been done in the past few weeks, but its earlier investments are on the fast track: Aegis, an unusual "reverse IPO" in which a large privately held Los Angeles-based company backed by Thayer will go public by merging with a smaller, Dallas company listed on Nasdaq. Thayer will end up owning about 38 percent of the stock of the companies that handle phone inquiries for client companies and make telephone sales calls. Global Vacation Group Inc., a Washington-based travel wholesaler that is planning a conventional IPO later this summer to raise $63 million. Derby Cycle Corp., with headquarters in Nottingham, England, raised $160 million last month by selling bonds in the United States and Germany. Software AG Systems Inc. of Reston -- which has given Thayer the kind of home run that big investors often long for but rarely hit. The $29.7 million investment was worth more than $460 million after Software AG stock soared to a record $32.25 Friday. Based on its track record with those companies, Thayer is talking to institutional investors that put money into its first fund about raising a second pool of capital. With this funding, the firm would have as much as $1 billion to make more investments.
Big-League Lineup Though Thayer has been in business in its existing form for only a little more than two years, Thayer's players are three longtime starters in the big leagues of business: Company founder Fred Malek, 62, who first made a name in Washington as a top aide to President Richard M. Nixon. Malek went on to become president of Marriott Corp. of Bethesda and then was president of Northwest Airlines after leading a buyout of that company with fellow Marriott alumni Al Cecchi and Gary Wilson. Malek led a management buyout of CB Commercial Real Estate Group, then returned to the hotel business, forming a pair of hotel investment partnerships and arranging a buyout of the Ritz-Carlton hotels in partnership with Marriott. Paul G. Stern, 59, was a top corporate manager before he got into the buyout business as a partner in Forstmann Little & Co. in 1993. By then his resume listed stints as chairman of Braun AG in Germany, vice president for strategic planning and acquisitions of Rockwell International Corp. and president of Burroughs Corp. He spent four years as chairman of Canada's Northern Telecom Ltd. before joining Forstmann. Rick Rickertsen, 38, hooked up with Malek in 1994 after working at Hancock Park Associates, a Los Angeles venture capital and buyout firm and Brentwood Associates, the biggest venture capital investor in Southern California. He worked on Thayer's two hotel funds and the Ritz-Carlton transaction. He also has coordinated fund-raising for Thayer Equity Investors III, the partnership behind the company's current deals. The principals are backed by a coterie of apprentice dealmakers -- half a dozen Harvard MBAs -- a small support staff and a heavyweight advisory board that includes Washington power lawyer Vernon Jordan; former vice presidential nominee Jack Kemp; Frank Zarb, chairman of the National Association of Securities Dealers; Jim Robinson, former chairman of American Express Co.; and Drew Lewis, former transportation secretary and current chairman of Union Pacific Corp. "Fred Malek is the driving force. He has built a very fine and very focused organization," said Ed Mathias, a principal at Carlyle Group, Washington's bigger and better-known buyout firm. Malek and Stern have the management experience and worldwide contacts essential for success in the relationship-based business, he said, while Rickertsen "is the right age and the right kind of guy" to complement the two veterans. "With the people they have now and the results they have shown, they should be able to raise a sizable amount of money," Mathias said.
Target Return: 30 Percent Though they are in the same business, Thayer and Carlyle do not compete directly for deals or financing. Much of Carlyle's funding comes from overseas and is focused on bigger deals and venture capital, which are not part of Thayer's strategy. In the taxonomy of finance, Thayer Capital Partners is classified as a private equity investment firm, which means it generally invests in privately owned companies rather than publicly traded companies. It also is considered a leveraged buyout firm because, in addition to its own capital, it uses borrowed money to finance transactions. The money that Thayer invests comes from two dozen investors, most of them institutions. Backers include the pension funds of AT&T Corp., Boeing Co., Textron Inc. and Aluminum Co. of America; Howard Hughes Medical Institute; Hawaii's Bishop Estate; Travelers Insurance Co.; CreditSuisse First Boston; Bank of Nova Scotia; and Dresdner Bank. There also is one individual investor -- Roger Penske, the race car driver turned truck and transportation magnate. Pension funds put most of their money into conservative investments intended to produce a return with little risk, but they usually allocate a small part of their cash to venture capital and buyout funds with more ambitious profit goals. Thayer's target is a return on investment of 30 percent a year, a goal the company told investors two years ago when it set out to raise its pool of capital. The original plan was to raise $250 million -- enough to finance a dozen or so of what are considered medium-sized deals these days -- but eager investors pledged $364 million. The fund is officially named Thayer Equity Investors III LP. Thayer I and Thayer II are a pair of hotel real estate partnerships set up previously by Malek and named for one of his favorite figures, Col. Sylvannus Thayer, the father of West Point, Malek's alma mater. Thayer's three partners also put their own money into the company's deals so they can share directly in the profit. But the primary source of the company's earnings is based on what is considered the standard formula for the industry: Thayer gets 20 percent of the profit it generates, after expenses. "The key to our business is to make a good rate of return for our partners," Rickertsen said. Investors measure performance as internal rate of return -- how much they make on their original investment every year. The longer a transaction takes to produce a profit, the more money the partners expect, he said. "The IRR clock is vicious. Time is very, very critical." To boost the return Thayer borrows money -- using "leverage," in financial jargon. "Our style is to use debt and equity in every deal," Malek said. If you spend $100 million to buy a business and sell it a year later for $150 million, you earn a 50 percent profit on your investment, he said. But if you put up $25 million of your own cash and borrow the rest, you double your money -- for a 100 percent return. "Our objective is to put a fairly sizable amount, but a prudent amount, of leverage into the transactions," Malek said, stressing "prudent." In the 1980s, buyout firms like Thayer often had only 8 percent to 10 percent equity in their investments, he said. Today Thayer's capital structure typically includes one-third equity, two-thirds debt. But in practice, the structure of Thayer's investments is much more complicated than simply buying stock and borrowing money. The prospectuses of Thayer companies selling stock to the public are replete with multiple classes of shares, convertible preferred stocks and other exotic securities, often engineered by Rickertsen. For example, Thayer made its investment in one company half in common stock and half in convertible preferred stock, paying a deferred dividend of 20 percent a year. If the value of the company's stock increases as hoped, Thayer will pass up the dividends, convert the preferred to common and sell it for a big gain. If that doesn't happen, the dividend provides downside protection. While the kind of investing Thayer does can be risky, Rickertsen acknowledged, it's not as risky as venture capital. Investors expect to lose the venture capital they put into some start-up companies -- and routinely do. Thayer, instead, invests in companies with assets that can be sold and cash flow that can be tapped to repay investors. The worst that can usually happen is that Thayer will get all or most of its money back. It won't make a profit, but it won't be wiped out. Malek said he likes technology companies but avoids ventures in which success depends on a technological breakthrough and ailing companies seeking financing for a turnaround. But Malek is willing to start his own companies from scratch, launching three ventures in the travel business, which he knows well from his days at Marriott and Northwest. For those ventures, Malek recruited Roger Ballou, who has served as president of Alamo Rent-a-Car Inc. and American Express's travel services group. Thayer is backing Ballou in Global Vacation Group Inc., a Washington company that is buying travel tour wholesalers and Associated Travel Network. Associated is a collection of what are known in the industry as "marketing service organizations," which buy airline tickets and hotel rooms in bulk for independent travel agents. Malek and Ballou reportedly have a third travel industry business in the works, but won't identify it. Because Global Vacation Group has filed an IPO with the Securities and Exchange Commission, neither Malek nor Ballou would discuss details of that company. But in an interview last week, Ballou said he and Malek, old friends, began discussing business ideas after Alamo was sold a few months ago. "I took my basic business idea to them and literally in the space of a week they had agreed to back it with capital," he said. "We took another week to hammer out some terms." "I felt like the dog that had finally caught a car," Ballou said. With $50 million of Thayer's capital, Ballou began buying tour wholesalers, which create tours by making deals with airlines, hotels, car rental firms and other services providers. By May -- just nine months after going into business with Thayer -- Ballou had spent $108 million acquiring five tour companies, creating Global Vacation Group, which now is one of the biggest operators of tours to Hawaii, the Caribbean and the United States with annual revenue of $114 million last year. Thayer put $50 million into Global Vacations and will own 60 percent of the company's stock, worth about $155 million if the IPO is completed on schedule this summer. Thayer's money was not the most important part in the equation. "The largest part of my coming together with them and a big part of what makes the thing tick is personal relationships," Ballou said. "They have the contacts . . . and in Fred's case, a guy who's well-known in the travel industry, and that's helpful."
Lunch Leads to a Deal The crucial mix of contacts, cash and quick decision-making also is behind Thayer's most successful investment, the buyout of Software AG Systems of Reston from its parent company in Germany. Software AG President Daniel F. Gillis set out to buy his division because he knew the German parent company had financial problems and needed cash. Gillis met Thayer through classic networking. Developing contacts in the Virginia technology community, Rickertsen went on the board of MLC Holdings Inc., a Reston computer leasing firm. MLC's chief financial officer was a friend of the Software AG chief financial officer. The three men got together for lunch in the fall of 1996 at the Hyatt Reston Town Centre, Rickertsen recalled. That led a few weeks later to a sit-down between Software AG and Thayer executives and then a trip to Germany by Gillis and Rickertsen in January 1997. "We were looking for a firm with a certain philosophy," Gillis said. "We had to select a partner that understood the strategy, liked the management team and wanted to fund it." Some of the firms Gillis talked to had their own ideas about how Software AG should be run. "We told them, if you don't like the story, don't invest." Thayer liked the story and the executives in Germany liked Thayer. Though Rickertsen spearheaded the deal and became chairman of Software AG's board, it didn't hurt that Stern once ran Braun AG in Germany and is fluent in both the language and business practices of the country. Software AG Germany agreed to sell the U.S. division for $85 million in cash plus a 24 percent royalty on sales of its software. Thayer put $29 million of its own cash into the company, borrowed the rest and completed the buyout in April 1997. Hoping to take advantage of the hot IPO market and cash out quickly, Thayer brought in BancAmerica Robertson Stephens and Donaldson, Lufkin & Jenrette to underwrite a stock offering. The timing turned out to be terrible. Software AG began its roadshow for investors last Oct. 27, the day the Dow Jones industrial average fell more than 500 points because of financial turmoil in Asia. Instead of $14 a share, for which Software AG had hoped to sell stock, the company had to settle for $10 a share. That was enough, though, for Thayer's investors to recoup their entire original investment -- and retain a 59 percent stake in the company. After doubling its profit, Software AG went back to the market last month and sold its stock for $24.25 a share. Thayer sold enough shares to pay $115 million to its investors and still keep 10.8 million shares worth about $345 million at current prices. "It's been a great deal for everyone," said Software AG President Gillis -- everyone including Gillis. Before the Thayer-backed buyout, he was an employee, albeit an employee earning almost half a million dollars a year. He sold $4.8 million worth of stock in the May offering and still owns or has options to buy more than 2 million shares. That's a $60 million nest egg that Thayer would be more than happy to help him invest. A Look at the Partners Fred V. Malek
Age: 62
Paul G. Stern
Age: 59 Rick Rickertsen
Age: 38
Thayer Equity Investors III holdings
Software AG Systems Inc. Global Vacation Group Inc.
Headquarters: Washington Derby Cycle Corp.
Headquarters: Nottingham, England Aegis Communications Inc.
Headquarters: Los Angeles and Dallas
Cosmotronic, Inc.
Headquarters: Irvine, Calif. Colorado Prime Foods
Headquarters: Farmingdale, N.Y.
IESI
Headquarters: Fort Worth Associated Travel Network
Headquarters: Washington
© Copyright 1998 The Washington Post Company |
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