Platinum Equity lines up $2.75 billion for new buyout fund

This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.

Pension funds and other big investors have been warned to scale back their return expectations in the private-equity buyout business.

But they still committed $2.75 billion to a new leveraged-buyout fund launched by Beverly Hills-based Platinum Equity. That was $1.25 billion more than Platinum CEO Tom Gores’ initial target, he said -- and $2.05 billion more than he raised in his first such fund, in 2004.

The private-equity business isn’t what it used to be, but a lot of institutional investors may be figuring they won’t do better anywhere else, given the sorry state of global financial markets.

Gores, who founded Platinum in 1995 to take significant stakes in companies or acquire them outright, has made 91 business purchases since then. He still has 22 firms in his portfolio, including steel products distributor Ryerson Inc., broadband telecom company Covad Communications Group and custom-car-wheel supplier Wheel Pros Inc.

Other companies he bought have been sold over the years, reaping annualized returns of 75% or better on investors’ initial capital, according to Gores.

That’s the central idea in the private-equity business: Find a business that isn’t performing up to its potential, buy it with a relatively small cash down payment and a hefty loan, fix it up and resell it for a substantial profit.

When money is easy and the economy is robust, savvy private-equity deal makers can flourish. Gores, 44, has done well enough in the buyout business over the last 13 years to make Forbes’ global billionaires list: No. 553 this year, with an estimated net worth of $2.2 billion.

(He also has faced some unwanted publicity after a private relationship became a subject of testimony in the government’s trial last spring of Hollywood private eye Anthony Pellicano.)

But private equity’s boom times have ended with the credit crunch. Through mid-August the number of takeover deals by U.S. private-equity firms was down 35% year-to-date from the same period of 2007, to 371 transactions, according to Dealogic Inc.

Gores concedes that, with lenders reluctant to fund deals, he may have to put up far more cash, or equity, for businesses he buys -- which, in turn, could mean lower investment payoffs, because it’s the leverage in buyouts that makes for super-sized returns.

‘We may have to over-equitize,’ Gores said. So for a new buyout fund, I asked, what might private-equity investors consider a good return? He said 15% to 30% annualized gains could make many investors happy. But naturally, he says he’s hoping to do better than that.

‘It’s not a time to look at past track records’ in private-equity returns, Gores said. But in terms of the kinds of firms he acquires, he is sticking with what he knows, he said: Platinum shops for what Gores calls ‘good, stable companies’ that need management help unlocking their growth potential.

However he does it, Gores has delivered -- which explains the cash he has lined up for the new fund.

As for the risks inherent in the weakened economy, Gores says he hasn’t seen any reason to be alarmed by the business trends at his portfolio companies.

‘Other than the credit markets,’ he says, ‘it’s not as bad as it seems.’