Hicks Muse Giving Investors Guarantee on Returns
A leading leveraged buyout firm is offering its investors a rare commodity in today’s turbulent markets--guaranteed returns.
The move by Hicks Muse Tate & Furst, disclosed to investors Tuesday, is already shoring up confidence in the struggling LBO firm, say partners there. Dallas-based Hicks Muse manages more capital than any LBO shop, overseeing $10.5 billion.
The offer “goes a long way to showing the character of the general partners,” said Richard Holbein, president of Holbein & Associates, the investment consultant for the Louisiana and Arkansas teachers’ pension plans. Both funds invest with Hicks Muse. “There are not many guarantees in this business.”
Hicks Muse said its eight partners would assure investors of annual returns of no less than 20% on $200 million of investments in start-up companies.
The move underscored the extent of negative publicity about Hicks Muse and the competition for investors’ money. At least 28 LBO firms are raising funds of more than $1 billion. LBO funds typically buy companies using large amounts of debt with the expectation of later reselling the companies at a substantial profit.
“It’s a tough fund-raising environment. There are a lot of firms in the market at the same time,” said Thomas Hicks, one of the firm’s co-founders. “A lot of people are going to raise less money than they hoped. We need to expand our fund-raising base.”
The guarantee is unusual because the buyout industry thrives on risk. Investments in private equity are deemed so risky that federal law prevents all but the wealthiest individuals and institutions from investing at all.
The firm’s statements prompted a burst of interest in Hicks Muse funds.
“The phones are ringing off the hook,” said Dan Blanks, a Hicks Muse partner.
The guarantee involves 10 Internet investments totaling $200 million within a Hicks Muse buyout portfolio that is intended to amount to $4 billion. Investors had been concerned about the Internet investments because of the failures of “dot-com” companies in the past several months.
Hicks Muse has struggled raising its new fund, Fund V, as bets on fledgling telecommunications companies such as ICG Communications Inc. have plunged in value. The minimum investment in the fund is $20 million.
