Editor: Your firm has a long tradition of raising capital and facilitating deals. What is your role in the private equity arena?
Dick: Rothschild today is principally an advisory firm, assisting its corporate clients on M&A and capital raising around the world. In terms of private equity, our function is strictly to co-invest along with clients in situations that we think are interesting, have strong return potential and pose no conflict to our core advisory business.
Campbell: Our basic role is to assist clients, whether corporations or private equity sponsors, in terms of helping them execute their strategy, which entails raising direct capital for their operations, whether in the form of equity or debt.
Editor: Do you work with funds in raising monies for their investments? What kind of services do you perform for the general partners of partnership deals?
Campbell: In general, we do not get involved with raising capital for the GPs in terms of their blind pool funds. We do work with GPs in terms of providing funding for direct investments in particular portfolio companies. Whether the GP/portfolio company is looking to make an acquisition or do a recapitalization, we partner with them/assist them by going directly to institutions and funding identified opportunities. One of the reasons that we stay away from blind pool fund-raising is that we work closely with Stacy's group, looking for capital to invest along with our own in our proprietary investing business. We avoid anything that might pose a conflict.
Editor: Does Rothschild initiate buy-out deals or do you come in as part of a syndicate?
Dick: We don't initiate buy-out deals in order to avoid conflict with our clients, many of whom are private equity sponsors. We do, however, seek opportunities to join equity syndicates in attractive deals, whether these are led by our clients or otherwise.
Editor: I understand that you act as agent for the seller in "Stapled Financings." Would you define "Stapled Financing"?
Campbell: A Stapled Financing is a recent trend which allows the advisor to the selling party to provide pre-arranged capital for the ultimate buyer. Clearly caution must be exercised in this process since it is unusual for the advisor to the seller to be providing assistance to the buyer. A natural conflict arises in terms of the selling advisor's role - who are they really working for, the seller or buyer? At the same time Stapled Financing, if utilized properly and fully disclosed to all parties, can be a valuable tool in closing complex transactions where speed of execution creates value.
Editor: Does Rothschild agree to supply bridge capital to help close a deal?
Dick: We only use bridge capital to help close deals in the UK. However, as advisors, we are often called upon to identify capital to facilitate a transaction.
Editor: What size market in terms of capitalization do you serve?
Campbell: From an M&A standpoint our focus is on larger and middle market corporations. I define large as a billion-plus in terms of enterprise value. The middle market includes companies with enterprise values between $400 million and $800 million.
Editor: Does the firm take equity in some of the deals it sponsors?
Dick: We do take equity in deals that our clients sponsor, and this is - in fact - our preferred way of investing.
Editor: What role do you play as advisers to corporations? Do you work with the general counsel or pension managers of corporations?
Campbell: This is our core strategy - providing high level, unbiased advice to companies. Since we don't lend or underwrite securities and because we are a private company, we don't feel pressure to go in and sell something every time we have an audience with senior management. Most of our business is repeat business and our clients know that we are there for the long term and we are there giving them unbiased advice. It's not like we're telling them: Look at this acquisition because we have the product to help you finance it. We work very closely with the general counsel in situations like this. We always make sure through an entire transaction that we are on the same page in terms of legal issues, especially if it involves different jurisdictions in cross-border transactions.
We don't work with pension managers at corporations since there's usually a wall separating them from other management due to the fiduciary responsibility of the corporation to its employees.
Editor: Do you operate on a retainer basis?
Campbell: Yes. We usually receive a retainer for our services, and then credit the retainer toward our success fee.
Editor: We read about the megadeals, but how much deal-making is going on at a level below the radar screen?
Campbell: Obviously, with the growth of hedge funds, you are seeing a lot of money chasing a few large deals. There is also a significant amount of activity going on below the radar screen. However, even in the middle market, there is a lot of interest among hedge funds, and the deals are not staying under the radar for long. As hedge funds are set up to move quicker than most institutions, a key to participating in these transactions is speed.
From our perspective, to be successful in today's environment you have to have a consistent presence in the market, stay ahead of the competition and put the right parties together.
Editor: The emergence of the Club Deal appears to be on an upward trajectory? Is it a healthy phenomenon for the capital markets? What if some of these deals implode?
Dick: Club Deals are indeed an important and growing part of the megadeal market, especially in Europe, although we've seen a number of deals here in the States as well. It is hard to know whether this structure is on a secular upward trajectory or whether it is just a function of a momentary mismatch between the size of funds and the size of deals available. From the GP's or sponsor's perspective, the Club Deals can be attractive as a way of limiting competition for deals and reducing deal prices. But it comes with a price. The price is having to work out governance arrangements among firms that are typically not used to having to work those kinds of arrangements out. On the part of the ultimate investors, the limited partners, the problem with Club Deals is that they limit the effective diversification that they thought they were getting by investing across sponsors. So it's very much a two-edged sword.
Editor: The breaking up of corporations with fossilized management in "Old Europe" in order to rationalize operations has been the aim of some venture capitalists and leveraged buy-out firms. Is your firm involved? Will it result in greater efficiencies among some of the larger corporations which will become more competitive with U.S. corporations?
Dick: It is indeed the case that, in the aggregate, Europe is still in the midst of industrial restructuring that the U.S. perhaps went through a few years earlier. That creates enormous opportunity and, in fact, has been feeding the private equity business in Europe for some time now. Our firm plays a very significant role in that business abroad, advising financial sponsors, advising corporations and, as I described earlier, as a co-investor participating in these deals. It's a very important part of our business. I think in the end it will lead to the greater competitiveness that we've seen in the U.S. and will no doubt be the prelude for some future stage that none of us are smart enough now to predict.
Editor: What do you see as the future trendline for private equity deals?
Dick: People have been predicting the peaking of private equity for about 15 or 20 years, and it continues to grow. This is in large part because the economic model on which private equity is built - a strong linkage of returns for the various players to the performance of the underlying businesses, the far more streamlined governance mechanisms involved in private equity, and ultimately the ability to generate value through a much more realtime linkage in the way businesses are run. I think this all bodes well for continued growth of private equity as an increasingly important mode of ownership of business assets. I think the limiting factor right now is simply the size of the funds, although they've gotten much larger than imagined just a few years ago. That's why we're seeing Club Deals, in effect to bridge to the next level. Is there some point at which private equity funds are too large? Maybe, but I think we haven't come anywhere close to finding that out yet.
Published February 1, 2006.