Not all megafunds are evil

Big funds bad; mid-market good: So seems the new creed of the industry. Many managers feel burned by experiences with buyout giants, and broadsheets have relished the negative headlines they can pump out on the back of such unhappy endings.

UK hair products business GHD is a case in point: founder Martin Penny spoke highly of his time with mid-market buyout house LDC, but after the business was sold to Montagu, a substantially larger investor, Penny launched a legal battle to contest his ousting.

But are all large buyout houses evil? Of course not. Look at Permira: 10 months ago, many deemed the European giant dead in the water. "They'll never raise another fund", "senior-level CVs are all over the place" and "they've tarnished their brand and that of all buyout houses permanently" were all quotes heard in the wake of their LP restructuring. But they proved to be Europe's most active large buyout house in 2009, with a couple of new deals, the completion of the year's largest take private and another on the cards by year's end. Most of the rest have done very little, aside from seeing portfolio companies written off or swallowed up by banks.

Perhaps the most well-known of buyout houses on a global scale, KKR has recently been commended, albeit discreetly, in a recent report by ratings agency Moody's. The report compared the treatment and ultimate success of two similar businesses, US mattress-makers Sealy and Simmons, with two different backers, KKR and Thomas H Lee, respectively. The report suggests THL's management of Simmons was aggressive to the point of heavily indebting the company and making it vulnerable to the downturn. On the other hand, Moody's suggests KKR's stewardship involved minimal profit-taking intervention, pointing out that KKR's approach may have seemed overly conservative at the time, but that it has left Sealy better placed to weather the credit crunch.

Moody's said: "While Sealy's owners have guarded its business, THL has tended to regard Simmons as a source of income. Simmons has changed hands more times than its rival: THL was Simmons's sixth owner since the mid-1980s. Sealy and Simmons looked like two similar companies. The key distinction since 2003 has proved to be the differing philosophies of their corporate sponsors. KKR's stewardship has bought Sealy some breathing room with its creditors."

Comparing bedfellows

Sealy - KKR

Bought in early 2004 for $1.5bn. Initial leverage was 6.5x Ebitda. Improving margins saw this come down to 5x a year later.

Credit rating was B1 at time of buyout but downgraded to Ba3 in May.

Sealy floated in May 2006, netting $300m in proceeds. Most went to paying down debt, with $125m going to shareholders as a dividend. KKR retained a majority stake.

February 2009: KKR partnered with Environmental Defense Fund on the Green Portfolio Project, which promotes environmental goals within business. Sealy is one of three pilot companies that together has saved about $16.4m in operating costs, and avoided 25,000 tons of greenhouse gas emissions, 3,000 tons of paper use and 650 tons of solid waste by implementing the tools developed through the partnership in 2008.

Mid-2009: KKR helped Sealy with debt restructuring (sold $350m of 7-year senior secured notes in the private placement market), extending $177m in senior secured convertible PIK notes. According to Moody's, KKR "has forgone opportunities to recap the business and left the cashflows mostly alone".

KKR continues to hold a majority stake in the business.

Simmons - Thomas H Lee

Bought in late 2003 for $1.1bn. Initial leverage was 6.3x Ebitda; dropping to 5.5x in 2004 on the back of strong performance.

In 2004, THL raised $165m in company debt to pay itself a dividend.

In 2007, THL led another $300m dividend recapitalization; together the two recaps netted $450m but failed to yield a "direct benefit" for Simmons.

Credit rating was B2 at time of buyout but dropped four notches to Ca/LD in February.

Summer 2009: Simmons has nearly $1bn of debt

Today: announced it would file for Chapter 11 bankruptcy protection by November. "Bondholders that funded more than $450m in dividends to THL (corresponding to 140% THL's original investment) are likely to receive less than 5% in a potential bankruptcy, but secured lenders will likely come out whole." THL, meanwhile, reaped a 40% return via dividends.

Ares Management and Ontario Teachers Pension Plan are buying Simmons for $760m.

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