TH Lee's Sperling wary of overpriced deals

NEW YORK Wed Mar 3, 2010 4:07pm EST

NEW YORK (Reuters) - Scott Sperling, co-president of private equity powerhouse Thomas H. Lee Partners LP, has learned some hard lessons from the record boom and resulting swoon his industry just experienced.

"We need to be careful that we not push pricing beyond what makes sense," Sperling said on Tuesday at the Reuters Private Equity and Hedge Funds Summit in New York. "Hopefully, we all learned that lesson and there will be a level of prudence going forward."

T.H. Lee spent the past year dealing with problems at one of its biggest deals, the 2008 takeover of Clear Channel Communications. The $18 billion price tag may have made sense before the economy tanked but looked rich in hindsight.

A $2.5 billion junk bond sale in December averted a looming refinancing crunch, but rating agencies say the day of reckoning has only been postponed for a few years.

Now Sperling is wary of many potential deals that are crossing his desk.

"We're still in a world where valuations are getting pushed pretty high," Sperling, wearing a conservative gray suit with a blue polka dotted tie, said. "If you look at past recessionary periods, you would have expected valuations to still be coming down."

Recent deals by other buyers have been priced at nine to 11 times earnings before interest, taxes, depreciation and amortization. Sperling was expecting levels of six to eight times EBITDA in the current economy.

CLEAR CHANNEL ON THE MEND

"From our perspective, that has dampened the opportunity set a bit for right now," he said.

Sperling's firm just announced its first major leveraged buyout in over 18 months. That deal, the $928 million acquisition of CKE Restaurants CKR.N announced on February 26, is still subject to a 40-day go-shop period, meaning it could still be won away by another suitor's higher bid.

Sperling's firm largely stepped back from the LBO frenzy that took hold in 2007 and peaked in October of that year when 112 deals worth $120 billion were completed -- the highest monthly total ever.

The one big deal T.H. Lee completed since then, its purchase of radio and outdoor advertising giant Clear Channel, has created more headaches than profits so far. Along with co-owner Bain Capital Partners LLC, Sperling had to navigate the company through one of the worst advertising downturns on record.

But after December's bond issue, Clear Channel is on the mend, Sperling said.

The experience forced the firm to revisit its most basic risk modeling procedures, which are used to determine how much debt can be used to fund a deal at a given purchase price.

"We had modeled in our projections the worst recession in both radio and outdoor that had happened in the last seven (economic) cycles," Sperling said. "This one was five to ten times worse."

FRIEND OF RAHM

A 1979 graduate of Purdue University in West Lafayette, Indiana, Sperling currently lives in a Boston suburb with his wife, Laurene, and four children.

Sperling arrived at Thomas H. Lee in 1994 after more than a decade running an in-house private equity shop for Harvard University's endowment dubbed the Aeneas Group. Sperling, who has an MBA from Harvard, was criticized by some at the university in the early 1990s for a small handful of deals that failed.

Though most bankers lean Republican, Sperling took two weeks off from his Harvard job in 1992 to volunteer for Bill Clinton's presidential campaign, the Harvard Crimson reported at the time.

Sperling is also friends with White House chief of staff Rahm Emanuel. Two years ago as a member of the House of Representatives, Emanuel rose to offer Sperling official 50th birthday congratulations entered in the Congressional Record.

Given his experiences at Harvard, Sperling has followed the university's more recent investment and financial problems with interest. Jane Mendillo, who was appointed to run the endowment in July 2008, worked for Sperling during his stint there.

"She's very, very good," Sperling said. "Clearly there were mistakes made. But what that means for the asset allocation formulas going forward need more study than just saying we need to pull back."

Some critics blame Harvard's troubles on excessive investments in illiquid areas like hedge funds and private equity. They predict a sharp decline in private equity investing in the future.

After noting that university endowments have not provided a significant amount of cash for private equity firms in recent years, Sperling is dismissive of the gloom and doom scenario.

"Over the last 30 years, the death of private equity in various places has been written numerous times," he said. "There is a good reason why private equity exists and a good reason why people invest in it."

(For summit blog: blogs.reuters.com/summits/)

(Reporting by Aaron Pressman; Editing by Phil Berlowitz and Steve Orlofsky)

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