Value Added: Investing In A Downturn
Here's Tom Heath's latest column on Washington's business community:
I met Dwight Bush a few years ago when he was part of a group that tried to buy the Washington Nationals from Major League Baseball. Bush, 51, is a well-known Washington corporate banker. He speaks softly and deliberately, like many bankers.
He also oozes gravitas.
Bush is setting up a new private equity fund, but I wanted to talk a little baseball first.
Does the current economic implosion make the Nationals a less appealing investment? Bush's baseball group, led by Indianapolis communications executive Jeff Smulyan, lost out to the family of Ted Lerner. Lerner bought the Nationals for $450 million two years ago.
"I think there's so many things [the Lerners] can do with that franchise that will make it really important to D.C.," said Bush, who shares five expensive ($150 per seat, per game) Diamond Club season tickets behind home plate. "From that perspective, I wish we had prevailed. On the other hand, it's clear to me the timing of the investment is going to make it more difficult for [the Lerners] to get the returns they are looking for. I think they have a real challenge to get the people in the D.C. community behind them."
Bush's resume includes a stint at J.P. Morgan Chase, where he worked in corporate finance and private equity. He also was vice president of corporate development at Sallie Mae, the giant student loan lender, and helped move that company from a quasi-government agency to a regular corporation. More recently, he helped BET founder Bob Johnson start the Urban Trust Bank.
He resigned from Urban Trust a year ago and is in the process of raising a few hundred million dollars to start a private equity fund that will invest in the same impaired assets that U.S. Treasury Secretary Henry Paulson wants to buy from banks.
Bush has experience at this sort of thing. He is on the board of JER Investors Trust, a Northern Virginia real estate investment company founded by Joseph E. Robert. I wrote a story about Robert a couple of weeks ago describing how he made his fortune buying and selling properties during the savings and loan crisis in the early 1990s.
I asked Bush why he was starting a private equity fund and where he was hoping to find money in this cash-strapped environment.
"What we know is that the last time we had a mortgage meltdown, there were great fortunes made," said Bush. "In this type of fragmented environment, those people who can identify good assets that are undervalued...people like Joe Robert...and that can work with those assets over time to help realize their true value" will make lots of money.
He said the private equity fund will do two things: manage assets that the federal government buys from banks through the Paulson Plan. The fund will also, separately, buy assets that the "Paulson Plan" auctions, then fix them up and sell them at a profit - hopefully.
Bush also has his eye on assets that desperate hedge funds are unloading at fire-sale prices.
Some $43 billion came out of the hedge fund market in September because investors are demanding their money. Bush said hedge funds are selling off quality assets, from manufacturing companies to farmland to commodities, at low prices so they can give cash to their impatient investors.
"Some of these [hedge fund] guys would buy the building their hedge fund operates out of, take two floors for themselves and lease the rest. That asset can probably be acquired because they need the liquidity. Or they invested in other non-financial assets. That's okay until you have to liquify that asset and investors say they want out.
"They will have to frequently sell those assets at a distressed priced, even if those are good assets."
But where is Bush going to get the money?
"Remember one thing," he said. "Every month, pension funds take in money and pension funds have an obligation to pay their retirees over time. So new capital is available in the market every month and the money has to be put to work."
Bush then gave me similar advice to what Russ Ramsey told me a few weeks ago. Ramsey, a co-founder of Friedman Billings Ramsey Group Inc., who now runs a private investment firm, said to buck up keep investing, even as the market continues its crash.
Bush: "You could look at this current situation we are in and say it's awful. But if you are a long-term investor, you have to look past this and you continue to invest in things that are going to yield long-term returns."
Given his experience in private equity, I asked Bush if the PE model based on cheap credit has been blown up. Here's the model: put up a minimal amount of money and borrow the rest for an ailing business. Increase the business's revenues, making it more valuable, and then sell it at a big profit. Under that model, private equity firms made huge returns for their investors and themselves. District-based Carlyle Group earned 26 percent annual returns, net of fees, over the past two decades.
"In the short term, private equity firms will tend to work more with strategic partners and the assets acquired will be less leveraged. Over the long term, you've got to remember that banks have to lend to make money and that this [the credit freeze] too shall pass. My view is that the current situation should reach bottom some time in early to mid-2009, and by 2010 we should have a more robust economy again."
He said the pendulum of regulation will probably swing toward greater control over financial institutions in the next few months or years. But Bush said the regulations will be relaxed over time.
"There's a tendency on the part of regulators in a time like this to tie things down too much and restrict too much commerce. Eventually they will have to come back to a more balanced approach."
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Posted by: baseball fan | October 23, 2008 1:29 PM
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