Taking the PIPE

Private equity's track record making private investments in public entities has been checkered at best. Investments in PIPEs typically aim to help companies in dire need of cash. They became popular starting a decade or so ago, with mixed results.

In 1999, Boston's Thomas H. Lee Partners LP invested $500 million in insurer Conseco Inc., which subsequently ran aground from a subsidiary's defaulted mortgages. Buyout pioneer Ted Forstmann led his buyout shop, Forstmann Little & Co., into disastrous PIPE investments in XO Communications Inc. and McLeodUSA Inc., becoming a symbol of the telecommunications boom's excesses, which ultimately led to his firm's fall from grace. Another casualty was Hicks Muse Tate & Furst Inc., now HM Capital Partners LLC, which plowed $1.6 billion into telecoms.

Not to say there weren't success stories. Many buyout shops, including Bain Capital LLC, Apollo Management LP, Madison Dearborn Partners LLC, TPG Capital and Warburg Pincus -- and lest we forget the smartest money of all, Warren Buffett -- can all lay claim to successful PIPEs at some point. Some of the most successful ones during the tech bubble were fairly small investments of under $500 million. JLL Partners Inc.'s (then Joseph Littlejohn & Levy) $150 million investment in prescription drug company Advance PCS Inc. was among the blockbuster wins, yielding net proceeds of $1 billion, or a 591.7% internal rate of return.

Recent events haven't changed the mixed reviews. Absent leveraged financing, the staple of leveraged buyouts, some PE shops have taken to PIPEs as an alternative way of deploying capital. This year to date featured an astonishing $180 billion worth of PIPEs, according to PlacementTracker, a unit of Sagient Research Systems Inc., which has followed PIPEs since the mid-'90s. Of that, sponsors invested about $19.1 billion, or 11%, compared with just $3.4 billion of last year's $84 billion total.

Understandably, interest has flagged of late. TPG Capital's $1.35 billion loss from Washington Mutual Inc., the failed savings and loan that J.P. Morgan Chase & Co. scooped up in September, showed just how treacherous the markets can be, though TPG said it had not foreseen the magnitude of the financial crisis nor its profound global impact.

Corsair Capital LLC fared better, breaking even on its $785 million investment in National City Corp., its first foray in a U.S. commercial bank. Not so for other private investors in the $7 billion capital raising by Cleveland's Nat City, which Pittsburgh's PNC Financial Services Group Inc. took over in October.

Likewise, other bailout PIPEs by private equity firms are under water, though the jury remains out. Warburg Pincus' $800 million in bond insurer MBIA Inc. is now worth about 50% less on paper. Others, including Wilbur Ross' $250 million outlay in bond insurer Assured Guaranty Ltd. and Thomas H. Lee Partners and Goldman, Sachs & Co.'s $1.2 billion commitment in equity and debt to MoneyGram International Inc., have taken even bigger hits.

Leonard Green declined comment.  Continued...