Private equity math, Nuveen edition

By Felix Salmon
April 14, 2014

The WSJ has the details of today’s big asset-management news: TIAA-CREF is buying Nuveen Investments for $6.25 billion.

The sale marks the end of an ill-fated acquisition by private equity shop Madison Dearborn in 2007, just before everything fell apart. Madison Dearborn paid a total of $5.75 billion for Nuveen — a premium of 20% to its market value. As the WSJ says, the buyers used $2.7 billion of their own money to pay for Nuveen, and then borrowed the other $3.05 billion. But then things got tough:

Within a year, Nuveen’s borrowing costs had risen as the financial crisis set in. The company eventually refinanced most of its buyout debt, which now stands at $4.5 billion and will be absorbed by TIAA-CREF.

With the TIAA-CREF deal, Madison Dearborn will have at least broken even on its Nuveen investment, a person familiar with the matter said.

On its face, this doesn’t seem right. If TIAA-CREF is absorbing $4.5 billion of Nuveen’s debt, that means it’s paying $1.75 billion in cash. That’s a billion dollars less than Madison Dearborn paid in 2007. Is it credible that Madison Dearborn has managed to dividend out a billion dollars of profit between 2007 and today?

No, it isn’t. If you look at Nuveen’s financial report, it shows net income in the five years from 2009 to 2013 to be minus $495,516,000. There’s another line, stripping out “Noncontrolling Interests” and showing net income “attributable to Nuveen Investments”; that one shows an even bigger cumulative five-year loss, of $540,752,000.

But it doesn’t end there. If you go back to the predecessor company and look at Nuveen’s results from the acquisition in 2007 through the end of 2008, you’ll find a net loss of another $1,941,588,000, and a net loss attributable to Nuveen Investments of $1,796,012,000.

Which means that either way you look at it, the cumulative losses that Madison Dearborn has overseen come to somewhere in the region of $2.4 billion.

So here’s my back-of-the-envelope math: you buy a company for $2.7 billion in cash, plus debt which you refinance a few times. While you’re running the company, it loses a total of $2.4 billion. And then you sell the company for $1.75 billion in cash. Total going out the door: $5.1 billion. Total coming in, at exit: $1.75 billion. Net loss: some $3.35 billion, give or take.

All of which raises some big questions about the WSJ’s claim that Madison Dearborn “will have at least broken even on its Nuveen investment”. If that claim is even close to being true, then at the very least we can’t take Nuveen’s public filings at face value at all. (Nuveen needs to make public filings even though it isn’t a publicly listed company, because it has issued public debt securities.) Somehow, Madison Dearborn will need to have turned losses for Nuveen into substantial profits for itself — the classic strip-and-flip strategy.

This is worth remembering, when private-equity types (think Mitt Romney) claim that their interests are aligned with the interests of the companies they buy. That certainly doesn’t seem to have been the case here. Nuveen is being sold with about $1.5 billion more debt than it started with, and with cumulative losses under Madison Dearborn’s ownership of some $2.4 billion. That’s not a great legacy for TIAA-CREF to inherit. If Madison Dearborn really is breaking even on this deal, that only goes to show the enormous disconnect between the economics of private equity companies — the wealthy rentiers of society — versus the economics of the real-world companies they buy and sell.

Update: Dan Primack has many more details on how Madison Dearborn is likely to end up breaking even here. For one thing, he says, “In addition to its $1.75 billion, Madison Dearborn will receive all of Nuveen’s balance sheet cash.” That’s a substantial sum: about $325 million or so. Then there are various successful investments that Nuveen made, as well as profit on the acquisition of a minority stake in Nuveen at a distressed price during the financial crisis. And most of those big losses were thanks to intangible asset writedowns. Which just goes to show how private equity really can come out ahead, even when the company it’s investing in seems to be struggling and losing billions.


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I suspect Madison Dearborn wrote down its investment in Nuveen over time as the company struggled. The Journal might simply have relayed the comment that MD was “breaking even” on the already written-down value of the investment in its portfolio.

Or: shenanigans. Your guess is as good as mine.

Posted by EpicureanDeal | Report as abusive

> Net loss: some $3.35 billion, give or take.

Unless MD injected more equity, those losses are TIAA-Cref’s problem now and don’t affect MD’s bottom line.

Sale price is $6.3b, cost was $5.8b. Debt is up to $4.6b from the original $3.1b. How MD pulled the extra $0.5b out isn’t clear, but is eminently believable.

This, however, seems right:
> the enormous disconnect between the economics of private equity companies — the wealthy rentiers of society — versus the economics of the real-world companies they buy and sell.

Posted by Wcwhiner | Report as abusive

You got tripped up with accounting.

Your cumulative $542m loss is mostly due to a $586m impairment in 2012 (you generously linked to the table yourself). Ditto for the other $2.4B loss with the $2B impairment in 2008.

Impairments = reckoning of previous bad decisions or if you’re a financial company in 2008, an extremely cruel mark to market rule (also related to reckoning).

Impairments are not cash! You don’t lose cash when you take accounting charges. This is why companies like reporting ‘adjusted EBITDA’, which they do.

Posted by DefunkdReader | Report as abusive

Distressed Minority Stake = BofA selling out Merrill Lynch’s stake.

What about Nuveen’s purchase of U.S. Bancorp’s Asset Management business for cash & 10% stake

Posted by deleveraging | Report as abusive

Personally, I never heard of Madison Dearborn and couldn’t care less whether they made a good move or not. As a TIAA-CREF participant, what I want to know is what on earth TIAA-CREF has in mind, and why they want a mutual fund company when they already have a perfectly good one of their own.

Posted by nisiprius | Report as abusive

Felix briefly mentions Nuveen’s intangible asset writedowns, but underplays them.

As Matt Levine notes – 14-04-14/how-bad-a-private-equity-invest ment-was-nuveen-investments – those impairments account for over 100% of the net losses posted by Nuveen during Madison Dearborn’s ownership. Those items are completely non-cash and are essentially a mark-to-market charge saying that Madison Dearborn overpaid for Nuveen in 2007. (That seems to be true, in the sense that Madison Dearborn would have taken a huge loss if it sold Nuveen in 2009 when, per Dan Primack, Nuveen’s annual EBITDA was $253 million, as compared to $404 million in 2013.) A key point to note is that GAAP dictates that these impairment charges are never reversed – there’s a requirement to test annually for impairment, but the amount that’s written down is never written back up.

Summarizing – the “$2.4 billion in losses” referenced by Felix are driven by required GAAP accounting for non-cash writedowns, and these losses are therefore completely meaningless for the type of analysis that he’s trying to carry out here.

Posted by realist50 | Report as abusive