“Fine idea, Juan. There’s a good boy.”
Jacklin’s office was divided into two functional areas, and ran in an L shape anchored by the northeast corner of the twentieth floor. The working quarters ran up the north side of the building, and comprised his desk, an ornate mahogany monstrosity that had belonged to Georgie Patton when he’d been governor of Bavaria following the second war, chairs for partners or principals, and shelves adorned with the dozens of de rigueur tombstones. “Tombstones” were Lucite trophies commemorating completed deals. Somewhere in there, he’d placed photographs of his family. Sneaking a look, he’d be damned if he could find them.
His fellow partners had taken up their spots in the “guest quarters,” and sat on the comfortable, low-slung couches that faced one another over a travertine coffee table. There was Joe Regal, who’d spent thirty years at Langley in operations. And Rodney Bridges, who’d done twenty years as a Wall Street lawyer before jumping the fence and playing top cop at the Securities and Exchange Commission, and who had now jumped back. There was Michael Remington, recently retired secretary of state, and aide to three presidents.
And then there was Jacklin himself. The pictures adorning his wall counted as an illustrated record of his rise to power. There was Jacklin, age twenty-four, fresh from OCS, standing in the middle of a rice paddy in ‘Nam. There he was, at thirty-two, being sworn in as congressman, and ten years later, taking office as secretary of defense. More recent pictures showed him recreating with the last three presidents-playing tennis, fishing for striped bass, and attending an event at the Kennedy Center. The pictures never failed to elicit the requisite oohs and aahs. Yes sir, ole J. J. was connected.
If there was a class system to every industry, Jefferson belonged to the aristocracy of finance. “Private equity” was just the newest name for an old game. The English called it merchant banking way back when Britannia ruled the seas and the East India Company owned everything worth having. Junius Morgan, J. P.’s father, had perfected the game and brought it back with him from London. Jacklin had helped tweak it, introducing the concept of “leverage” to give the investor more bang for his buck. Twenty-five years earlier, when Jacklin set up shop, Jefferson was called a leveraged buyout firm, or LBO for short. And the tone used was more fitting for freebooters and buccaneers than royalty.
Time, and an unrivaled track record of success, had tempered any criticism. Since its founding, Jefferson Partners had invested some $185 billion in over three hundred deals, and delivered returns averaging a phenomenal twenty-six percent per year. Ten million dollars invested with Jefferson back at the beginning was worth a billion-two today. By contrast, the same amount invested with the Dow Jones Industrial Average would have brought you barely $200 million. Chump change.
Pension funds, college endowments, corporate treasurers, and the larger family trusts comprised the backbone of Jefferson’s clientele. For years, they had fairly begged to invest their money with Jefferson. There was a $100 million minimum and the line started at the door.
The last years, however, had seen a surge in the number of private equity firms. With the market in the doldrums, investors began seeking out “alternative instrument classes” where their dollars could work harder. Foreign markets? Too risky, and who could forget Russia in ’98? Derivatives? One word: “longtermcapital.” Then there was Jefferson, quietly buying and selling companies, not making any waves, and all the while raking in the chips. What had everyone been thinking? The answer had been there all along.
From the outside, private equity looked like an easy way to make a buck. After all, what did it take? A few smart guys with a little experience and a Palm filled with the names of their nearest and dearest. Drum up some money, find an undervalued company, do a little pruning, and you were off to the races. Best of all, there was no need to have the costly infrastructure of a bank behind you. Ideas were the equity investor’s capital. Brainpower. Savvy.
It only got better from there. The profit structure was set up to reward those with the ideas. This was no fifty-fifty split. Most funds promised a certain return on the clients’ investments. They called this return the hurdle rate. Usually, it stood at around twenty percent. While the return wasn’t guaranteed, Jefferson could not take a profit itself until it had paid its investors their twenty percent.
The rule was that once the hurdle rate had been met, and the clients paid out, the rest was divvied up according to an eighty-twenty split, with the equity firm getting the lion’s share. What made this all the more irresistible was that the private equity firm, or financial sponsor, as they were referred to within the industry, put up the least amount of money, usually just five percent of the purchase price.
Say a company cost one billion dollars. The equity firm would put twenty percent down and use the services of a friendly bank to finance the remaining eighty percent through a debt underwriting. But look closer at the twenty percent, or two hundred million dollars, that the equity firm pledged. Of that amount, $160 million, or eighty percent, was paid out of the fund. The firm itself chipped in just forty million dollars of its partners’ money. Come time to sell that lump of coal turned diamond, it was the firm’s turn to shine.
If in a year they sold the company for two billion dollars, the profit would be divided up thusly: Investors in the fund would receive their investment back plus the twenty percent on top of it, a total of approximately $192 million. They would then receive another twenty percent of the remaining $968 million, or $193 million, bringing their grand total to $386 million earned on an investment of $160 million. In one year! A home run, to be sure. But it was nothing compared to what the private equity fund earned.
The remaining eighty percent of the $968 million profit, some $774 million, less twenty or thirty million dollars for fees to investment banks, lawyers, and accountants, flowed directly into the partners’ pockets. Remember, the equity firm only put up forty million dollars of its own money. One year later, they wrote themselves a check for $774 million, and, of course, another forty million for the money they’d invested originally. These were profits on a biblical scale.
Jefferson had kept its position as an industry leader by virtue of its record, and its constant drive to close bigger and bigger funds. A few years back, one had topped out at five billion dollars, making it the first to be called a megafund. Tonight, they would gather to toast Jefferson Capital Partners XV, which was set to close with over ten billion dollars committed. No one had thought of a name yet for a fund that big.
“A word?”
Guy de Valmont took Jacklin by the elbow and led him to a corner of the office. “See the article in this morning’s Journal?”
“No,” said Jacklin. “Didn’t get a chance yet.”
“It’s about Triton. It claims that if the appropriations bill doesn’t pass, Triton will have to declare Chapter Eleven.”
Jacklin tugged at his chin. Triton Aerospace was a manufacturer of antiaircraft systems that Jefferson had purchased eight years earlier. Eight years was an eternity in private equity. Speed was the name of the game. Buy a company, turn it around, ratchet up the free cash flow, then sell the thing. That was the ticket. Jefferson’s average holding period of four years led the industry.
“Company’s really in the shitter. We’re never going to find a buyer unless that ass Fitzgerald signs off on that bill.”
“That ass Fitzgerald” was Senator Hugh Fitzgerald, chairman of the Senate Appropriations Committee, and the bill being bandied about was the $6.5 billion Emergency Defense Funding Bill, of which $265 million was earmarked for the Hawkeye Mobile Air Defense Units manufactured by Triton.