Will Ripplewood Holdings Outlive Bernie Madoff?
We think it would be somewhat aggressive to suggest that an "in kind" distribution to limited partners by an LBO fund is necessarily indicative of a meltdown in the buyout shop- but only somewhat aggressive. As aggressive as pancreatic cancer? We're not sure. (And since it is the New York Post that is reporting on Bernie's demise, we're not so sure about that either).
Most LBO limited partnership documents permit "in kind" distributions to their investors (limited partners of the fund) as long as the assets are "marketable securities." Exceptions are generally made only if the fund itself is winding down or liquidating to end operations. Limiteds tend to find these distributions annoying, but not universally offensive. They generally don't trigger recognition of unrealized gains automatically, and, to the extent the securities are really marketable, the investor can just sell them on the open market (though the sudden supply can depress price severely, obviously). That's irritating, but there is also the issue of valuing the securities for the purposes of measuring compensation to the limited partner. Do they use the price on the date of distribution? An average over some recent period? Up for discussion, typically.
All of this is a long way of pointing out that buyout funds are unlikely to want to do distributions in kind except given exceptional exceptions. What then are we to make of this morning's press release on Business Wire?
RSC Reports Distribution of Ripplewood Holdings’ Share Ownership To Its Limited Partners and Resulting Changes To Board of Directors
RSC Holdings Inc. (NYSE:RRR), one of the largest equipment rental providers in North America, announced that Ripplewood Holdings, L.L.C. (“Ripplewood”), a private equity firm holding approximately 34% of outstanding RSC Holdings common stock through two of its funds, has distributed approximately 26.6 million RSC common shares to its limited partners and is retaining ownership of the remaining 8.2 million shares. Oak Hill Capital Management, LLC, a private equity firm also holding approximately 34% of outstanding RSC Holdings common shares, is retaining its entire position in RSC.
Timothy Collins, Ripplewood’s founder, stated: “We continue to believe that RSC is the best company in the equipment rental business and we are pleased by the success of our investment to date. This share distribution was made to provide our limited partners with greater flexibility in an environment where private equity investors are very focused on liquidity. We have great confidence in the RSC business model and management team with respect to our continued investment in the company.”
Well, seen in the context of Zero Hedge's coverage last week of Reader's Digest's bankruptcy, and the blow that this represented to Ripplewood, we think we have an idea. Back then we quipped:
One wonders if Ripplewood's LPs share the same gratitude for the PE firm, which managed to destroy $275 million in equity value in less than 3 years.
We are guessing this distribution isn't all that gratifying, nor is its timing compelled by a desire to cash out gains.
RSC Holdings conducted a mildly disappointing IPO in May of 2007, raising about $460 million after a November 2006 buyout of the firm by Ripplewood and Oak Hill in which those funds acquired 85% of the firm for $3.3 billion and notes that might have hit another $400 million or so depending. After hitting a high of $22.26 (the IPO was expected to command $23-$25) in July 2007 it's been almost entirely downhill for RSC which sits at $8.50 today. As to the retail investors who picked up shares in the IPO: That's what you get for buying a Leveraged IPO (LIPO) issue when the ink from the buyout is only seven months dry.
That said, we wonder if Ripplewood is long for this earth.