Blooming in broad daylight

Most private equity firms extol the virtues of being both privately owned and independent. Most spinouts from a larger private equity entity cite these advantages, as well as a lessening of bureaucracy, as justification for going independent. Freed from the suffocating regulatory requirements of listed companies, say many general partners, they can be more nimble, responsive to the market, and able to add value as long-term investors.
So how does Evercore Partners’ private equity practice explain its place within a larger, publicly listed organization?
In fact, Evercore’s founders argue that being public offers distinct advantages.
The firm, with two lines of business—M&A advisory work and investing—debuted on the New York Stock Exchange last August in a closely watched IPO. With 3.95 million shares selling at $21 per share, Evercore raised $83 million.
Especially within the private equity industry, market insiders were curious to see what kind of value would be given to a company with a significant private equity business, and how that private equity business would operate under the hot lights of a public listing.
Evercore’s IPO also represented a milestone in an off the-beaten-path business plan for Roger Altman and Austin Beutner, two ex-Blackstone partners who co-founded Evercore in 1996.
The firm’s private equity business, while a smaller slice of the company’s overall operations, is no mouse in a room full of elephants. The firm currently has more than $1.2 billion in capital under management in private equity and venture funds.
But in a booming M&A market, Evercore’s advisory business is thriving. The firm was recently ranked the eighth largest investment bank in the US. Evercore services a long list of corporate heavyweights, including CBS, General Mills, AT&T and Credit Suisse.
Among the firm’s recent high profile projects was advising automobile maker General Motors on its $7.9 billion sale of 51 percent of its interest in its financial services arm GMAC Financial Services. It has also
counseled the pharmacy CVS on its acquisitions of its competitors Osco Drug and Sav-on Drug as part of the $17.4 billion sale of Albertsons.
Evercore’s private equity division has a history of investments in companies like New York-based American Media, the magazine publisher whose titles include the health magazines Shape and Muscle & Fitness, as well as the tabloids National Enquirer and Star. Other notable deals include a March 2006 investment of approximately $57 million in Houston, Texas-based Davis Petroleum Corporation, an oil and gas exploration and production company that operates in the Gulf of Mexico, Texas, Louisiana, Oklahoma and the Rocky Mountain region. Evercore
also joined Fidelity National Financial, a publicly traded provider of outsourced products and services, and private equity firm Thomas H. Lee Partners in the purchase of Sedgwick CMS, a company that outsources insurance claims management services to the private and public sectors. Evercore made a $68 million commitment to that deal.
Last May, the firm committed an undisclosed amount in the purchase of Chicago-based long-haul waste transporter Mr. Bult’s. Evercore has invested in nearly every sector of the economy, according to co-CEO Beutner.
However, the firm specializes in the energy, business and information services, media and mature technology industries.
For its size, Evercore pursues a relatively diverse set of strategies, ranging from US middle market buyouts to venture capital to doing deals in Mexico. A dedicated private equity fund, Evercore Capital Partners I, closed at $512 million in 1998. Evercore is currently investing from Evercore Capital Partners II, a $663 million fund that closed in 2001. According to a recent quarterly investor conference call for Evercore, fundraising for a third vehicle is in the works.
Evercore Ventures, a fund that invests in start-up companies, closed at $62 million in 2000.
Evercore’s investment division in Mexico is Protego Asset Management, which invests in Mexican peso-denominated fixed income securities. With approximately $400 million in assets under management, the fund makes investments in Mexico’s housing, health care, retail, consumer finance and transportation sectors.

An ‘enduring firm’
According to members of the Evercore private equity team, going public has not significantly changed how the private equity arm operates. “There has been no direct impact on the day-to-day activities,” says Neeraj Mital, the senior managing director of the firm’s investment activities and private equity business.
Over the long run, Beutner says in an interview, the advantages of being housed in a publicly traded company will surface. “It does provide an opportunity to continue to build an enduring firm,” Beutner says.
The staying power of being public, he adds, includes the ability to attract and retain talent within the investment team. As a public company, the firm can pay individuals with shares of the company in addition to the standard cash and carried interest. “Shares in our holding company have always had value,” he says. “Now as a public entity, we have a more concrete way to measure that value.”
“The IPO has enabled us to attract new talent to the firm and provide added incentive to our current team,” confirms Mital.
Existing as a public entity also benefits the firm by allowing increased exposure to investment opportunities, Beutner says. “The IPO yielded higher visibility, which has helped in our efforts to attract deal flow.”
Being public can have its challenges, as well. Evercore missed its deadline for filing its 10-Q with the Securities and Exchange Commission in November, blaming its recent acquisition of Protego in August for the lapse. At the time, the firm said it was still trying to establish the acceptable accounting for the Protego transactions. The incident generated a few headlines, but Evercore’s share price has strengthened since.
Beutner says the firm has always and continues to report to its limited partners each quarter on a GAAP (Generally Accepted Accounting Principles) basis. Evercore also reports to its public shareholders each quarter on a GAAP basis. Public shareholders receive portfolio company valuation data in the aggregate while Evercore’s limited partners receive it for each individual portfolio company.
According to the firm’s 10-Q, the firm describes its private equity arm as the investment management division. Its sources of revenue, the form says, include management fees, portfolio company fees, carried interest and gains or losses seen by the individual portfolio companies.
Included in the firm’s definition of portfolio company fees are monitoring fees—those associated with development strategies set up to improve the operating and financial performance of the company—and director fees from the services rendered by senior managing directors on the boards of the portfolio companies. Transaction fees are also a part of portfolio company fees and paid for the counsel given to the held companies.

Analyst attention
Being public creates greater scrutiny for Evercore, but Beutner takes it in stride. “Some moderate attention is brought to the firm, but we have a broad business at Evercore,” he says, noting that a particular change in one single portfolio company probably will not generate significant amounts of attention. “Being public increases the number of people who might be made aware about portfolio company activity, but there are a number of other places where they could find that same information.”
Analysts who evaluate the private equity division of Evercore are not always well versed in private equity deals, but according to Beutner, it is not difficult to educate them about the business. Though there are not many examples of private equity in the public market, he says, the analysts typically “do their homework.” If one looks at the firm’s deals on an individual basis, he says, it can be difficult to understand the trends in the business.
“But looking at the business as a whole,” he says, “makes it a whole lot easier.”
Remaining a part of the larger Evercore team rather than spinning out as an independent private equity firm also has major benefits, the firm argues.
“Our firm’s structure is a competitive advantage,” says Mital. The firm, he adds, uses the larger “footprint” of Evercore as a source of resources that can help in making decisions about investments. “Historically, we grew up as one firm. There’s no wish on anyone’s part to separate into two unique entities.”
The firm, Beutner says, is “relationship-oriented. We’re better in each of our businesses because of the other businesses.”
He adds: “Our strategy is very closely tied to being part of the larger Evercore structure and network.”
One deal that exemplifies the benefit of having the larger Evercore base behind the private equity business is the acquisition and subsequent sale of Michigan Electric Transmission Company. Evercore came across the opportunity through a contact in the advisory business, and, upon further research, the private equity team realized that the energy transmission sector looks like a good place in which to invest. Evercore led a group that acquired Michigan Electric for $387 million in December of 2003. According to a source close to the investment, Evercore itself contributed $68.8 million to the deal and acquired a 45 percent stake in the limited partnership interest. The group sold Michigan Electric to ITC Holdings, the Novi, Michiganbased holding company that owns the electricity transmission company ITCTransmission, in October of 2006. In that exit, the source says, Evercore made a more than three times return on its initial investment, a total of approximately $214 million in cash. Evercore has now fully divested its stake in Michigan Electric.
Such a successful investment, Beutner adds, requires an understanding of the industry, a great deal of research, and a broad network, including the deep bench on the advisory side. “It fits like a glove,” Beutner says.
Sourcing deals, says Beutner, is done in a number of ways. “A lot of it is good, old-fashioned shoe-leather,” he adds, indicating that it’s the senior partners’ “direct relationships” that are usually the source of good deal ideas.
“We have relationships with a number of people in the corporate world,” he concludes.
Evercore’s investment professionals report directly to Beutner, the leader of the private equity business’ day-to-day operations, and bring a variety of industry experiences to their posts. Among those on the team is John Dillon, a 40-year veteran of Memphis, Tennesseebased forest-based writing and packaging products producer International Paper. Dillon joined Evercore approximately one year ago, and spends time advising the portfolio companies.
“Our portfolio companies benefit from our involvement by receiving operational insights, based on experience, from people like myself, which they wouldn’t otherwise have access to on their own,” Dillon says of his role in the business.
Evercore has also boosted its team of professionals with the addition of James Matthews, formerly a general partner at New York-based private equity firm Welsh, Carson, Anderson & Stowe. With Mital, Matthews is now the co-head of the private equity division.
Business is robust on both sides of the Evercore business.
But the true test of practicing private equity within a listed entity will come when the environment for investment falters or economic instability occurs, under the glare of the public markets’ regulators and reporters. Evercore’s resiliency in the face of harsher market conditions will prove just how valuable this unique structure is.