Why buy milk when you can buy the cow? By the same token, why buy futures when you can buy a futures brokerage? That must have been the reasoning of Thomas H. Lee Partners. Either that, or the big Boston private equity firm simply spotted a lucrative LBO investment in Refco: It more than tripled its money when the New York derivatives brokerage went public last month.
Of course, gains of such magnitude aren’t unheard of in the buyout game. But Lee’s big hit is extraordinary in that it took barely one year -- one of the quickest trips a company has ever made from LBO to IPO. Three to five years is typical.
“Sometimes a company has the opportunity to go from a private deal to the public markets very quickly,” shrugs Lee co-president Scott Schoen, 46, who worked on the deal. “We’re very pleased with the outcome.”
The $583 million, August 11 IPO valued Refco at $3 billion, making Lee’s June 2004 investment of $507 million -- a 57 percent stake -- worth $1.7 billion. Within a week the stock had risen 20 percent. (Lee sold a portion of its shares at the IPO but retains a 44 percent stake.)
The deal is also a triumph for Refco’s CEO, Phillip Bennett, who had teamed up with Lee on the buyout and now owns one third of the company. Promoted from CFO in 1998, he acquired derivatives brokerages and clearing firms around the globe, positioning Refco as a leader in a hot industry -- global futures volume grew 16 percent last year alone. “There’s no doubt the market is telling us that there has been an increase in the equity value,” says Bennett with considerable understatement.
The success of Refco’s IPO is all the more remarkable in light of the company’s run-ins with regulators, including an ongoing SEC probe into allegedly manipulative stock trades by two former Refco brokers. The company duly warned investors before the IPO that it could face SEC penalties.
“That residual history maybe put some people off, but our conclusion and due diligence was that this was from the past and not from the present,” says Schoen. “A year later the business has grown substantially from even when we bought it.”
The buzz over Refco has sparked talk that U.K. hedge fund manager Man Group will spin off its own derivatives brokerage arm. (Man Group says no decision has been made on the matter.) A private equity buyer shouldn’t be hard to find.
