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Powers' play

As Hellman & Friedman's first CEO, Brian Powers must preserve founder Warren Hellman's legacy while getting great results in a private equity market in which too many chase too few good deals.

In the spring of 1999, Brian Powers, a senior partner of San Francisco private equity firm Hellman & Friedman, heard that Bernie Ecclestone's auto racing empire might be up for sale. The family trust that ultimately controlled Formula One Holdings and all the related companies run by the self-made billionaire, supposedly wanted to sell a 50 percent stake in the business for estate-planning purposes.

Powers recognized right away that this was an intriguing property: The holding company, SLEC Holdings, controlled virtually all of the commercial and media rights to the hugely popular Grand Prix racing circuit. Through a mutual friend in Australia, Powers arranged to meet Ecclestone (who was recovering from heart surgery) at his London office. To the banker's surprise, the hard-charging onetime race driver purported not to care who bought the stake -- as long as the price was right.

Powers asked Ecclestone what qualities he was seeking in an investor. The entrepreneur gave him a cool glance. "That's easy," he replied, "Deaf, dumb and blind."

"How about two out of three?" Powers retorted. Ecclestone laughed.

The two established a rapport. But Hellman & Friedman, after its usual painstaking due diligence, couldn't come up with a high enough bid. So the firm dropped out of the race, though Powers did make a point of staying in touch with Ecclestone.

But, in a surprise turnabout, Ecclestone's family trust decided several months later, in January 2000, to let Hellman & Friedman snatch 37.5 percent of Formula One away from a rival, Deutsche Morgan Grenfell. It was a dramatic photo finish: DMG's three-month option on the stake had expired only minutes before, while its partners and co-investors were standing around in Formula One's offices squabbling over some small point, according to one source.

When they reentered the conference room, Ecclestone and his legal advisers allegedly told DMG's partners that the option had expired and they'd lost the deal. A dumbfounded Powers got a call in San Francisco saying Hellman & Friedman had prevailed after all. The firm's $712.5 million bid was roughly 16 percent less per share than DMG had paid for its initial 12.5 percent stake: Ecclestone, it seems, had simply decided he preferred to work with Powers and his firm.

"They're top-drawer people," the entrepreneur says. "Everyone I know speaks highly of them. I've gotten to know Brian quite well -- and actually gotten to like him, as it happens."

THE ABILITY TO WIN DEALS WITH A SHARP EYE, plenty of perseverance, a willingness to collaborate -- and a bit of wit and charm -- helps to explain why Hellman & Friedman is such a singular private equity partnership. Since the firm was founded in 1984 by Warren Hellman, a former president of Lehman Brothers, and Tully Friedman, a onetime Salomon Brothers investment banker, the low-key, ever-so-prudent but quietly aggressive Hellman & Friedman has raised five funds worth a combined $8.4 billion.

More impressive than the volume is the funds' remarkable performance. From the start of Hellman & Friedman's first institutional fund, in 1987, through December 2005, the firm has invested $5 billion across its first four funds and part of the fifth and generated an aggregate annual net internal rate of return of 30 percent. On a gross basis this works out to 2.5 times the investment cost.

Unlike many of its peers, Hellman & Friedman has never suffered a sophomore slump: Every one of the four funds -- the $3.5 billion fifth and biggest fund (HFCP V) is only now being invested -- outperformed its predecessor. Hellman & Friedman's net returns far outstrip Cambridge Associates' U.S. private equity index, whose net IRR for the the 19 years through September 2005 works out to 13.18 percent.

But in its 22nd year, Hellman & Friedman faces a redefining moment: a midlife identity crisis. The burgeoning private equity market -- there were nearly four times as many deals in 2005 as there were five years ago -- has put the firm's collegial, collaborative approach to investing under severe strain, as has an inevitable generational shift. Larger-than-life figures at the firm -- including Warren Hellman, its founder and longtime guiding light, and, lately, Matthew Barger, the inventor of its investment model -- are pulling back from day-to-day roles. And a new top boss -- none other than Brian Powers, who has stepped in to replace these legends -- must contend with a multitude of challenges: sustaining those dazzling returns for a third decade; expanding abroad as the U.S. deal market becomes congested; attracting talented bankers in a hotly competitive field; and, most critically, adapting Hellman & Friedman to the harsh new private equity environment while preserving the firm's only-in­San Francisco culture. In a sense, Hellman & Friedman isn't just battling for deals anymore; it's battling for its soul.

The pressures on the firm are immense. Hellman & Friedman has always flourished by being willing to do something most private equity firms disdain: take noncontrolling minority stakes in companies and work alongside their managers. Today's hypercompetitive market seems increasingly less tolerant of such a quaint practice. As more and more money has poured into private equity, Hellman & Friedman's rivals have done ever-bigger deals and sought to safeguard their investments by exerting absolute sway over companies, bullying them into shape and rushing them onto the market, say critics.

Hellman & Friedman, by contrast, still sees itself as a long-term partner to companies, not as a short-term market predator. Nonethless, it has teamed up lately with big buyout firms, such as Blackstone Group, Kohlberg Kravis Roberts & Co. and Carlyle Group, to do high-powered, megabillion club deals.

In the latest example, Hellman & Friedman joined a six-strong consortium of private equity firms -- the others: AlpInvest Partners, Blackstone, Carlyle, KKR and Thomas H. Lee Partners -- in a bid to acquire Dutch publisher VNU for $9 billion. (Resistance by key shareholders could thwart the deal).

The sheer size of the private equity market is changing the deal-making equation for all firms. J.P. Morgan calculates that U.S. buyout firms have $150 billion in ready cash to invest globally, compared with $35 billion in 1997. That translates, with leverage, into $600 billion in fresh funds for deal making. Research firm Dealogic estimates that from 2004 to 2005, the number of acquisitions done by private equity firms around the world nearly doubled, from 1,125 to 2,191. The total value of deals worldwide last year? About $350 billion, a 35.5 percent increase from 2004's sum.

Powers must somehow re-invent Hellman & Friedman without fundamentally changing the place. He became CEO -- the firm's first -- back in October 2003, when Hellman, now 71, officially stepped back from day-to-day management. Powers, 56, is that rare deal maker who likes being a manager and is good at it. His résumé lists impressive management credentials: managing director of Hong Kong multinational Jardine Matheson Holdings, CEO of Australia's Consolidated Press Holdings and chairman of Austrialian media conglomerate John Fairfax Holdings.

"He actually enjoys doing this [managing] stuff, which is incredibly lucky for us," says Hellman & Friedman deputy chairman Barger. "We have aspirations to be global, but the challenge of overseeing a bunch of really bright, driven people is not trivial, and Brian is used to dealing with large entities and large egos. He is a world-class manager."

Both Hellman and Powers are settling comfortably into their new roles. Hellman still presides over the place with the genial, slightly distracted air of an elder statesman. On most afternoons he ambles about the firm's sunlit, minimalist offices at One Maritime Plaza, overlooking San Francisco Bay, in rumpled cotton twill slacks, denim shirt and tweed jacket, trading quips with, and also checking up on, partners and associates alike.

For a strong-willed founder, Hellman is letting go gracefully."I probably own less of the general partnership than any active founder among the large private equity firms," he says. "That's no accident. If you're going to successfully institutionalize a business like this, you've got to share the ownership. You can't afford to hog it. You've got to get as close to socialism as you can, in what is essentially a capitalistic environment."

Barger's recent disclosure that he would also be easing back from Hellman & Friedman after 22 years signifies a further changing of the guard. He is a seminal figure at Hellman & Friedman, the de facto chief investment officer. Barger, 48, will remain a partner and a senior adviser in the coming years and will assist in disbursing HFCP V. But he won't be involved in raising or investing a future HFCP VI.

Two partners, Patrick Healy, who's been with Hellman & Friedman for 12 years and heads the European office in London; and Philip Hammarskjold, who has been with the firm for 14 years and has arranged some of its most successful investments, will replace Barger on the investment committee. The committee also currently includes Hellman, Powers and Thomas Steyer, the founder of Farallon Capital Management. His close relationship with Hellman & Friedman -- he's a partner at the firm -- goes back to the mid-1980s, when Hellman invested $4 million of his own money to help start Farallon. (For more on Steyer's long relationship with Hellman & Friedman, see Institutional Investor's Web site at www.institutionalinvestor.com.)

Tully Friedman left Hellman & Friedman in 1998 to launch a rival buyout shop, Friedman Fleischer & Lowe; located in the same building, he remains on good terms with, and occasionally even invests alongside, his old firm.

"Every time you have an organization that is growing and trying to prove itself, you are by definition in transition," Steyer says. "But that is not necessarily a bad thing -- if you remain static, you die."

Hellman & Friedman must prove itself all over again with HFCP V. The $3.5 billion invested in the fund nearly makes it equal to all the money Hellman & Friedman had raised and invested in the two decades before HFCP V closed in July 2004. (HFCP IV was $2.2 billion.) The firm has been on a tear, by its prudent standards, investing HFCP V. So far it has made four investments, worth $1 billion in all.

The pace of investment for both HFCP IV and HFCP V has surprised some of Hellman & Friedman's limited partners. "They are very cautious, methodical, disciplined investors, so to go out and strike nearly half a dozen deals in little more than a year is just off the charts," says Ahmad Ali, who oversees private equity and venture capital investments for Cornell University's investment office, which manages the school's $4.7 billion endowment.

The deal making has been all the more remarkable considering that the backdrop is a ferociously competitive private equity market that has witnessed the emergence of a new class of rivals to firms like Hellman & Friedman. Return-hungry hedge funds have been launching knockoff products with longer lockups that are designed to make private-equity-style investments. What's more, hedge funds are banding together in consortiums to take on buyout shops.

Hellman & Friedman might appear to be at a disadvantage in this mad scramble for deals. The firm lacks a marquee name and a massive war chest. HFCP V pales beside, for instance, the $13.5 billion buyout trove raised recently by Blackstone.

But what Hellman & Friedman does have going for it is its idiosyncratic, almost anachronistic approach. The firm savors stakes in companies that it deems to be rich in intellectual capital, or "elevator assets," as Powers calls corporate talent. It has established franchises in a bunch of brainy businesses, such as advertising, financial services, insurance, software, media and asset management.

The firm demands that firms it invests in, and collaborates with, possess good brand names; competitive positions protected by steep barriers to entry; robust free cash flow (typically twice that of the average company); and virtually no debt.

"I'm a real believer that you don't gain influence by saying, 'Hey, buster -- you'd better listen to me because I own 80 percent of your business," Hellman says. "Influence comes from advice, from guidance, from using whatever expertise you have to guide the company's managers effectively."

A SCION OF A WELL-KNOWN West Coast banking family, Warren Hellman was born to do finance but loves to play music. While living in New York City and working on Wall Street in his 20s, the University of California, Berkeley and Harvard Business School grad became smitten with bluegrass and decided to take up the banjo.

Cocksure, he called Pete Seeger's manager to ask if he could take lessons from the famous folk singer. The response was disbelief. "The man said, 'Are you crazy?'" Hellman recalls with a chuckle. Seeger's staff did provide him with a referral to a renowned banjo teacher in New York, with whom he studied for about a year.

Hellman is no virtuoso at the banjo, but he is one at investing. It's practically his birthright: Financial acumen, like perfect pitch, seems to appear in every generation of the Hellman clan.

His great-grandfather, Isaias William Hellman, or I.W., as he is known to his descendants, left Reckendorf, Germany, at 17, in 1859, and journeyed to Southern California. At first he worked as a grocery clerk in a bustling little town called Los Angeles, but within a dozen years the enterprising 29-year-old had co-founded, in 1871, the future city's first incorporated bank, Farmers and Merchants Bank.

The institution prospered, eventually merging, in 1957, with Los Angeles­ based Security Pacific National Bank Corp. By the late 1890s, I.W. Hellman was involved in managing an additional bank, Nevada National Bank. It later merged with San Francisco­based Wells Fargo Bank, and the Hellman patriarch -- who was a successful real estate speculator on the side -- became president of Wells Fargo Nevada National Bank (now just Wells Fargo).

I.W. Hellman's progeny carried on his financial legacy. Warren's grandfather, Isaias William Jr., worked for Wells Fargo; Warren's father, Marco (who once worked at Lehman), founded a brokerage house, J. Barth & Co., in San Francisco; and Warren's son, also Marco, was an investment banker before working at Hellman & Friedman in 1988­2000.

Warren Hellman was born in New York City in 1934, but he grew up in California. His father, known as Mick, joined the U.S. Army Air Force at the start of World War II and relocated his young family to Vacaville in the Central Valley to be close to his air base. Warren's mother, Ruth, also learned to fly, and joined the Women's Airforce Service Pilots, or WASPs, ferrying planes around the country to free up combat pilots.

Warren was a fiercely independent child. When he was 12 he rode his favorite pony, Loco, to Sacramento and back -- a 73-mile round-trip -- because he wanted "to practice running away," as he now says with a laugh. He called his mother when he got back. "She said, 'Don't even bother to come home. Just keep going,'" he recalls. "And I said, 'But Loco is out of fuel.'"

Not long afterward the Hellmans packed their adventurer off to San Rafael Military Academy (now known as Marin Academy), a prep school that Hellman characterizes as "reform school for rich kids." Nonetheless, he got into Berkeley, where he played varsity water polo and graduated with an economics degree. He received his MBA from Harvard two years later, in 1959.

Warren's uncle, Frederick Ehrman, who was a senior banker at Lehman, helped him land a job as a junior investment banker in the firm's industrial group. Hellman turned out to be a deal-making whirlwind, earning the nickname "Hurricane." At 28 he was made a partner -- the youngest in Lehman's history, and a decade later, in 1973, he became president.

Yet Hellman was never comfortable with Lehman's tumultuous culture, which was marked by fratricidal infighting between bankers and traders. When Wall Street legend Robert Lehman died, in 1969, Joseph Thomas took over as chairman, but he became enfeebled by poor health and was soon succeeded by Ehrman. Warren's uncle ruled with a heavy hand, and in 1973 a group of board members, including Peter Peterson, the former secretary of Commerce who is now chairman of Blackstone, ousted Ehrman in a palace coup.

It fell to Hellman, as the president, to fire his uncle, further souring Warren on the Wall Street ethos. Although banker Peterson firmly took control of Lehman, he was pushed out in 1983 by trader Lewis Glucksman. It took the firm years to regain its old glory.

Hellman fled the firm and its palace intrigues in 1976. "Lehman was a bitterly competitive, truly nasty organization," he says. "I gave a breakfast for some graduate students a few years ago, and a woman asked me to talk about the mentors in my life. I said, 'Does negative count?' because I learned a ton of ways of running a business at Lehman Brothers that were exactly opposite of the way I wanted to run a business." His favorite banjo, an elegant "White Laydie" crafted in 1909, bears this telling inscription: "Reformed Investment Banker."

Don't suppose, though, that the self-exile from Wall Street lacks a competitive streak. He has participated twice in the punishing Western States Endurance Run, a 100-mile ultramarathon that winds through the Sierra Nevada Mountains. He once fell and broke a rib at the 25-mile mark but got up and finished. He was 51.

Hellman's trophy case attests to his competitiveness. He is a five-time age-group winner of the Ride & Tie World Championship, a grueling combination of long-distance running and horseback riding that requires participants to cover 40 miles as fast as they can.

In late October the septuagenarian flew to Maryland to compete in the North American Endurance Championships -- a 100-mile horse race that participants must complete within 24 hours. His time, counting rest stops: 16 hours (13 in the saddle).

Hellman's corner office is as crammed as his life. There are photos of his family: He has been married to former classical ballet dancer Christina for 51 years, and they have three daughters and a son, and 12 grandchildren. There are sundry framed awards and trophies. And amid this cornucopia is a wealth of musical memorabilia, including posters from the Strictly Bluegrass Festival, which Hellman founded in San Francisco in 2001.

The "strictly" in the name was altogether deliberate: Hellman had hoped that he could cajole the first festival's headliner, Emmylou Harris -- whom he adores -- into playing only bluegrass. But Harris is apparently as stubborn as Hellman: She sang what she pleased, and he renamed his free festival the Hardly Strictly Bluegrass Festival.

In October the jamboree drew its largest crowd ever -- 300,000 -- to Golden Gate Park. Joan Baez, Steve Earle, Dolly Parton and, of course, Emmylou Harris performed. And for the first time, Hellman took the stage with his ragtag band, the Wranglers. "I'm not sure I'd dignify it by calling it a band," he says sheepishly. "We had practiced together exactly once before we got up on stage."

Back at the firm, Powers playfully calls Hellman "our chief culture officer, or CCO." The description is apt. Hellman's imprint is everywhere.

For instance, he made sure that the history of Hellman & Friedman is, literally, written on its walls. He named conference rooms after the partnership's greatest successes -- Formula One, for example. And with his typical puckish humor, Hellman had plaques made up to mark the firm's greatest failures and had them affixed to the inside of the men's room stalls. A number seem to have been surreptitiously defaced, as if the partners didn't want to be reminded of the $127 million drubbing the firm took in 1997 on MobileMedia Corp., a paging outfit that went bankrupt, or the $53 million it lost two years earlier on EasyCall Asia, another paging company.

From the start of his post-Lehman career as a private equity investor, Hellman has demonstrated a knack for finding profitable investments. His very first project, in 1977, was a venture capital firm in Boston, Hellman Gal Investment Associates, that he formed with Joseph Gal, an engineer-turned­venture-capitalist, and Paul Ferri, who'd been a general partner of WestVen Management.

Hellman's reputation enabled the firm to draw top-notch limited partners. The Ford Foundation was the lead investor in Hellman Gal's first fund. But just before making its commitment, the foundation hired a 27-year-old lawyer-turned­portfolio manager who would soon take charge of its venture capital, private equity and real estate investments -- Brian Powers. The future CEO of Hellman & Friedman wasn't sure Warren Hellman knew what he was doing.

"We were just two or three weeks away from signing with Warren's new firm, and -- against my better judgment -- we went ahead and invested with him," the silver-haired, bespectacled Powers recalls. "Needless to say, the first fund was just a runaway success. I think we made ten times our money."

Despite that triumph, Hellman and Gal fell out over the firm's direction and dissolved the partnership after three years, whereupon Hellman and Ferri launched Hellman Ferri Investment Associates. The Ford Foundation's Powers stepped up as lead investor in the firm's second fund.

Over the next few years, the partnership thrived, but Hellman and his wife missed California. For one thing, most of their kids had settled in the Bay Area after finishing college back east. So in 1981, Hellman, then 47, headed home to San Francisco. (Hellman Ferri became Matrix Partners.)

At first, Hellman did a little freelance investment banking for Lehman. While helping Crown Zellerbach Corp. restructure its finances, Hellman met Tully Friedman, a Salomon Brothers banker who was advising the paper company. The two so enjoyed working together that they launched Hellman & Friedman in 1984.

One of the first investment professionals hired by the partners was a well-scrubbed, sandy-haired 27-year-old Californian named Matthew Barger. A graduate of Yale University, where he'd been a forward on the soccer team, Barger had earned an MBA from Stanford University and had put in time as a banking associate at Lehman.

Hellman, who credits himself with having an eye for talent, had surer instincts in Barger's case than even he imagined. More than any individual -- save Hellman himself -- Barger has shaped the firm's investment philosophy.

Hellman says, with slight exaggeration, that his initial investing approach was nothing more than a negative reaction to what he'd learned at Lehman. "All I had to do was sit down in the morning and say, 'How would we have done this at Lehman?', and then I'd do the exact opposite," he says. "But that didn't really make for a coherent investment philosophy."

Nonetheless, the contra-Lehman methodology seemed to work. The fledgling partnership made headlines in 1985 with one of the noteworthy deals of that decade -- taking Levi Strauss private. The investment was Hellman's baby. Although his firm was still two years away from raising its first institutional fund, he was able to lead a $1.6 billion leveraged buyout of the famous jeans maker (whose CEO, Robert Haas of the founding family, happened to be Hellman's distant relative and a longtime friend). Adding to the feeling of a family reunion, Wells Fargo led the consortium that provided the bulk of the financing.

Although Levi Strauss has fallen on hard times, at its peak in 1996, Hellman's investment was worth 25 times its implied cost. He remains a shareholder.

As his firm matured, so did its investment model. But it didn't happen overnight. "If you look at our first fund, it was just a hob-glob of stuff," Barger admits. "There were a few things that worked out pretty well, some that didn't and a whole lot in the middle that were pretty mediocre. That fund certainly wasn't the bright and shining light that we expected, and ultimately, I thought we could learn something from that."

Barger wryly calls this groping for an investment formula "an effort to channel Warren Buffett" into private equity. The precepts that the firm settled on are deceptively simple. Hellman & Friedman seeks out those sustainable businesses that have high barriers to entry, solid brands and a predictable growth outlook over four to five years.

But the firm also scrutinizes companies for good free cash flow, which is distinct from the familiar earnings before interest, taxes, depreciation and amortization. As a metric, says Barger, ebitda has a serious shortcoming: It leaves out the cash required to fund working capital and replace or add equipment. He points out that both of these capital expenditures can be significant costs and in some instances can eat up ebitda altogether. By contrast, he says, companies with strong free cash flow can afford to plow money back into the business, pay down debt and pay dividends.

Barger came up with an elegantly simple way to determine how much free cash flow a company generates. He assesses the return on "tangible" capital by calculating the company's tax-adjusted free cash flow and dividing that by total capital expenditures. For the average U.S. company, Barger says, return on tangible capital is about 10 percent. Hellman & Friedman looks for businesses in the 20 to 30 percent range -- or higher.

While searching for such rarefied enterprises, Hellman & Friedman's partners realized that the best prospects had other defining characteristics: They tended to be built around intangible assets, namely in-house talent, and were definitely not capital-intensive manufacturers. Seeking out companies with intellectual capital, Barger says, is linked to identifying exceptional managers.

"We've really become more disciplined about identifying good managers, because over and over again we've done really well in situations where we've found them," he says. "We've not done nearly as well in situations where we've made compromises."

Typically, Hellman & Friedman invests $100 million to $400 million in a deal -- although it can go as high as $700 million -- charging a 1.5 percent management fee and a carried interest of 20 percent on profits. (The firm puts roughly 5 percent of its own money into its funds.) The portfolios are highly concentrated, with barely a dozen companies apiece.

"If you only have ten portfolio companies in a fund, you can't have more than one or two mistakes, at most, before cratering the returns," notes Cornell's Ali. "You shouldn't even have more than one, and if you have two, you're in deep trouble. That's why these guys require tremendous lead time to really understand what they're investing in. It helps them drastically reduce the probability of loss on any given investment."

Hellman & Friedman's intensive research reduces risks, and it also unearths opportunities. The firm's decision to help Franklin Resources acquire fellow mutual fund company Templeton, Galbraith & Hansberger in 1992 by buying $100 million of its subordinated debentures was based on the insight that fusing one of the nation's largest managers of fixed-income funds with one of the world's preeminent managers of global stock funds would produce those often-chimerical synergies.

Franklin Resources fit Hellman & Friedman's investing template perfectly. It had good management, virtually no debt, strong free cash flow and attractive growth prospects. And the deal could not have been more farsightedly timed: Mutual fund inflows surged in the mid-1990s, and Franklin Resources, known in the retail market as Franklin Templeton Investments, was ideally positioned to ride the wave. Hellman & Friedman realized $280 million on the deal.

Certain of the firm's investments have taken a more tortuous path. Conspicuous among these is the firm's long-running stake in the Nasdaq Stock Market. Negotiated by Hellman and London-based partner Healy in May 2001, the investment was sparked by the London Stock Exchange's bid for Nasdaq. Although the takeover never took place, Hellman & Friedman saw a chance to profit from the over-the-counter market's impending demutualization.

The firm's purchase of $245 million of Nasdaq's convertible subordinated debentures amounted to a 15 percent ownership share -- and a major commitment for Hellman & Friedman. "We had a lot of skin in the game," confirms Hellman. The stake represented 11 percent of Fund IV and was typical of Hellman & Friedman's concentrated bets. But under the terms of Nasdaq's demutualization, Hellman & Friedman's 15 percent stake entitled it to only a 5 percent vote. That would complicate Hellman & Friedman's customary collaborative approach.

At first, the plan concocted by Nasdaq, with input from Hellman & Friedman, was to quickly launch an IPO of Nasdaq. But then the market cooled, Nasdaq's business soured, and the deal had to be postponed several times.

Meanwhile, Nasdaq members who had received shares as part of the demutualization began unloading them -- ironically, on Nasdaq's OTC bulletin board -- when the lockup periods expired. The exchange fell from a market capitalization of $1.1 billion in June 2002 to $560 million that November.

In December, Nasdaq chairman and CEO Hardwick Simmons departed. He was followed out the door six months later by Richard Ketchum, deputy chairman after Nasdaq's board, on which Hellman sat, passed over Ketchum for CEO and gave the job to SunGard Data Systems executive vice president Robert Greifeld.

In light of Nasdaq's tumbling share price, the executive-suite upheaval and mounting competition from so-called electronic communications networks, it looked as if Hellman & Friedman would have an extremely difficult time cashing out its investment. "It was a really bumpy road," says Healy, who replaced Hellman on Nasdaq's board in February 2004. "The company faced intense competition from ECNs."

Nevertheless, he and the other Hellman & Friedman partners remained patient; they had confidence in Nasdaq's resilience and in Greifeld's talents as a manager. It probably didn't hurt that they had an in-house expert to reassure them: Former NASD and Nasdaq Stock Market chairman Frank Zarb had joined Hellman & Friedman as a partner and senior adviser in 2002.

Sure enough, things began to turn around as the markets picked up and Greifeld chopped away at costs. In January 2005, Nasdaq did a critical secondary offering that shifted its listing from the OTC bulletin board to the main Nasdaq market, substantially improving the stock's liquidity. By April of last year, the exchange's prospects had so improved that it bid $1.88 billion for a rival, Instinet; the deal closed in December. On the day Nasdaq announced its offer, the exchange's share price surged 26 percent, to $13.43. The firm sank a further $60 million into the company, bringing its stake to approximately 20 percent. On March 1 the stock closed at $40.49. A week or so later Nasdaq turned around and bid $4.2 billion for its old pursuer, the LSE (but was initially rebuffed).

Hellman & Friedman's readiness to collaborate with (competent) managers helps it gain business. In December 1996, New York advertising agency Young & Rubicam welcomed the firm's $240 million stake. Then-CEO Peter Georgescu wanted to motivate and secure the loyalty of his firm's next generation by redistributing some of Y&R's ownership from its most-senior partners and shareholders to the younger set. To do so he needed an investment shop to assist in a recapitalization; this made a merger or IPO all but inevitable. Hellman & Friedman was apparently the only private equity firm willing to take a noncontrolling, minority stake. What's more, CEO Georgescu said publicly that he trusted Warren Hellman.

Following a management buyout arranged by Hellman & Friedman, Y&R did go public, in 1998, and two years later was acquired by London-based WPP Group. Hellman & Friedman, which owned approximately 40 percent of Y&R before its IPO (management owned the remainder) realized proceeds of $1.03 billion -- 4.3 times its investment. This translates into an annualized return of 104 percent over the life of the investment.

Hellman & Friedman's expertise in businesses that run on high-octane brains is another of its calling cards. In mid-2004 executives of Delaware International Advisers Ltd., a London-based asset manager owned by the U.S.'s Lincoln National Corp., decided that they ought to give their promising younger staffers more of an ownership stake. The 20 existing shareholders (out of 120 employees), who held just 14 percent of the company, were senior executives and portfolio managers.

Lincoln, however, was uncomfortable with the prospect of DIAL's managers owning more than 20 percent of the firm. So the company's managing director, David Tilles, obtained Lincoln's permission to do a management buyout. DIAL screened a host of prospective investment partners, but only three made the cut. One was Hellman & Friedman.

Turning the tables, DIAL made the finalists fill out requests for proposals. RFPs were standard procedure for asset managers like DIAL when pitching business, but unusual in private equity.

"I believe it was quite a shock for them," says Tilles. "Most of these types of deals are done through personal relationships, not RFPs. We certainly made use of references and introductions, but we wanted to be very disciplined and systematic about selecting the very best partner for us."

Tilles and his team wanted a partner that knew the money management industry cold and and that could shortly, if not immediately, offer them majority ownership. Hellman & Friedman certainly had a wealth of experience with asset managers. Among those that had benefited from its investments were Artisan Partners Limited Partnership, Brinson Partners (now integrated into UBS Global Asset Management) and Oechsle International Advisors.

Hellman & Friedman's willingness to take a minority stake also impressed Tilles. "What they were prepared to do immediately, which the others weren't, was to offer 56 or 57 percent equity ownership to the management professionals in the firm," he says. "They were also willing to build incentives for us. If we grew the business and met certain hurdles over several years, they made it clear that we would qualify for further equity exposure."

Hellman & Friedman paid Lincoln what now looks like a bargain price of $125 million for its stake in DIAL. The total cost, which was shared with management, was $172 million in cash and $27 million in assumed debt. Since the announcement of the MBO, DIAL (renamed Mondrian Investment Partners) has grown from $19 billion in assets to $42 billion. "While we felt that investors would be hungry for international managers, we simply never guessed that they would be this hungry for Mondrian's products," says Allen Thorpe, a Hellman & Friedman partner who worked on the deal. "We have a lot of limited partners in common with Mondrian, which was another thing that helped convince them we could be helpful as part of this deal."

Says Tilles: "There are some firms that, to be blunt about it, are clearly driven to make the most money they can for themselves. They don't care about the collateral damage incurred along the way. Hellman & Friedman is not like that. The firm's partners truly understand the asset management business and are willing to be supportive because they realize that any collateral damage impairs the value of people businesses."

BRIAN POWERS KEPT IN TOUCH with Warren Hellman after he left the Ford Foundation in 1981 to join former Salomon banker and future World Bank president James Wolfensohn at his newly formed, eponymous financial advisory boutique. But Powers, who had graduated from Yale (class of '71) and the University of Virginia School of Law, missed, of all things, managing. In 1986, at 36, he joined Jardine Matheson as executive director; the next year he became managing director, or taipan, as the head of the firm that was the model for James Clavell's Noble House is known.

In 1989, Powers returned to the U.S. and spent an additional couple of years with Wolfensohn, advising big companies on strategies and deals. He joined Hellman & Friedman in 1991, at Hellman's behest. But in two years, Powers quit, because one of his first major undertakings for the firm -- the restructuring of distressed Australian newspaper company John Fairfax Holdings -- was so successful it landed him another job.

A consortium of three investors -- Hellman & Friedman, Consolidated Press Holdings and The Telegraph, a company owned by Canadian-based Hollinger -- had banded together to buy the company. Hellman & Friedman had helped to refinance and eventually IPO Fairfax on the Australian Stock Exchange in 1992. The firm, which had initially invested $30 million, realized an IRR of 93 percent, earning 3.4 times its money.

The founder and head of Consolidated, the late Kerry Packer, called Hellman after the IPO to congratulate him but also to convey bad news: The Australian billionaire had lured Powers away to be the new CEO of Consolidated. "I told him I was really pissed off," Hellman recalls. "And he said, 'Warren, I don't think that's a wise thing for you to be saying, mate. I'm six-foot-eight and I weigh 260 pounds.'" Hellman laughs at the memory.

Powers started out as CEO of Packer's private family company but wound up six years later, in 1998, as chairman of the revived and independent Fairfax, in which Packer merely held a stake. In that nonexecutive role, Powers was able to split his time between Sydney and San Francisco, where he rejoined Hellman & Friedman part-time. Powers quit Fairfax shortly before becoming Hellman & Friedman's CEO.

Barger, who had been overseeing the firm's operations for some time, was only too glad to hand those duties over to Powers. "The biggest shock to me was that Brian even wanted the job, but it was perfect for him," Barger says. "And it's a sign that we're getting more serious here about becoming a bigger place yet."

Hellman & Friedman, for its part, needs a world-class manager. The firm began striking deals in Europe in the late 1990s and in mid-2004 opened a London branch, run by Healy. The partnership didn't get around to opening a New York City office until later that year.

Europe now figures conspicuously in the firm's deal making. In August 2003, HFCP IV invested $200 million in German Media Partners, an investment vehicle formed with multiple investors, to acquire majority control of ProSiebenSat.1 Media, one of Germany's biggest broadcasters. Just two months later, Hellman & Friedman acquired 19 percent of Axel Springer, the German newspaper publisher that produces Bild, the largest-circulation tabloid in Europe, for $205 million.

HFCP V is off to a running start. Some key investments: New York­based advertising technology company DoubleClick, which was acquired by a subsidiary of Hellman & Friedman and JMI Equity, Click Holding Corp., for $1.1 billion in July 2005; Vertafore, a Windsor, Connecticut­based specialized software, services and information provider for the property/casualty insurance industry, in which Hellman & Friedman bought a 90 percent stake for $195 million; and GeoVera Holdings (formerly CATRisk), a Fairfield, California­based insurer and reinsurer that Hellman & Friedman purchased outright in a partnership with Friedman Fleischer & Lowe for $150 million.

In October the New York office, which is just gaining traction, co-invested a chunk of HFCP V with LBO heavyweight Texas Pacific Group, buying 60 percent of LPL Holdings, whose primary enterprise is LPL Financial Services, one of the largest independent broker-dealers in the U.S. Hellman & Friedman anticipates writing a $345 million check for LPL.

"The goal here is really to build a unified and integrated team that just operates in different geographies," says Jeffrey Goldstein, who with Thorpe and Zarb leads the New York office. "One of the advantages for us of working in New York is that we're closer to the large New York financial community. This is even more valuable because financial services deals, particularly in asset management, are still an important theme for the firm."

Hellman & Friedman is adapting to the new private equity climate in more-controversial ways. The firm's partners have shown that they are not averse to working alongside archrivals like Texas Pacific. In July 2004, Hellman & Friedman partnered with Blackstone, KKR and Texas Pacific to invest in Texas Genco, a wholesale power generator being spun out of CenterPoint Energy. The acquisition price: $3.7 billion, far more than Hellman & Friedman could put up on its own. The price the company fetched 14 months later when it was sold to NRG Energy: $8.3 billion. Hellman & Friedman made more than a sixfold return on its $225 million investment.

The appeal of such joint deals is hard to resist. Still, the key to Hellman & Friedman's longevity will be retaining enough momentum -- and capturing enough banker talent -- to keep attracting companies with a surfeit of intellectual capital that are willing to do proprietary deals with the firm. Hellman & Friedman holds a marked advantage in this territory, given its long history of minority investments in service businesses. But that edge won't last.

"Our heritage is much richer in that area," says partner Healy. "But it's a temporary advantage. Like most things in the capital markets, it will erode over time."

Powers contends that to keep Hellman & Friedman competitive, he must enrich its brain trust. The 50-person firm now has 30 investment professionals, including 13 partners.

"We're building human capital so that we can have even more capacity," the CEO says. "And the competition is ferocious right now as all of our competitors, including hedge funds, are trying to identify the very best prospects. It's tough, but we feel its critical for our future."

Warren Hellman would just like to be assured that Hellman & Friedman abides by its core principles as it evolves -- that it doesn't corrode from the inside the way his old firm Lehman did.

"When I started this firm 22 years ago," he says, "I wanted to create something that would be a fulfillment of the way I hoped business could be done. This is my last stand."