Wonder why Wall Street firms make private equity bets even as some clients complain about the practice? Look no further than the impending IPO of Burger King. In December 2002, Goldman Sachs teamed up with Texas Pacific Group and Bain Capital to buy the fast-food chain for $1.4 billion. In February, Burger King registered for a public offering that research firm Sanford C. Bernstein estimates could value the company at $1.74 billion. That would yield Goldman a cool $97 million on the roughly $150 million it put up for its 31 percent stake. (The rest was financed with debt.)
That’s a respect-able return of 35 percent in three years. But it’s just the cheese on the burger, so to speak. In February the company paid its owners a $367 million dividend, according to the IPO filing. Then there are the big helpings of management fees since the buyout: $22.4 million for deal-related expenses and $27 million for services such as executive recruitment. Now Burger King is paying $30 million more to end the contract mandating these fees. Goldman’s take of all these payouts is close to $150 million. For dessert, the firm will get a share of an expected $10 million-plus in fees as one of eight IPO underwriters.
Private equity shops pay billions in fees to Wall Street each year. Some resent that banks compete with them for deals. A few firms, like Credit Suisse, Deutsche Bank and J.P. Morgan Chase, have responded by spinning off or shrinking their LBO units. Others, including Bear Stearns, Goldman and Lehman Brothers -- which together booked revenues of $3.4 billion on buyouts last year -- have no such plans. (A Goldman official says the firm coinvests in deals with clients to reduce potential conflicts.) “Private equity is just too good a business for Goldman, Lehman and Bear to walk away from,” says Bernstein analyst Brad Hintz. Bonanzas like Burger King make it clear why.
