BUSINESSWEEK ONLINE : OCTOBER 16, 2000 ISSUE
SPECIAL REPORT A Buyout Fund for the Internet Age Telecom investing can be treacherous--as investors learned this year when shares of local telephone exchanges called CLECs (competitive local exchange carriers) plunged about 75%. But Providence Equity Partners Inc., a Providence (R.I.) manager of buyout funds specializing in telecom investments, isn't worried. It sold its shares of its St. Louis CLEC, Brooks Fiber Properties Inc., two years ago with an 800% gain. And its remaining CLEC, MPower Communications Corp. ( MPWR) in Rochester, N.Y., is still up 20% from the price the fund paid for shares a year ago. With such prescient moves, and published returns that have averaged 150% annually over the past eight years, Providence stacks up as one of the shrewdest private equity investors in telecom. Founded in 1991 by Jonathan M. Nelson, the firm manages four funds with some $2 billion in assets. Nelson, 44, and his partners, Glenn M. Creamer, 38, and Paul J. Salem, 37, are all Brown University and Harvard Business School grads. The three New Englanders say they like being in Rhode Island, far from the glare of Wall Street. As leveraged-buyout funds race to reinvent themselves as tech specialists, Providence's track record is one that many would love to emulate. Thomas Lee, president of Thomas H. Lee Co. in Boston, says that he has been recommending the fund for years. ''Jonathan is one of the smartest people I know. I'm only kicking myself I didn't get in his fund myself.'' One indication of Providence's smarts is how before the U.S. CLEC meltdown, Nelson and his team shifted their attention to Canada. A few years back, each Canadian province was still dominated by a telephone monopoly. Anticipating a switch to competition, Providence in 1996 founded Metronet Communications, Canada's first local-service phone company. ''We had a vision of building out the country quickly, before anyone else could,'' says Nelson. Providence invested $40 million of equity in the new company and brought on Craig Young, former chief executive of Brooks Fiber, as CEO. Today, Metronet, which went public in 1997, is the largest CLEC in Canada. Last year AT&T ( T) bought 33% of the company, renamed it AT&T Canada, and plans to buy the remaining public shares by 2003. Providence still owns 20%. Its realized gain, so far, is 15 times its investment. ''NO CONNECTION.'' For a specialized fund, the big peril is that if an industry tanks, the fund can be dragged down with it. Nelson, however, argues that telecom is different. Communications is not a monolithic business, he contends. ''In fact, it consists of many different sectors. Europe's wireless market is quite different from U.S. rural phone companies. They're so different, there's really no connection at all.'' As a private-equity fund, Providence has the flexibility to start new companies--as in the case of Metronet--or buy existing divisions of large companies. An example of the second is Languageline Services, a former division of AT&T that makes translators for 140 different languages available round-the-clock to operators manning 911 emergency hotlines. Providence bought the division in March, 1999, for $81 million in equity and an undisclosed amount of debt. Languageline CEO Chris Ensign couldn't be more pleased: ''I think Providence has a very good graspof how the market is evolving. They see opportunities others might not realize as quickly.'' What's next for Nelson and partners? They won't say. But one can be sure that the next deal for Providence is just a call away. By Debra Sparks in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Return of the LBO CHART: Largest Buyout Firms CHART: Privileged Investors... TABLE: A Pipeline to Losses? A Buyout Fund for the Internet Age Storming Fortress Europe TABLE: The American Invasion of Europe INTERACT E-Mail to Business Week Online

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