Getting Ahead by Keeping Your Head


As managing director of $5 billion private-equity firm TA Associates, Richard D. Tadler had a front-row seat when investing mania gripped private-equity and venture-capital outfits in the late '90s. The dot-com boom made it difficult for TA Associates -- which likes to invest in companies with operating profits of at least $5 million -- to stick to its knitting. The firm also felt pressure from within, especially from its young turks, eager to prove themselves.

So, TA doubled its new investments per year, to about 20 companies. Even though this represented a departure, the conservative firm still found itself far less exposed than the venture-capital outfits that increased their annual investments to 50 -- and in some cases as many as 80. Today, TA, with more than 300 companies in its portfolio, can boast about having kept its head during the Internet investing craze.

Some of TA's more well-known investments are Island ECN, Network Appliance, Date Online -- recently bought by Ameritrade -- and Lawson Software, one of the few technology IPOs last year.

HOT AND COLD. As an example of how quickly investment styles and sectors go in and out of vogue, Tadler tells the story of health-care company AmeriChoice. Two years ago, he couldn't get a single investment banker to even listen to the AmeriChoice pitch. "Today, the place is crawling with investment bankers," says Tadler, who has worked at Boston-based TA since 1987.

Nothing much has changed vis-a-vis the business plan and growth at AmeriChoice, which is readying itself for an IPO. What has changed is the Street's perception of health-care companies. For Tadler and the managers at AmeriChoice, it has been a lesson in patience and the virtue of staying the course.

Tadler talked to BusinessWeek Chicago Correspondent Pallavi Gogoi about how he chooses the companies he invests in, where TA gets its financing, and what's hot in private equity. Edited excerpts from their conversation follow:

Q: What has the recent investing boom and bust meant at TA Associates?

A: Venture-capital firms saw a pretty good bull market from 1991 to 1997, where valuations were good and the investments generated incredible rates of return. But there was a huge bubble in 1999 and 2000. It was a bizarre time, something I haven't seen since I started in the business in 1982.

People would make investment decisions at the table: Standard due diligence and thought processes were thrown out of the window. We were forced to react a lot quicker.

Everybody wanted to do another startup. Considering most of our investments were in companies that were [already] profitable and bigger, we were astounded at how fast smaller companies were going public. A lot of the younger people at our firm were distracted and wanted to do startups. We were more conservative, so we had trouble recruiting employees.

Q: In any given year, how many companies do you invest in.

A: We're a deal shop, and we want to invest. Historically, we've invested in 10 companies per year, and in our peak years in 1999 and 2000, it went up to 20. Other firms did as many as 80 investments. Last year, we did only six. [The dollar amount invested, some $308 million, was about average.]

Q: What kind of investments did you pass on in the late 1990s?

A: We know a lot about the health-care sector. We had the opportunity to invest in many e-health-type companies, like WebMD, during the late 1990s. But we passed on them and stuck to our guns. And today, there's not one profitable e-health company. The amount of money flushed in that pursuit has been staggering.

Of course, we did make a few mistakes on Internet-related technology companies, but they were more on the margin, [and not entirely startups].

Q: At what point do you invest in a company?

A: We find a company of material size that has around $5 million in operating earnings and has [a track record] of minimal annual growth of 15%. Many of the companies that we approach are about 5 to 15 years old, and are bootstrapped to a certain size -- an entrepreneur has grown his idea to about $50 million in revenues and doesn't know whether to take the company public or sell the business.

That's where we come in, by either buying a portion of the company or providing some capital. On an average, we stay on for four to seven years and work with management to get through the second phase of its growth, and make it a bigger business. We ultimately exit via an IPO or sell the business.

Q: And what is your profit goal?

A: Historically, our compounded capital gains on investment have been above 30%.

Q: How do you get your investment ideas?

A: A lot of our investments are derivative of a larger trend. If biotech is hot right now...we look for companies that will serve that industry on the information and service side.

Like Invitrogen, which provides tool kits for biotech companies. Or NuGenesis Technologies, an information-technology company that helps manage data at pharmaceutical companies. Or if we notice that there will be a big boom coming in the usage of stents, we look at surgery centers.

Q: What about technology?

A: In technology, we have a number of investments in cellular companies, as it has been a huge growth area. But we do believe that it will slow down. So, we're investigating what components need to be enhanced to make a handset better, and so microcomponent companies are on our radar screen.

Also, we believe that wireless companies themselves will come up with strategies to enhance their offering. So, we have invested in a company called Asurion, which provides carriers with two products -- one that guarantees the handset in case it's lost and one that will fix it in case of problems, like AAA [American Automobile Assn.] service.

Q: What are some sectors that interest you today?

A: One new area for us is energy. Enron and other problems aside, the way people get and pay for energy is changing, so we're looking at companies that have software for improving energy trading. Or energy management -- a company that helps deliver clean power to business clients.

Q: How do you get your financing?

A: A lot of it is raised from three major sources: endowments, foundations, and universities. A lot of the major universities, like Harvard, Duke, and Yale, allocate a portion of their money to private-equity funds like us.

And many state pension funds, like Virginia or New York, will take between 2% and 10% of their investments funds and try to get higher returns by allocating it to a venture-capital, private-equity, or buyout firm. We also get some capital from overseas, including large banks like the Industrial Bank of Kuwait or insurance companies like Allianz.


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