Buffett Shuns Buyout Funds, Says `They Don't Know the Business'

(Corrects verb in quote to ‘love’ in headline and second paragraph of story published Oct. 8)

Warren Buffett, Berkshire Hathaway Inc.’s billionaire chairman, said he avoids acquiring companies from leveraged-buyout firms because they focus on “exit strategy.”

“We have an entrance strategy,” he said in pre-recorded remarks broadcast yesterday at a San Francisco conference for the International Corporate Governance Network, a London-based nonprofit whose members include institutional investors. Buyout firms “don’t love the business,” he said.

Buffett, 80, built Omaha, Nebraska-based Berkshire into a $205 billion provider of insurance, energy and consumer goods through four decades of stock picks and takeovers. He looks for companies with durable competitive advantages and leaves their managers in charge. He said he prefers to retain former owners after acquisitions, and let them run the business, because they have a “passion” for the company and “know it well.”

“I look in their eyes and see if they love the money or love the business,” Buffett said. “Everyone likes money,” he said. “We count on people loving the business.”

Buffett oversees chief executive officers running more than 70 Berkshire units, including car insurer Geico Corp., power producer MidAmerican Energy Holdings Co. and underwear maker Fruit of the Loom. Buffett, who doesn’t enforce a mandatory retirement age at Berkshire, says he avoids interfering with his managers.

“I give them their own paint brush,” Buffett said.

No Deals With Buyout Firms

Buffett spent $27 billion buying railroad Burlington Northern Santa Fe this year, telling Charlie Rose in an interview in November that Berkshire would hold the firm for a century. Buffett told employees of CTB Inc., the farm-products provider he bought in 2002, that Berkshire would own the unit “forever.”

Private-equity firms pool investor money to take over companies, financing the purchases mostly with debt, with the intention of selling them later for a profit. Blackstone Group LP, led by Chairman Stephen Schwarzman, 63, is the biggest private equity firm, followed by Carlyle Group.

“We haven’t bought a single company from an LBO operator,” Buffett said.

KKR, Goldman Deal

Berkshire and Leucadia National Corp. teamed up last year to buy a loan-servicing and mortgage business from a bankrupt lender partly owned by private equity firm KKR & Co. and Goldman Sachs Group Inc. The joint venture, Berkadia Commercial Mortgage LLC, agreed to pay more than $400 million for the assets of Capmark Financial Group Inc.

“We are impressed by the existing management team,” Buffett said in a December statement announcing the completion of the Capmark deal. “We are optimistic about the prospects for these businesses.”

KKR, Goldman Sachs, Dune Capital Management LP and Five Mile Capital Partners LLC bought 78 percent of Capmark, then called GMAC Commercial Mortgage, in 2006 for $1.5 billion in cash and the repayment of $7.3 billion of debt.

Buffett, who also serves as Berkshire’s CEO, typically shuns debt and funds his takeovers with cash or stock. Berkshire has the second-highest credit rating at Standard & Poor’s and the third-highest at Moody’s Investors Service.

Buffett’s remarks at the conference were recorded within the last four to six weeks, according to Tina Chande, head of events for ICGN. He was interviewed by Nell Minow, co-founder of the Portland, Maine-based Corporate Library, which researches governance issues.

‘Embarrass’ Directors

Buffett urged shareholders to challenge directors when companies perform poorly. His annual letters to Berkshire shareholders often contain musings on corporate governance and accounting best practices. He has said public-company boards too often defer to CEOs and fail to provide adequate oversight.

“The best way to affect the behavior of board members is to embarrass them,” Buffett said. “If boards aren’t performing their function, then a few major shareholders holding them accountable will help.”

To contact the reporters on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net; Andrew Frye in New York at afrye@bloomberg.net.

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net.

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