Never Underestimate an Investor Named Warren

Warren Hellman's firm is making Buffett-like plays

What do the Nasdaq, race cars, and bottled water have in common? Not much--unless you're F. Warren Hellman, chairman of San Francisco-based investment group Hellman & Friedman LLC, one of a handful of firms cleaning up at a time when most are picking up the scattered pieces of the tech mess. Indeed, the private-equity firm has been so strikingly successful lately that some investment partners and rivals consider Hellman the Warren Buffett of the West Coast. Besides sharing the same first name as the Berkshire Hathaway Inc. (BRK.A ) billionaire, Hellman has gained a reputation for unearthing value in such eclectic investments as the racing-circuit franchise Formula One Holdings Ltd. and Australian water bottler Neverfail Bottled Water Ltd.

Now he is shelling out $240 million for debentures that, once converted, will amount to a 9.8% stake in the Nasdaq Stock Exchange. Hellman is betting that if the exchange successfully breaks free from the National Association of Securities Dealers, its primary owner, for a possible public offering, the firm's piece could earn a return of more than 20%. Hellman is counting on Nasdaq's listing to be just as successful as the recent initial public offering of the Deutsche Borse exchange in Frankfurt. He also likes Nasdaq's roughly $500 million in cash reserves and its strong growth prospects. "Simply put, Nasdaq is a terrific business franchise," he says.

However, some analysts believe the investment could disappoint. If Nasdaq fails to hit the public market, Hellman's firm may be stuck holding its 4% convertible five year notes with no buyer in sight. "The question is: What's the exit strategy?" asks Jesse Reyes, vice-president of global product management for Venture Economics. Counters Patrick J. Healy, the partner overseeing the investment: "When you make a good investment, you literally don't have to worry about the exit, because it takes care of itself."

MARATHON MAN. Hellman is down-to-earth and approachable, with his tie askew and hair sometimes slightly out of place. But don't confuse disheveled with laid-back. His understated demeanor belies competitiveness. Once, Hellman tripped at the one-quarter mark of a 100-mile ultramarathon and broke a rib. He got up and completed the remaining 75 miles. Hellman has tattoos of his horse and his company logo adorning his leg and arm.

Observers expect that Hellman & Friedman will soon make more investments in addition to their stake in Nasdaq. Hellman's close-knit team now runs three funds that have raised $4.5 billion and have returned a net average of more than 30% to investors. Hellman founded his firm in 1984 with Tully Friedman, who left to start his own firm in 1998.

Hellman & Friedman first made its mark in 1985 with the $1.8 billion buyout of blue-jeans maker Levi Strauss & Co. When Hellman completed the second buyout of Levi Strauss in 1996, investors saw returns of as much as 53 times on their original investment. The firm has proved to be a shrewd, disciplined investor many times over since then. Three months after picking up a 37.5% stake in Formula One Holdings in 2000, the firm flipped its $312 million investment for a nifty $280 million profit. Then, it walked away with an $800 million return on a $243 million investment in ad agency Young & Rubicam Inc. just before the shop went public in 1998. "They are very smart, contrarian investors," says Rick Hayes, who oversees private equity investing for the California Public Employees' Retirement System, a pension-fund giant and a longtime Hellman partner.

That's not to say there haven't been some missteps along the way. In 1997, the firm lost nearly all of a $127 million investment in paging company MobileMedia when it went bankrupt. Hellman says that early mistakes helped the firm shift its focus from looking for fast deals to seeking good investments. If Hellman can spin gold from blue jeans and water bottles, Nasdaq may not prove too daunting a challenge.

By Douglas Robson in San Mateo, Calif.

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