Private Equity At Its Most Private

Inside Wasserstein & Co., now thriving after a terrible start in the late 1980s

Judging by Bruce Wasserstein's rueful description of the private equity business he runs on the side as "the much-maligned W & Co.," he probably wishes that his name weren't on the door. After all, Wasserstein & Co. is to blame for the prevalent perception on Wall Street that Lazard's (LAZ ) chief executive is as inept a deal investor as he is a talented merger-and-acquisition adviser.

In a first attempt at removing this smudge on his reputation, Wasserstein allowed BusinessWeek a peek inside what is one of the most private of all private-equity firms. What the record shows is that W & Co. is starting to hit its stride after getting off to a terrible start in the late 1980s. The firm "is not successful -- it's extremely successful," says Wasserstein, W & Co.'s chairman and principal owner.

Wasserstein & Co. remains a pipsqueak vs. the likes of the Blackstone Group or the Carlyle Group, but its third and latest buyout fund is indeed off to a flying start. Launched in 2001 with $480 million, U.S. Equity Partners II has generated robust gains of roughly 45% a year on the $335 million it has invested to date. Through a series of refinancings, the W & Co. fund has recouped its full investment and still owns substantial equity in all five companies remaining in the portfolio.

Wasserstein & Co. is the successor to the merchant banking arm of Wasserstein, Perella & Co., which raised $1 billion in 1988 only to squander much of it on disastrous leveraged buyouts of Gateway and Yardley Group, both British companies. In 1997-98, WP gave it another go, raising $265 million for a new fund, U.S. Equity Partners I, strictly limited to stateside targets. When Dresdner Bank acquired WP in 2000, the Germans didn't want the merchant bank, and it was spun off as Wasserstein & Co.

Although W & Co. has invested across a wide spectrum of consumer industries, media investing has turned into its specialty. Its Prism Business Media unit is one of America's largest business-to-business publishers, featuring 70 trade books and 130 Web sites. W & Co. also counts among its holdings 25 legal publications, a dozen M&A and real estate titles, and a minority stake in the construction publisher Hanley Wood.

New York, the sole mass-circulation publication in the bunch, also is the only one Wasserstein owns personally, via a family trust. The magazine was not appropriate for the LBO fund, mainly because Wasserstein was loath to flip it in the usual three to seven years. "It most likely will stay with the Wasserstein family for a very long time," says Anup Bagaria, W & Co.'s vice-chairman.

In all his magazine ventures, Wasserstein employs the same basic strategy. The idea is to boost profits not by slashing editorial budgets to fit print's diminishing share of advertising budgets but rather by investing to speed the development of new sources of online advertising and other revenue.

This approach is paying quick dividends at Prism, which W & Co. acquired a year ago from Primedia Inc. (PRM ) for $385 million cash. Prism's operating earnings have risen 25% this year over last, thanks largely to a 55% surge in online ad revenues from the likes of Fleet Owner and National Hog Farmer.

The online take also is surging at New York and will hit $6 million this year, up from $1 million in late 2003, when Wasserstein bought the weekly for $55 million. Bagaria says a costly recent Web relaunch will put New York solidly in the black in 2007.

Wasserstein's dual role as chairman of W & Co. and CEO of Lazard creates potential conflicts of interest. For example, if the buyout firm were to acquire a company advised by Lazard, Wasserstein could invite accusations of self-dealing. "It's a nonissue," insists George L. Majoros Jr., W & Co.'s president. "There is a rigorous, bright-line separation between the firms." The last thing W & Co. needs is controversy when it is finally putting up numbers worth bragging about.

By Anthony Bianco

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