Madison Dearborn Returns Record $3.3 Billion to Clients

Madison Dearborn Partners LLC, Chicago’s biggest private-equity firm, handed back a record $3.3 billion to investors in 2012 as it sold companies to take advantage of higher pricing fueled by the Federal Reserve’s bond buying, according to a year-end letter to clients.

The firm, which has raised more than $18 billion across six funds since it was founded in 1992, surpassed its previous peak from 2011 when it returned close to $2 billion, according to last month’s letter, a copy of which was obtained by Bloomberg News. High debt levels in deals suggest it’s a good time to sell assets, the company wrote.

“Experience has shown time and again that the economic benefit of high leverage and cheap debt is rarely retained by the buyer, and is almost always paid over to the seller in the form of higher purchase prices, a pattern which was repeated in 2012,” the firm, which has $12 billion under management, said in the letter.

Borrowing used in U.S. deals during the third quarter averaged 6 times earnings, close to the 6.2 times at the peak of the leverage buyout boom in 2007, the firm wrote, as the Fed’s so-called quantitative easing fueled a boom in credit, Madison Dearborn said.

Tax Increases

The firm’s sales of companies last year helps it avoid an increase in tax rates on capital gains, including private equity managers’ carried-interest income, which were part of a tax deal passed by the U.S. House last night. The top rate will increase to 23.8 percent from 15 percent, including taxes from the 2010 health-care law that took effect yesterday.

Chuck Dohrenwend, a spokesman at Abernathy MacGregor Group Inc., declined to comment on the letter on behalf of Madison Dearborn.

Fed officials led by Chairman Ben S. Bernanke implemented $2.3 trillion in two rounds of bond purchases, known as quantitative easing, since 2008 to boost U.S. economic growth.

In September, the Fed announced a third round of easing in which it’s purchasing $40 billion of mortgage debt a month as it seeks to improve growth and reduce unemployment. In December, the Fed added $45 billion a month of Treasury purchases to the program, bringing total purchases to an $85 billion-a-month pace.

“As investors embraced greater risk in search of yield, capital flows into the high yield and leveraged loan markets have been robust, driving leverage and purchase price multiples higher,” the firm wrote.

Macro Outlook

Madison Dearborn sold credit information provider TransUnion Corp. to Advent International Corp. and Goldman Sachs Group Inc. for a 52 percent gross internal rate of return and a 2.2 times multiple of cost, according to the letter. It sold NextG Networks Inc. to Crown Castle International Corp. for a 42 percent rate of return and a 2.5 multiple.

Other sales included packaging maker BWAY Parent Co. and beverage and salad dressing company Bolthouse Farms, generating multiples of 1.8 and 2.4, respectively.

“In some cases we elected to trade some multiple for a higher IRR, which we believe is appropriate from a portfolio perspective given the uncertain macro outlook,” the firm wrote.

Madison Dearborn spent about $900 million in five transactions last year as of Dec. 21. The firm’s latest fund, Madison Dearborn Capital Partners VI LP, was expected to be 58 percent invested by year-end, according to the letter. The fund, which began investing in February 2009, deployed $2.1 billion in 11 companies by year-end and the firm expected it to be fully invested by mid-2014.

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