It is a year of transition for John R. Muse, chairman of Dallas-based Hicks, Muse Tate & Furst. In January, before closing Hicks Muse's second Europe Fund, the firm's London office split off to form a separate entity. Mr. Muse, who had been heading the London office, moved his family back to Dallas. He is still non-executive chairman of the European business and remains on the management committee of Europe Fund II. In the meantime, Hicks Muse is preparing to raise another U.S. buyout fund in 2006. Its last U.S. fund, a $1.5 billion buyout fund raised in 1998, still has $300 million left to spend. Mr. Muse spoke about the future of the private equity investment powerhouse and its return to its roots as a U.S.-based leveraged buyout firm.
What direction do you expect the firm to take in 2005? I don't think there's any change in the direction. We've been back on our game, so to speak, for over four years now. We've returned to our success formula, which is a sector-focused, buy-and-build approach to private equity investing. Over the years, that's been very successful for us and for our limited partners. We just returned to that and found a lot of success where we knew we would.
And we've got a lot in the hopper right now. … we completed four very attractive deals last year in two of our sectors of focus: media-cable TV, specifically, and energy. Right now we're looking at two very attractive food deals; food and branded consumer products being another sector of focus for us. Our business is very much driven by this sector focus, on the one hand, and on the other hand by our ability to see a value-creating angle through the implementation of our buy and build strategy. And that's our trademark.
Will Hicks Muse be aiming more at large companies or midsized companies? You know, everybody's got their definition of what's large and what's middle market. Our "fairway" is what we would call the upper middle market, and by that I mean a transaction size of $250 million to $500 million, which typically would translate into an equity check of $75 million to $150 million. Having said that, we have the capability to go up in size if we see things that are attractive, because we have a number of limited partners who are interested in co-investing additional capital, and would provide additional capital alongside our fund on a deal-by-deal basis. So we have the ability to scale up from there and do $750 million, $1 billion, $1 billion-plus deals for the right opportunity.
But what we've found over the years in terms of the success formula, where we've had the best performance has been in the midsize deal range. And if you think about it, it makes a lot of sense. That size business is big enough to have scale and sector or subsector leadership characteristics, big enough to attract or retain very good management, big enough to access a number of different exits — whether it's a strategic sale or an IPO or a recapitalization — but not so big that it's hard to move the needle.
How will you achieve most of your exits? Do you see IPOs heating up, or do you expect more exits through selling to other strategic investors, or are you maybe even selling to other private equity funds? I would have told you — and almost anybody in our industry would have told you — three or four years ago that selling to a strategic (buyer) is kind of the holy grail of our business because historically they've had the lowest cost of capital. They've had the ability to extract synergies. And they typically have been the highest price buyer; in other words, offered the highest value.
And that still in many instances is the case and can hold true. But increasingly, boards of these bigger companies are getting increasingly reticent to bet the company on a large acquisition. … (T)here is more liquidity now away from the strategic buyers, so from the standpoint of a seller, there are more opportunities, more alternatives available to us than there were before. So I think we see all of those as being possible avenues for exit.
Do you see yourselves venturing out of the U.S. and Canada again? Well, certainly not at the present time. We have a significant number of investments still in our Latin American fund, which we plan to see through to their successful conclusion. But we have concluded that long term, in Latin America, we're not capable of assessing or taking into account the macroeconomic risks that hit us down there: all good investments, all in our core space of media, but we got impacted by sudden adverse, unexpected macroeconomic events, which created less than optimal returns for that fund. So I think we're going to have a nice recovery … But longer term, we're not going to raise another fund there….
(In Europe), we achieved the objectives we wanted to achieve. We developed a buy-and-build sector-focused strategy over there with European nationals, and seven years on, they've decided to go their own way.
You said the London separation was because you've done everything that you wanted to do. Well, I've ascended to the chairmanship of HMTF, which, as you know, is a U.S.-based firm. And so the plan all along was for me to relocate to the United States this year when I became chairman. And I have achieved the objectives of developing and training the London team in this strategy. I would be less than honest in saying that I wouldn't have preferred that there be some kind of ongoing affiliation. But these things happen in our industry, where from time to time teams want to have their own firm. That's what happened here.
Did the separation involve some kind of buyout? There's no money changing hands. You know, it's actually at the end of one fund, and at the beginning of another. HMTF will continue to be the investment committee for Europe Fund I's four remaining investments, and the new firm will manage the investments of the second fund.
A New York Times article implied the reason for London splitting off had to do with the viability of Hicks Muse. I obviously don't agree with that speculation. We're alive and well, and if you … saw the focus and the cohesion of this group here and the portfolio we've got and the new investment opportunities we are looking at, what you'd see is a very vibrant, focused organization. So I think it had to do more with what I said earlier: These things happen from time to time in our industry. People get a feeling for whatever reason they want to have their own shop. And that's what happened here.
What's it like being back after being in Europe for so long? It's great. I've been back and forth. I've principally been Europe-based for the last seven years but, hey, the United States is the biggest, most dynamic economy in the world. It never ceases to amaze me, the breadth and depth of the investment opportunities and business models and niches and sub-niches in the industries and the innovation that goes on in this economy.
You still have a lot of properties coming up for sale in Europe, but I don't think anywhere in the world do you have the same entrepreneurial culture and scale and dynamic economy that gives rise to what we could do with the business in terms of value creation. So I like operating over here. I'd rather operate in a business in North America than in Europe any day, just because of the flexibility and the scale and the opportunity.
Having said that, the U.S. market is more rationalized and more picked over. And so you have to look for these value-creating angles in these companies that we look at. But they're out there. There are plenty of them out there.
Do you expect to be hiring in the coming year? We've been pretty much in a steady state. We've been hiring two to four young people a year in the analyst and associate ranks, and I think that'll continue. We have three analysts joining us this summer and a couple departing. They go through these two- to three-year programs. But we've grown our own over the last seven or eight years, and we're seeing the fruit of that effort in that a lot of these men and women have come up through the ranks, have learned the business, and have hit their stride now. We've got a very good team, and not a team that we really need to add to.
You've shifted to more of a committee-like structure. Yes, that's why in most interviews we do these days we put the spotlight on the partners and principals doing the work every day, executing the deals and managing the assets. That's a very strong group here. It's Jack Furst, who's been a partner for 15 years. It's Joe Colonnetta, Andrew Rosen and Peter Brodsky, who are also partners. Then there are three principals: Edward Herring, Eric Lindberg and, just promoted at the first of the year, Jason Downie. So we've got plenty of capacity.
They're young and hungry and focused and engaged. And I'm proud of them.