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— Private Equity —
Rosetta Stone Inc. In an unforgiving market for initial public offerings, Rosetta Stone Inc., a provider of foreign-language education software that had virtually no public competitors, stood out as a rare, successful listing. The Arlington, Va., company was formed in 1992 as Fairfield & Sons Ltd. by brothers-in-law Allen Stoltzfus and John Fairfield to use software for foreign-language learning. Over the years, it scored high-profile contracts with the U.S. State Department. In January 2006, ABS Capital Partners and Norwest Equity Partners, along with management, bought it for about $50 million and renamed it Rosetta Stone. Earnings swelled in the sponsors' hands. Last year revenue grew organically at nearly 70%, to $209.4 million, while Ebitda just about doubled, to $36.4 million. ABS and Norwest sold a combined 3.125 million common shares in the initial public offering, raking in $34 million and $22 million, respectively, from the partial realization. Together with their combined 41.5% remaining stake, worth about $208 million, their 5.5 times return translates to a winner in any language. Aquilex Holdings LLC Harvest Partners LLC's $200 million acquisition of Aquilex Holdings LLC, a provider of outsourced specialty-welding services, was the New York private equity firm's first investment from its fifth fund, an $815 million pool raised in 2007. It also was one of the quickest exits. The firm bought it in January 2007 and sold it 23 months later in the wake of Lehman Brothers Holdings Inc.'s September 2008 collapse. Specializing in highly technical repair and overhaul services to the energy and power-generation sectors, the Atlanta company acquired three businesses, starting with subsidiary Welding Services Inc., which it bought from First Reserve Corp. in 2007. Soon after, it added HydroChem Industrial Services Inc., an industrial facility cleaning service, from Los Angeles' Oaktree Capital Management LP for $315 million, followed by Southeastern Mechanical Services Inc. Altogether, Harvest's $175 million in equity yielded a 40% internal rate of return from the roughly $750 million purchase in October by Ontario Teachers' Private Capital, the private investment arm of the Ontario Teachers' Pension Plan. Final bids, coming on the day of American International Group Inc.'s government bailout, got a big boost from Teachers' $171 million mezzanine funding. Without it, the exit may have been just another big one that got away. Regency Energy Partners LP Dallas-based natural gas transporter Regency Energy Partners LP was the deal that kept on gushing for the former Hicks, Muse, Tate & Furst Inc., now HM Capital Partners LLC. HM Capital, formerly led by buyout pioneer Thomas Hicks, sponsored a $405 million acquisition in December 2004. It pumped $185 million into the company's business of gathering, processing, marketing and transporting natural gas, then sank an additional $15 million in June 2005 to back the expansion of its northern Louisiana pipeline. In January 2008, it added natural gas compression services provider CDM Resource Management Ltd. By then, Regency had already gone public, in January 2006, generating about $245 million for the sponsor. HM Capital took more cash off the table in 2007, when GE Energy Financial Services acquired a stake in Regency for $603 million. After exiting its remaining stake last year through a secondary offering in September, it just about quintupled its original cost. Interestingly, Regency also contributed to HM's coffers when it bought another HM portfolio company, TexStar Field Services LP, in 2006, giving the investor another 5 times return. Nordco Inc. New York PE firm Riverside Co., among the industry's hyperactive midmarket investors, purchased Nordco Inc. in 2003, when the Oak Creek, Wis., railroad track repair company produced just $45 million in revenue. Nordco, which designs and sells equipment used to build, maintain and repair Class I railroad tracks, grew under Riverside ownership. It added new and rebuilt equipment, repair parts and service capabilities for North American railroads, accounting for 60% of the market. Four acquisitions helped diversify its range of products and markets: J.E.R. Overhaul Inc., in 2006; Dapco Industries Inc. and Dapco Technologies LLC, both in 2007; and Central Power Products Inc.'s Shuttlewagon Railcar Mover business in 2008. By the time Canada's Omers Private Equity, the PE arm of Ontario Municipal Employees Retirement System, offered to buy it in June for an undisclosed price -- at $150 million to $200 million -- Nordco had $170 million in total revenue. Unitranche Fund LLC's $100 million debt financing helped seal the sale, putting Riverside on track to reap a 5.1 times cash-on-cash return and a 31% internal rate of return. ... Not every exit was a triumph. Two failed deals stood out: Masonite International Corp. Kohlberg Kravis Roberts & Co. had to sweeten its take-private of Canadian doormaker Masonite International Corp. to $2.7 billion to satisfy shareholders, including longtime co-investor Ontario Teachers' Private Capital, which owned just over 1% of the Mississauga, Ontario, company. But the transaction, among the largest in the boom-era wave of building products acquisitions, turned out to be not so sweet for KKR. Masonite, founded in 1925, boasted brand recognition and a strong market position globally. But as the housing slump worsened, revenue slipped. Cost cutting could not offset the impact of plummeting housing starts last year, leaving it little room to maneuver around financial covenants on some $1.5 billion of debt. KKR wrote off its investment last year. The company prenegotiated a Chapter 11 restructuring that essentially ceded control to holders of Masonite's senior secured debt, led by Centerbridge Partners LP and Oaktree Capital Management LP. Masonite went into bankruptcy March 16 with liabilities estimated at $2.6 billion, the second-largest private equity-backed Chapter 11 filing this year to date, after aluminum producer Aleris International Inc., backed by TPG Capital. In all, KKR sank $552 million in Masonite, though it later sold some shares to institutional co-investors Alpinvest Partners NV of the Netherlands and Sculptor Investments Sarl of Luxembourg. KKR's publicly listed credit business, KKR Financial Holdings LLC, was an unsecured creditor, but any recovery from the reorganization was a piddling sum for the sponsor who would just as well slam the door shut on that escapade. Merisant Worldwide Inc. Merisant Worldwide Inc., the Chicago manufacturer of Equal and other sweetener brands, traces its origins to aspartame developer G.D. Searle & Co. in the '60s. Monsanto Co. bought Searle in 1985. Then, in 2000, two New York investors -- Pegasus Capital Advisors LP, founded in 1995 by former Apollo Advisors LP co-founder and Drexel Burnham Lambert lawyer Craig Cogut, and MSD Capital LP, Michael Dell's investment vehicle -- bought what became Merisant for $598 million. The company, the market leader with more than a third of global sales, performed so well initially that in 2003, the sponsors recapitalized it not once but twice to extract dividends. In July it issued a note to finance a $197 million cash dividend, followed by a $72.5 million payout in November. By the following year, the company filed to go public via a $700 million offering of income deposit securities, then a popular alternative offering tax advantages. But the market for IDS issues soon soured, and Merisant pulled its filing. The company had generated net losses from 2003 to 2007, and revenue was declining. As well, competition from Splenda manufacturer McNeil Nutritionals LLC ate away at its market share. Highly levered and unable to make payments, Merisant finally bowed to a bankruptcy filing Jan. 9. Fortunately for Pegasus, which owned 88.7% of Merisant, and MSD, the $270 million in dividends more than covered their $160 million cost. Car chase
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