Is Warren Buffett Still Against Private Equity?

Very recently, 3G Capital and Warren Buffett have teamed up to purchase H.J. Heinz. And yes, 3G is a private equity firm.

Warren Buffett isn’t really a big fan of private equity, and in the past he has said that these firms are short-term financial engineers who “don’t love” the companies that they purchase. He has even bragged that he’s never previously purchased a company from one of these private equity firms.

So what is the public supposed to think of the idea that Warren Buffett has now teamed up with 3G Capital Partners, a private equity firm? They are jointly purchasing H.J. Heinz Co. in the total amount of $28 billion.

When you really think about it, this move is kind of hypocritical.

In the press, 3G Capital has been labeled a hedge fund manager as well as a private equity firm. Both of these statements are correct from a factual standpoint. The company oversees several private equity funds. The most recent fund had a gross asset value as of last October in the amount of $1.12 billion. Here’s the way 3G describes their family of funds in the company brochure:

The 3G Special Situations Funds’ objectives are to achieve superior long-term capital appreciation by making either controlling or non-controlling (but, in such cases, typically influential) investments in a small number of companies operating fundamentally good businesses with easy to understand business models that are being undermanaged or to which the Adviser believes it can add meaningful value. The 3G Special Situations Funds focus on leveraged acquisitions, recapitalizations, and acquisitions of controlling or influential stakes of businesses in industries where the Adviser has either operating experience or a strong network of contacts within the industry.

It currently appears that 3G charges 20% carried interest for all of these funds, and the management fee is around 1 to 2%. About one quarter of company capital comes from firm principals, and the rest of it comes from a minute group of high net worth Brazilian investors (and there’s even a smaller group of institutional investors).

3G Capital manages a few different small hedge funds through diversified strategies. Some of their funds hold stakes in companies such as SandRidge Energy, Goldman Sachs and Google.

That’s why it might be smarter to describe this company as an alternative investment platform, that also features varying strategies. Basically the way you may categorize Kohlberg Kravis Roberts & Co. and The Blackstone Group.

Those people familiar with 3G aren’t often comfortable with these comparisons. However, the company certainly does have a much grander investment horizon than your average and ordinary private equity firm. So in a sense, 3G resembles Berkshire Hathaway more than KKR or even Blackstone.

It hasn’t been possible to determine the investment lifecycle of a private equity fund from 3G, as a way to compare it to the industry-standard of 10 years. As a matter of fact, one source tells us that there might not even be one. If that is the truth, then you’re looking at one major distinction between Berkshire Hathaway and 3G.

If that statement isn’t true, then the only major difference between the 3G and Berkshire is that they raise their money by tapping into rich Brazilian friends instead of university endowments and public pension funds in the United States.

3G certainly doesn’t own any publicly traded securities the way Berkshire Hathaway does (which tells us that there has to be some viable path to investor liquidity).

Looking at the private equity track record of the firm doesn’t seem to remove the label either. As an example, 3G purchased Burger King in 2010 mainly by leveraging bank debt, then returned the money back to the public two years later through a reverse merger (instead of the usual IPO). 3G still has a major stake in Burger King, but there’s nothing novel in regards to a private equity firm remaining in control of our portfolio company three or four years down the line of the initial purchase.

When talking about bank debt, even the deal with H.J. Heinz is technically a leveraged buyout. There’s no question that it includes more equity than a typical mega-LBO with Berkshire Hathaway putting up as much as $12 billion and $13 billion (as well as 3Gs smaller equity slug), but the move will still keep billions of dollars worth of new debt of the books of Heinz.

Maybe Warren Buffett was only being hyperbolic when he speaks of his private equity contempt. Think about this for a second… if he truly believed the things he said, then he would have found another partner with whom he would purchase Heinz.

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