Private equity builds strong companies, contributes billions to American economy

WASHINGTON, DC, May 16, 2007 –

The private equity industry makes substantial contributions to the American economy by building strong, financially secure companies and delivering superior investment returns to pension funds, universities and foundations, Private Equity Council President Douglas Lowenstein told a Congressional committee today.

Private equity investment returns secure the financial futures of tens of millions of Americans, underwrite college scholarships and help pay for important medical and scientific research, Lowenstein added.

“Private equity is about hundreds of thriving companies contributing to the economy in numerous positive ways,” Lowenstein said in testimony before the House Financial Services Committee, chaired by Rep. Barney Frank (D-Massachusetts). Well-known companies that have been strengthened through private equity ownership include Dunkin’ Donuts, Toys R. Us, Domino’s Pizza, MGM Studios, and J. Crew, among hundreds of others — both known and less well-known, Lowenstein said.

Superior returns

“Public and private pension funds, foundations and university endowments have chalked up returns from private equity investments that far exceed those available from the stock market,” Lowenstein added. “Between 1991 and 2006, private equity firms worldwide created more than $430 billion in net value for these and other investors. These funds translate into stronger public employee pension programs, more funds for college financial aid and scholarships and more funds for research and other causes supported by charitable foundations.”

Lowenstein joined other witnesses at a hearing on the effect of private equity investment firms on the American economy. Among those at the witness table was Jon L. Luther, chairman and chief executive officer of Dunkin’ Brands, who told members that private equity ownership “liberated” his company.

Luther said new resources provided by private equity owners have spurred Dunkin’ Brands’ expansion efforts and helped create new opportunities for entrepreneurial franchise holders. “As a result, our franchising efforts, the engine of our growth, have taken off,” Luther said. In the next 15 years, Dunkin’ Brands, which also owns Baskin-Robbins, expects to add 250,000 new jobs to the economy, Luther added.

Private equity firms raise substantial amounts of money from pension funds, universities, foundations and other investors, collectively known as limited partners. The firms use the money to buy companies that PE fund managers believe can be strengthened and improved, either by an infusion of capital, an introduction of new management talent, development of a new business strategy or perhaps all three. Generally, private equity owners hold the investment for three to five years, with a goal of improving the company’s performance and balance sheet and eventually selling it for a profit. Eighty percent of the profits flow back to the investors.

Investors are drawn to private equity because the returns delivered by private equity funds far outstrip those from many other investment opportunities, including the public equity markets. Between 1980 and 2005, the “top quarter” private equity firms, on average, produced annualized net returns for pension funds and other limited partners of 39 percent. During the same period, the Standard & Poor’s 500 index posted returns of 12.3 percent, Lowenstein said.

In his testimony, Lowenstein presented three case studies describing private equity acquisitions that delivered dramatic improvements to mid-sized businesses, saying they typify the approach PE firms have to growing companies and increasing their long term value:

SunGard, a major software developer and vendor, was under tremendous earnings pressure from public shareholders. Under private equity owners, the company plans to complete 53 new research projects in 2007 (up from about 10 annually before the private equity acquisition).

AxleTech International Holdings, Inc. designs and manufactures drive train components for growing markets in the military, construction, material handling, agriculture and other commercial sectors. Since its acquisition by a private equity firm, AxleTech sales have increased 16 percent annually and employment has increased by 37 percent, from 425 to 568. New jobs were created in AxleTech facilities in Troy, Michigan; Oshkosh, Wisconsin; and overseas.

ITC Holdings, an electric power transmission company in Michigan, has increased its capital budget under private equity ownership by 20 times and grown from 28 to 230 direct employees.

“Private equity is not a silver bullet, but neither is it a dark force,” Lowenstein said. “It is an innovative, flexible financial tool that has proven very successful in responding to the global challenges faced by American businesses today.”

About The Private Equity Council

The Private Equity Council , based in Washington DC, is a resource and research center that develops, analyzes and distributes information about the domestic and international private equity industry. Its ten members are: Apollo Advisors; Bain Capital; The Blackstone Group; The Carlyle Group; Kohlberg, Kravis & Roberts; Hellman & Friedman; T.H. Lee Company; Providence Equity; Silver Lake Partners and TPG Capital.

Robert W. Stewart 202.652.2313