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Boston calling

Thomas H Lee Partners has been investing in private equity from its single office in Boston since 1974. Since founder Tom Lee left in 2005 the firm has evolved and learned some difficult lessons – particularly during the last investment cycle – but Lee’s ‘culture of collegiality’ remains in place, co-president Scott Sperling tells Graham Winfrey

Stepping out of the elevator into Thomas H Lee Partners’ headquarters on Federal Street in Boston, it’s hard not to feel disappointed. Though perched on the 35th floor, the view of downtown Boston is hidden behind such dense fog that all the windows look as if they’ve been whitewashed.

But if the scene outside is unwelcoming, the office of THL co-president Scott Sperling certainly is not. In fact, the family photos and leather couches make it easy to forget this is a senior executive’s workspace.

Then again, Sperling – who runs THL alongside co-president Anthony DiNovi – is not your average private equity boss. After graduating from Harvard Business School in 1981, and spending a brief period at the Boston Consulting Group, Sperling has worked in the industry for the best part of 30 years. But unusually for someone in his position, he made his name as a limited partner: he spent a decade running the private capital division at The Harvard Management Company, during which time asset values at the endowment grew from roughly $200 million to more than $2 billion.

During this period, he also made a number of direct private equity investments alongside Thomas H Lee Partners. Founder Thomas Lee was so impressed that in 1994, he recruited Sperling to help manage THL. The ex-Harvard man became co-president six years later.

Lee himself, of course, is no longer at the firm that continues to bear his name; he left in 2005, founding his current firm, Lee Equity Partners, a year later. He has always strongly denied reports that the separation was less than amicable – and although he has no involvement with THL these days, Sperling says that Lee maintains a working relationship with executives at the firm. The two men were on the board of Warner Music together until THL sold the company in May this year, and according to Sperling, remain friends. Are they golfing buddies, we ask? “I’m not a very good golfer,” Sperling replies, with a smile.

But Lee’s major legacy to the firm lies in the culture he created, says Sperling. “The spirit that Tom built in this firm back in the early 1980s continues to this day in ways that he probably never contemplated,” he says. “I think most people consider us one of the most collegial of the buyout firms and I think that part of the culture has continued to exist.”

Happily, investors don’t seem to think that the change in leadership has weakened THL.

Scott Sperling

“I put Scott and Tony really next to anybody in terms of talent,” says a limited partner in one of THL’s past funds. “One of the things that impressed me back when they raised Fund V was they took 18 months to make their first investment, which I really respected. They waited and waited and really showed a lot of discipline.”


In fact, there’s an argument that THL has raised its game in the last few years – partly in response to difficult market conditions, and partly to address earlier weaknesses.

The firm boasts a strong historical track record; according to one source outside the firm, it has generated a 21 percent IRR since inception. But in recent years, it has narrowed its investment focus to the three sectors where it has generated the best returns: business and financial services, consumer and healthcare, and media and information services. “There may be interesting opportunities in chemicals or plastics or energy, but that’s not what we do,” he adds.

Every investment professional in the firm, from senior partners down to analysts, is now assigned to one of the three verticals (except DiNovi and Sperling, who oversee them all).  

The firm has also boosted its operational capabilities. These days when it makes an investment, it brings in professionals from its in-house strategic resources group (SRG) to change the way the company does business and improve the efficiency of operations.

“The SRG member isn’t there to oversee the CEO, they’re there to go deep into the organisation, often two or three levels below the CEO,” Sperling says. “The nature of the culture of collegiality here really extends to these companies, and that really results in a very good and strong implementation of these new operating plans.”

But it didn’t have this facility until 2006 (preferring to rely on external consultants to drive operational improvements at its portfolio companies). One LP suggests the move was driven by investor pressure during the marketing period for its sixth fund, which collected $8.1 billion in 2007. “They were a little less committed to the operating model at that point,” says the LP. “I think they heard LPs loud and clear and clearly adjusted.”

The firm has also improved its communication with LPs.

Historically, THL has always offered its LPs plenty of co-investment opportunities; the firm’s sixth fund received an additional $2 billion in committed co-investment capital. As such, Sperling says its LPs are used to getting a lot of information about individual portfolio companies.

“If an LP has questions about specific deals, we put them on the phone with the deal team. They know that we don’t mind them calling up deal team members about a deal,” he says. “When you’re used to having a lot of co-investment LPs, it’s not a big stretch to do that for our LPs in general.”

However, in recent years it has recognised the need for more in-depth reporting across the board. “I’m not going to tell you that this wasn’t something we had to get better at,” Sperling admits. “We did.”

Nowadays, according to one LP source, all aspects of the portfolio are up for discussion. “You can challenge them on anything,” the source says. “They’ll tell you why they like an industry or like a company.” That should stand THL in good stead if the US Securities and Exchange Commission starts to ramp up GPs’ reporting requirements.


Another significant change to the business since Lee’s departure has been the establishment of a mezzanine division, THL Credit, in 2007, with a $500 million fund (although Sperling insists this is “less than a standard deviation away from our core business”).

THL hired Bison Capital Asset Management co-founder James Hunt as chief investment officer of the group (he’s now the CEO), and brought in a number of credit veterans that had worked with Hunt in the past, including chief operating officer Sam Tillinghast.

After assembling the team, THL deliberated about which credit strategies to pursue. “We thought about various areas for them to focus on, and one of the areas that they had spent a lot of time in – and which had particularly high rates of return – was the mezzanine area,” says Sperling.


THL Credit lends to businesses smaller than those its parent firm typically acquires – on the grounds that the risk-return profile is more attractive at this end of the market. “They’re able to generate low-teens cash-on-cash returns and mid-to-high-teens total returns, which is a much more attractive place than if they were just buying the debt in our companies,” explains Sperling.

However, Sperling insists that this diversification does not mean that THL is looking to follow the lead of some of its mega-buyout fund peers (such as Apollo Global Management, The Blackstone Group and Kohlberg Kravis Roberts) by adding business lines before taking its management company public.

The firm is no stranger to the idea of tapping capital from the public markets. When it teamed up with Bain Capital to complete the take-private of Clear Channel, the world’s largest outdoor media and radio company, in a $23.9 billion transaction in 2008, it allowed the company’s shareholders to retain a 30 percent stake (albeit largely as a way to get the deal over the line).

But THL remains firmly committed to staying private, he says. “The ability to continue to focus our business on doing the things that have been successful for us historically is something that we think is very important to us,” he says. 

Going public might not hurt returns – but it could affect the culture of the firm, he argues. “The feel of a place, we believe, does change somewhat when you’re a public company, and we like the feel of where we are. We don’t want to be in a position where culturally we’re focused more on asset aggregation than we are on just owning and operating businesses. I think that’s a potential cultural shift that makes us uncomfortable.”


Whatever their talents, private equity managers don’t  necessarily make great macroeconomists, Sperling admits. “Quite frankly, we haven’t been as good at figuring out the probabilities of some of these macro uncertainties,” he says. “You never would have expected the auto industry advertising to go basically to zero.” So he doesn’t profess to be able to predict the future; in fact, he says: “The level of uncertainty is kind of awe-inspiring”.
Take pricing. Tighter credit markets have started to bring down valuations – but does that make deals attractive? Sperling isn’t sure.  “It may look like the pricing is a lot better relative to where it was six months ago, but the question that we have to confront is: is that pricing good enough relative to the uncertainties that we have going forward?”

However, Sperling says he and DiNovi remain focused on finding new ways to improve the business in today’s continuously changing economic climate.

“In running this firm, that’s one of the things we think a lot about. How do we adapt what we’ve been doing, and what we’ve done reasonably successfully, in the environment we’re in today – so that we can avoid stepping into situations that are a mistake?”

And if the private equity industry does become a world with far fewer multi-billion dollar funds, as many people expect, THL is not fazed by the prospect of a new normal, he says. “If the world continues to go in the direction we’re in, which is that funds are going to be smaller than they were, we’re fine with that.”

Either way, investors seem to think THL will have more hits than misses in its portfolio. “They had some mistakes,” says one LP . “They have had a couple of deals that I think will be zeros, but they also had things like MoneyGram and some others that I think are going to make quite a bit of money for their investors.” That will, ultimately, be the real test of the changes Sperling and Di Novi have instigated. 



If good investment is – at least in part – about timing, THL’s acquisition of Clear Channel in the summer of 2008 couldn’t really have gotten off to a worse start. 

Clear Channel owns or leases over 834,000 advertising displays in over 44 countries; its radio stations reach an audience of 238 million US listeners each month, according to THL’s website. But shortly after THL completed its investment in the company, the world economy collapsed – and as is often the case, the advertising industry was among the hardest hit.

Though THL had expected a dramatic decline in advertising, the resulting downturn was much more severe than expected. Advertising by the US auto industry, the biggest spender in both radio and outdoor advertising, effectively dropped to zero.

However, THL had a plan to grow Clear Channel through the economic downturn – drawing upon internal study, the knowledge of external operating partners and the firm’s past experience with media businesses.
“We had an enormous base of knowledge about what we would do with [Clear Channel] to effect operational improvements,” says Sperling.

The first step was to reduce costs by over $600 million on a permanent basis. But THL didn’t stop there. It also took national radio programming in cities like New York, Chicago and Los Angeles and repurposed it for more remote areas of the country via a new digital platform.

In September, the websites of every Clear Channel-owned radio station live-streamed the iHeartRadio music festival, a two-day event in Las Vegas billed as “the biggest live music event in radio history”.

“You had artists ranging from Coldplay and Black Eyed Peas and Lady Gaga who basically did this because they wanted to be part of this new platform,” Sperling says. “For them, a digital platform that extends the reach of traditional radio is incredibly powerful.”

On the outdoor advertising side, digital billboards represented an enormous opportunity for Clear Channel’s growth, since rotating digital ads allow for substantial increases in revenue per billboard.  “If you’re McDonald’s, you can advertise breakfast in the morning hours,” explains Sperling. “If you’re Wal-Mart, you can say: ‘This store has a sale today’. In a few hours, you can advertise something else.”

According to Sperling, Clear Channel’s story is summed up best by Ryan Seacrest, the producer and ‘American Idol’ host, who was recently named as the company’s chief innovation officer. “Seacrest likes to say that Clear Channel was always this huge, massive player, but never acted that way. It never tried to harness the power and reach that it had to put better product out for its customers.” THL is doing its best to put that right.


THL’s stewardship of Simmons Bedding, which filed for bankruptcy in late 2009 and had previously paid out to sponsors via dividend recaps, was a key focus of a series of extremely negative articles on the LBO industry published in 2009 by the New York Times. Last year we asked THL co-president Scott Sperling whether his LPs found the coverage concerning

“No, I think LPs look at the nature of the headlines and do their own evaluations as to the substance. Whatever the headlines are, the fact is, [LPs] felt, based on a detailed knowledge of the facts, that we did what was in the best interest of the fund and that it was done appropriately. The company, during our ownership, increased its investment level, built numerous new plants and took market share from its competitors. If you run a company well like that, it generally allows you to do recaps, and when the recaps were done, nobody complained about them. S&P and Moody’s didn’t complain at the time; they noted the company’s strong operating and financial performance.

“In retrospect, when you have the worst housing crunch ever and the entire industry sees a sharp, record drop-off in demand, and your plants are running at relatively low utilisation because of that, you are going to make adjustments in employment levels like any other company would. Even with that, Simmons was still taking market share during that period – so it was outperforming its competitors. Our LPs did make a small profit on the investment and Simmons continues to be an industry leader largely because of the actions taken under our period of ownership.


Since 2007, THL has participated in a handful of multi-billion dollar acquisitions and exits

January 2007 – THL, GS Capital Partners, CCMP Capital Advisors, JP Morgan Partners and Warburg Pincus acquire food services company Aramark for $8.3bn
November 2007 – THL and Fidelity National Financial acquire business services company Ceridian for $5.3bn
March 2008 – THL and Goldman Sachs acquire MoneyGram International for $760m
July 2008 – THL and Bain Capital acquire Clear Channel for $23.9bn
June 2010 – THL sells Michael Foods to GS Capital Partners for $1.7bn
August 2010 – THL acquires inVentiv Health for $1.1bn
March 2011 – THL acquires food marketing company Acosta for $2bn (est.)
July 2011 – THL, Bain Capital and Providence Equity Partners sell Warner Music Group for $3.3bn
July 2011 – THL, Bain Capital and The Carlyle Group partially exit Dunkin’ Brands via a $423m initial public offering