The fallout over the demise of commodities trader Refco reached the private-equity firm Thomas H. Lee Partners yesterday as its founder and chairman, Thomas H. Lee, departed the company to set up his own rival private-equity firm (W$J article here). Previous posts on the Refco case are here.
Over the past several years, Mr. Lee has taken a lessened role in Thomas H. Lee Partners’ business as a three person board has managed the firm. However, Mr. Lee’s break with the firm comes just weeks after the firm’s $500 million investment in Refco during 2004 became essentially worthless as the commodities-trading company collapsed in an accounting scandal earlier this fall.
Mr. Lee’s move is occurring at a volatile time for private-equity industry, which is really an outgrowth of the financing techniques that Micheal Milken and investment bank Drexel Burnham developed in the 1980’s to spur realization of shareholder value. Private-equity investors purchase controlling stakes in companies on the bet that the value of the stake will increase, often in connection with a public offering. As a result, private equity firms are accumulating huge pools of cash to invest and some of bigger firms now control companies that generate aggregate revenue that is on par with some of the largest U.S. conglomerates. Nevertheless, as more money flows into these private equity firms, the competition for the good prospects increases, which means that more mistakes — such as Thomas H. Lee Partner’s ill-fated investment in Refco — are more likely to occur.