Barons of Buyout

In the midst of a giant shopping spree, Fort Worth’s Texas Pacific Group sets its sights on Internet airline ticketing.

In the battle for leisure travelers’ dollars on the Internet, the Purple Demon is swooping in to give Star Trek’s Captain Kirk a run for his money. Project Purple Demon is the code name for, a popular travel Web site that was officially launched in late October to offer discount airline tickets. It’s a frisky new competitor of’s, the Internet bidding service whose ads feature actor William Shatner. Like Priceline, Hotwire sells excess capacity—unsold seats—on flights. But unlike Priceline, where consumers make bids for discount fares and then wait to see whether their offer is rejected or accepted, there is no bidding on Hotwire. The customer plugs in dates and destinations, and within a minute the site comes up with a price. Hotwire’s founders—including six major airlines as partners—are betting that the site’s ease of use and bargains (recently a round-trip ticket from Dallas-Fort Worth International Airport to Chicago O’Hare, with a day’s notice, went for $236, a fraction of the retail price) will give it an edge over competitors. And they’ve got a lot riding on its success— $75 million, to be exact.

The company behind all this is a Fort Worth investment firm called Texas Pacific Group ( TPG), run by a media-shy financier and founding partner named David Bonderman. Bonderman helped lead the buyout and turnaround of once-bankrupt Continental Airlines, and TPG is known for accomplishing the same thing with America West Airlines. Basically it buys troubled companies with the hope of selling them later for a profit (when debt is used to help finance such deals, they’re called leveraged buyouts, or LBOs). TPG cut its teeth doing LBOs of Old Economy companies, and its assets include well-known brands like Del Monte Foods, clothing retailer J. Crew, and luxury shoe retailer Bally; it recently sold Beringer Wine Estate Holdings to the Australian beverage company Foster’s Brewing Group for about $1.5 billion. LBOs, remember, were the rage in the takeover-crazy eighties. Buyout artists like Henry R. Kravis used them to gain control of corporate giants like RJR Nabisco. Financiers such as junk-bond king Michael Milken provided the leverage, or borrowed money—in the form of the risky, high-interest junk bonds—that fueled the buyout binge. When the bottom fell out of the junk-bond market in the late eighties, debt—which boosts returns for investors in LBOs—became harder to get and LBOs fell out of fashion. Meanwhile, the sexier venture capital business, with its high-tech highfliers, drew investment capital away, as did the stock market. As Old Economy companies lost their luster with investors, buyout firms too went looking for high-growth companies with higher returns.

But TPG never was a pure buyout firm nor is it typical of most of the companies in its industry. In the nineties, even while it was doing more- traditional deals, it was pioneering the art of using LBOs in high tech, an industry once widely shunned by the clubby, secretive buyout business as too unpredictable and risky. It has also recently been doing more and more straight equity investments, like Hotwire, where no borrowed money is used. The firm’s philosophy is different too. Bonderman and his cohorts see themselves as strategic partners with the companies they buy and invest in, not just dealmakers that buy in and cash out. “The market has changed,” says William Price, one of TPG’s three founding partners. “Buyout firms have had to focus more on growth companies and how to change them and add value after they own them. It’s not just a simple transaction approach anymore.”

The market has changed in other ways too. Now that the stock boom has subsided, and venture capital is no longer producing the returns it once did, institutional investors such as pension funds and insurance companies are pouring more cash into buyout firms’ funds. A recent Business Week article estimated that LBO funds are expected to raise a record $80 billion this year, a 60 percent increase from the $50 million they raised last year. TPG has profited from the trend; this past winter it easily rounded up $4 billion of new investment money in a mere three months—about 55 percent of the total moneys it had raised to date—for two new TPG funds, one of which was devoted to tech investments. That was a record for the firm, so Bonderman, who is known for his rock and roll parties, threw a private bash in March to celebrate, renting San Francisco City Hall and hiring the B-52’s rock band to entertain guests. About a third of the new fund already has been invested, mostly in high tech and in Europe, where the buyout frontier is less expensive and very active, as big companies streamline and shed unwanted divisions. High tech now accounts for about half the $7 billion that TPG manages. The company makes its money from fund management fees and by increasing the value of holdings. TPG won’t discuss its fee structure, but the industry norm is a 1 percent management fee and a 20 percent take of profits. Most of the tech companies the firm invests in are in telecommunications—especially wireless—semiconductors, networking, and storage technology. So far TPG hasn’t done any deals in Texas, although it’s been looking at companies in Austin and the Dallas area.

When Bonderman and James Coulter—both former financial advisers to Fort Worth billionaire Robert Bass—along with Price, a former dealmaker at GE Capital Corporation, were forming TPG in 1993, they decided that they should go against conventional wisdom and invest in high-tech companies even though almost no other buyout firms were. They saw that the industry was maturing, and though cash flows and revenues still could be volatile, tech companies at that time were getting larger, and giants like AT&T and Motorola were shedding divisions. All offered opportunities. “We decided that sitting in 1993 and not investing in technology was akin to sitting in 1893 and saying, ‘We’re only going to invest in agriculture but not in railroads or

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