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Warren Buffett Starts New PE Firm!

03.13.14

Not really, but Mr. Buffett’s much anticipated 2013 letter to the Berkshire Hathaway (B H) shareholders noted that the B-H/3G Capital purchase of Heinz for $28 billion was a “partnership template tha t may be used by [B-H] in future acquisitions of size”. Mr. Buffett noted in his letter that the Heinz transaction has “some similarities” to a “private equity transaction”. It looks a lot like a typical PE transaction. Mr. Buffett distinguished it because, unlike most PE transactions (in which the PE buyer looks to exit within seven years), B-H “never intends to sell a share of [Heinz]”.

The 3G guys (Mr. Buffett mentions Jorge Paulo Lemann, Bernardo Hees, and Alex Behring by name) have already cut Heinz’s costs significantly through, among other things, what is known as “zero-based budgeting” (look it up). Previously, 3G very successfully managed its LBO of Burger King in October 2010.

Many PE firms have relationships with so-called operating partners, but members of the team at 3G actually serve in numerous operating management roles at 3G’s portfolio companies on a day-to-day basis. This could seemingly limit the number of deals that 3G can manage at one time, but it also means the 3G guys will better understand all of the factors impacting the bottom line of its portfolio companies. This direct involvement helps the 3G guys wring additional efficiencies out of the portfolio companies, even those that were already well managed (Heinz was generally considered well managed). Some may question whether the 3G approach will increase long-term value or hurt top-line growth? Mr. Buffett, the gold standard for smart investors for four decades, clearly likes the 3G model and sees significant potential for the enhancement of long-term value.

Mr. Buffett has famously criticized the PE model in the past as mere financial engineering, but it is clear that he sees the Heinz transaction as something different. Mr. Buffett noted in his letter that 3G is responsible for operations while B-H is the financing partner with $8 billion of 9% preferred stock in Heinz (and $4.25 billion for one-half of its common stock).

 

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