www.thedeal.com vol. 9 no. 19 november 28 — december 11, 2011

T h e w i n n e r s o f T h e J u d g e

Learned hand Award given annually by the new York chapter of the American Jewish Committee form an elite club of lawyers whose ranks include Joseph Flom, Martin Lipton, H. Rodgin Cohen and Arthur Liman. That club welcomed its first woman on nov. 9 when the AJC

gave the award to Franci Blassberg, a 58-year-old partner at debe voise & Plimpton LLP.

Blassberg is also the first lawyer from debevoise to receive the honor, which is named for one of the great American ju-rists of the 20th century. Learned Hand served on the u.s. district Court in new

York from 1909 to 1924 and on the 2nd u.s. Circuit Court of Appeals from 1924 until his retirement in 1951. The AJC first gave an award in his honor in 1964, three years after his death, to recognize his distinguished legal career and re-cord of religious tolerance. A Protestant, hand in 1922 objected to Jewish quotas at harvard and in 1944 gave a famous speech before an estimated 1.5 million people at the annual “i Am an American day” in Central Park, where immigrants often took the oath of citizenship. The award is not restricted to Jews; Robert Sheehan, the former executive partner at skadden, Arps, slate, Meagher & flom LLP and a Catholic, received it last year.

Blassberg, who was honored at a dinner reception at the st. regis hotel, graduated from Cornell university in 1975 with an A.B. in history and from Cornell’s law school two years later. she began working on Pe deals in 1978 at de-bevoise and the next year started doing work for Clayton, dubilier & rice LLC, which was formed in 1978 and would become one of the important firms in the industry. Blassberg made partner at debevoise in 1985, the same year she represented Cd&r on its $746 million purchase of uniroyal inc., which turned to the buyout shop to fend off a hostile approach from Carl Icahn. Cd&r went on to become Blassberg’s marquee client, and she has executed a steady stream of deals for the buyout shop and its portfo-lio companies. (Blassberg married Cd&r co-founder Joseph Rice III in 1992; they have one child.)

in 2005, Blassberg represented a consortium comprising Cd&r, Carlyle group and Merrill Lynch global Private equity that bought hertz Corp. from

A conversation with Debevoise & Plimpton’s Franci Blassberg • by David Marcus

Majoring in private equity, with a minor in M&A

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ford Motor Co. for $15 billion. Two years later, she advised Cd&r when it teamed with Kohlberg Kravis roberts & Co. LP to pay $7.1 billion for the u.s. food service business of royal Ahold nV. earlier this year, Blassberg represented Cd&r port-folio company diversey holdings inc. on its $4.3 billion sale to sealed Air Corp.

Blassberg recently sat down with The deal magazine’s david Marcus to discuss the AJC award, her career and the cur-rent state of the private equity market. The Deal magazine: Can you talk a little about the Learned Hand Award?Franci Blassberg: i was very honored to receive the award. i confess that i was initially reluctant to accept it. i am more in my comfort zone not being the center of attention. But given the amazing group of past recipients and the recognition of the award, i overcame my concerns. The fact that a new York woman had not re-ceived the award in the past influenced my decision. i thought it was an oppor-tunity to highlight the fact that women are part of the corporate legal estab-lishment. it also highlights debevoise’s long-standing commitment to a diverse profile. it highlights our reputation and expertise in private equity. i hope it will be helpful in recruiting ambitious young lawyers, including women interested in corporate work.

How did you get into private equity?when i joined debevoise in 1977, new associates weren’t required to choose a department. As a result, i did a little liti-gation and a little corporate and gradu-ally migrated to the corporate depart-ment. At that time, we had a very active private-placement practice, and my first exposure to leveraged buyouts was rep-resenting insurance company lenders in LBos. one of the first of these was Con-goleum Corp., a first Boston deal in 1978. Another was Marley Co., an early [1981] KKr deal.

some of this was before funds gave investors committed pools of capital to invest and before banks had a leveraged finance focus. The big players were the insurance companies who would provide “strips” of the capital structure. They’d buy senior debt, subordinated debt, may-

be some junior preferred stock, and, as a kicker, they’d also get the chance to buy some common equity. deals were struc-tured so that the buyout firms or branch-es of investment banks acting as sponsor would put in a relatively small amount of capital to acquire what was sometimes considered “cheap” stock because only the deal sponsors and the management had the opportunity to make that invest-ment without buying the whole strip.This was at the very start of the industry, and these were presumably small deals.size is relative. Congoleum was $445 million and Marley about $330 million. Those were not small deals at that time.

The checks that insurance companies were writing were large, and the com-mon equity that went into the deals was very highly leveraged, which created great returns. This was before the con-cept of “carry” existed, except in con-nection with the pricing of the common stock. in order to have the chance to ac-quire the common stock, the insurance companies had to buy a lot of debt and junior preferred stock, so the carry was created structurally by the fact that the sponsor was given the opportunity to acquire only common stock. formalized carry didn’t emerge until the early ’80s when people started raising funds.

Did you start specializing in these kinds of deals early in your career, or did people not specialize at that point?i was initially trained as a financing law-yer, and then i started doing M&A work as a second- or third-year associate. while i was learning financing skills, i was also learning M&A skills, and then in the early ’80s, when funds started to be organized, i learned funds skills.

Throughout the ’80s, i did all sorts of corporate work that came to be the components of a private equity practice: financing work, acquisition work, fund formation work and then iPo or exit work. i followed the life cycle of a deal. in those days lawyers didn’t specialize in the same way as they do today.

i still do general M&A work that doesn’t involve private equity. i some-times think of people having majors and minors in their practices. These days,

i’m a private equity lawyer with a minor in M&A. Before private equity became such a factor in the M&A marketplace, i was an M&A lawyer with a minor in pri-vate equity.

You mentioned the fund formation work as a key way to develop relationships with the private equity firms. At what point did you start doing a lot of work for specific private equity firms?The first fund i worked on was as coun-sel to the limited partners in an early Kelso & Co. fund.

in those days, counsel for the limited partners as a group was selected by the lead investor and generally paid for by the sponsor. in 1983, Cd&r began to raise its first fund, and i was asked by the firm to do the sponsor-side work because i had done the LP work on the Kelso fund and was familiar with the fund structure. i’d worked on several Cd&r deals by then and was familiar with the client. it wasn’t until the mid-’90s that we formed a separate fund formation group.

These days it’s hard to be effective as a fund lawyer and a deal lawyer because of the need to stay abreast of both market and legal trends. But even now, it makes sense for firms to represent both limited and general partners in funds and buyers and strategic sellers in deals so that they understand the market and the other side’s perspective.

Could you talk about how your career de-veloped in the 1980s and what happened after the collapse of the Ohio Mattress deal in 1989?in the late ’80s, we were doing a signifi-cant number of private equity transac-tions. Basically, i focused on friendly transactions as opposed to deals with a hostile element. The one exception to that was when Cd&r was the white knight for uniroyal in 1985 after Carl icahn took a position in uniroyal stock. even there, though, i represented the guys in white hats. [Cd&r paid $746 million for uniroyal.]

when drexel went under in 1990 and the high-yield-bond market disap-peared, there was a little bit of a dark period because there was no financing

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available for deals. The first deal that i did after drexel unraveled was the Lex-mark deal in 1991. That was financed al-most solely by J.P. Morgan because iBM wanted to sell its printer and keyboard business and still had a lot of clout with the banks. [Cd&r paid $1.5 billion for Lexmark.] J.P. Morgan’s role in that deal foreshadowed the major role that banks would play in the next formative period for private equity.

Do you draw any comfort from those peri-ods of inactivity?You bet you do. it’s a cyclical business. it has always been a cyclical business. it is always going to be a cyclical busi-ness. The people who have been in the industry through the various cycles will tell that some of the best investments are made in the down cycle—maybe not at the beginning of the down cycle, but cer-tainly toward the end of the down cycle. i think people should take a lot of com-fort from that. of course, we’ve never seen quite so much capital committed to an industry as we have now, and that certainly distinguishes this from some of the other cycles.

You were coming of age when these mar-kets were developing very rapidly. Did you ever think about moving over to the in-vestment side?There were some thoughts and some dis-cussion. in the end, i thought i was a bet-ter adviser and counselor than i would be a principal investor or risk taker. i also thought we were building some-thing here at debevoise that i wanted to be a part of. it’s been very gratifying to participate in the building of a private equity practice from the ground up.

Turning to the current state of private eq-uity, what do you see, given your body of experience in the field?This cycle may be a deeper cycle than some of the others that we’ve seen. There

is a huge amount of unspent capital. The debt financing window opens and closes more quickly than it used to. There are challenges to exiting mature invest-ments. There are fundraising challenges and perhaps a changing fundraising en-vironment. The announcement by the Teacher retirement system of Texas that they are going to invest $3 billion with both KKr and Apollo is an interesting de-velopment. Bespoke arrangements where large investors have managed accounts with private equity firms have become more common over the last year or so.

Perhaps this is a variation of that or possibly another development in how in-vestors allocate funds. i believe that Tex-as Teacher has asked those managers to allocate among their different alterna-tives offerings and in effect create a vari-ation of a single-sponsor fund-of-funds. That seems like a new development to me and may create a new approach to investing, at least by those with large amounts of capital to put to work.

i also think the sovereign wealth funds are changing the way they do busi-ness in a dramatic way, and that is going to have an impact on the entire industry. in addition, as a result of the Volcker rule, investors affiliated with banks will no longer be investing in funds to the same degree, and banks will no longer be sponsoring funds.

Do you think the market is going to seg-ment into the really large players that are able to take large slugs of money from the sovereign wealth funds and the CalPERS of the world and much smaller, more fo-cused funds that won’t want hundreds of millions of dollars from a given source?That is possible. That may be a long-term process, and there are a variety of things that could happen to change that trend. People often forget, though, how good returns are in middle-market private eq-uity. if what you need to do to generate returns is create ebitda growth, it’s much

easier to do that when ebitda is smaller. if you can count on multiple expansion because the business also has developed more scale and you can buy a midmarket business for 5 times earnings and sell it at 10 times and you’ve grown ebitda by 2 times, that’s a huge home run. But if you can only grow ebitda by 45% and have no multiple expansion, those returns won’t be as strong.

it’s hard to say whether larger deals sponsored by larger firms with diversi-fied alternative offerings will be better for the investors. They may be better for the sponsors because they will have more pieces of carry in different and more diversified places.

When you look at Europe and the rest of the world from a private equity perspec-tive, what do you see?There are many different private equity markets. The european private equity market is troubled because the europe-an economy is troubled. when there’s no confidence, no one wants to invest, and no one wants to sell. why sell businesses when you can’t get decent prices for good assets? And it’s hard to define what is the “right price” in this economy.

it’s a very difficult dealmaking envi-ronment. The markets in Brazil, india and China and other places are of course different and stronger, although there are many who view some of those econo-mies as overvalued. here in the u.s., many people have suggested that it will take until the election for the markets to rationalize themselves. it’s hard to pre-dict, but few are feeling like the tide will turn quickly.

As you look out over the next three to six months, what do you see in the U.S.?opportunistic transactions, but not a re-surgence or a rebound in the market that we saw in the first half of the year. But three to six months is a short time in the private equity business. n

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