Madison Dearborn founder builds team of assets (2024)

A self-described "bit of a baseball nut," John Canning sits in a conference room on the 38th floor of a Loop office building and tells how he's on the verge of placing a bigger bet on the future of America's pastime.

The Chicago businessman owns 11 percent of the Milwaukee Brewers, has stakes in minor league teams in Virginia and New Mexico, and is negotiating to buy interests in three more in Maryland.

"I'll only own half of the Maryland teams and the other ones I own a little less than that," said Canning, 61, who played catcher on Denison University's baseball team. "But it's a lot of fun, and minor league teams make economic sense."

And his stake in the Brewers? That, he said, is "just for fun."

Mad money spent on sports teams, however, has no place in Canning's day job.

Major league player

As the founder and chief executive of Chicago-based private equity firm Madison Dearborn Partners LLC, Canning oversees an investment firm that since 1993 has been entrusted with billions of dollars from endowments, pension funds and other big institutions looking to diversify their portfolios away from stocks, bonds and cash.

As one of the biggest private equity players between the coasts, Madison last month finished raising $6.5 billion for its fifth fund, its biggest ever. Proceeds of its past funds have been invested in companies ranging from wood-products maker Boise Cascade Holdings LLC to meat producer Pierre Foods Inc. to commercial finance company CapitalSource Inc.

"We think very highly of Madison Dearborn, and we did invest in their most recent fund," said WillMcLean, chief investment officer for Northwestern University's endowment fund, which has committed $40 million to Madison's fifth fund, up from the $30 million it sank into its fourth one.

The trick for Madison now: putting that $6.5 billion to work in a way that generates the double-digit returns that Northwestern and other investors have grown accustomed to at a time when some question how much longer the good times can roll in the private equity industry.

"They've long established themselves as one of the premier buyout firms and as one of the firms that got the industry going," said David Barry, an editor at thetrade publication Private Equity Analyst. "The key issues are really how long are all the forces that have allowed the buyout industry to thrive going to continue?"

It has been a great time to be a buyout fund. Low interest rates have made it easier to do deals. The Sarbanes-Oxley corporate governance law, which many companies have called onerous, has driven some public corporations to go private. And institutional investors have had a growing appetite for private equity, hedge funds and other alternative investments.

Buyout funds raised $24.9 billion in the first quarter of 2006, up 78 percent from the first quarter of 2005, according to Thomson Venture Economics, which tracks the private equity industry.

Approaching tough times

But despite having just raised $6.5 billion, Canning believes that the rate of the growth of money pouring into private equity will eventually slow. And firms will be more circ*mspect about doing deals.

"This is a time to be a little cautious," he said.

Among the troubling signs for the industry: Debt that private equity firms are taking on to complete deals is creeping up, and interest rates are climbing.

"The recent buyout boom has been dependent on lenders being a promiscuous ATM machine," said Dan Primack, editor-at-large for trade publication Private Equity Week. "They have to be planning for a downturn. In two years, if the debt market tightens, you could see that not all" of the money raised by private equity firms will end up getting used.

Also, as private equity firms grow and as they plunk down bigger dollars for deals, it's debatable whether they can continue to generate hefty returns when they sell off an investment. That's because buying a company for $10 billion and selling it or taking it public for $20 billion or $30 billion is likely a taller order than, say, parlaying a $300 million investment into $1 billion.

Another trend likely to be a turnoff to some private equity investors, or limited partners as they're called, is the growing prevalence of so-called "club deals."

Picking teams

A decade ago, private equity firms were largely lone wolves, doing deals on their own. But as transactions get bigger, more firms are teaming up. For example, while Madison is usually the controlling shareholder of the companies it buys, it's reportedly teaming up with a group of major private equity firms to bid for the Spanish-language network Univision.

Here's why club deals can be worrisome to investors. "If three different private equity firms team up to do a deal, and a limited partner invests in all three of those firms, it could have huge exposure" in one deal, violating the basic investor tenet of diversification, said Primack, of New York-based Private Equity Week.

In one deal, for Sungard, seven different private equity firms teamed up to buy one company. "I know LPs who invested in at least five of those funds," Primack said.

In a way, Madison is a bit of a niche player in the private equity sector, occupying a space between the megafunds, such as Texas Pacific and Blackstone, which have been out trying to raise more than $10 billion, and smaller funds.

"There aren't as many players in the $5 billion to $7 billion range as there are $10 billion and up and $3 billion and under," Primack said.

Canning, whose four earlier funds raised from $550 million to $4 billion, is confident that Madison's track record of a compounded annual return of about 20 percent will remain intact with his fifth fund.

For one thing, Madison plans to stay in familiar territory, sticking to the same five sectors in which it has invested for years: old-economy basic industries, communications, consumer goods, financial services and health care.

Another sign that Madison is unlikely to bite off more than it can chew: With $6.5 billion, Madison figures that it's set for about the next six years, expecting to invest at the same pace, about $1 billion a year, to which it's accustomed.

Madison's fourth and previous round of fundraising occurred in 2001, when it attracted $4 billion from Northwestern and other investors. By late 2005, Madison had only about $400 million available in that fund.

"The way a fund works, your money is drawn down, and once you sell the investment, you send the money, less your share, back to the limited partners," Canning said. "When we get to having one or two investments left, you have to raise new funds. It happens every four or five years."

The process is seamless to most of Madison's 25 investment professionals.

"They don't think of it as one fund stops, another begins," he said. "They'll have another fund before we run out of money."

Madison's investment pros get help from about 10 associates and a support staff of 25. The firm occupies two floors in Three First National Plaza, near the intersection for which the company is named.

Signature office

Canning occupies a small office, by CEO standards anyway, where a lifelike sculpture of a wolf, visible from down the hall, stands guard. His passion for baseball is evident. There's memorabilia signed by Robin Yount and Hank Aaron, limited-edition prints autographed by Cal Ripken Jr. and Joe DiMaggio, and a photo of Babe Ruth pitching at Yankee Stadium.

But there's whimsy as well: On the floor, only a few feet away from his wolf, are sculptures of a ferret and a frog. Framed photos include one of Smokey, his 2-year-old, 115-pound black lab, whom Canning bought for $4,500 at a charity auction.

"He's allowed on furniture I'm not allowed on," he said. "He's never going to see the inside of a kennel."

Canning, who has committed to investors that he'll remain CEO for at least the next six years, believes in personally kicking the tires of some of the companies, or types of companies, that Madison invests in.

The firm owns about 25 percent of Heathrow, Fla.-based Ruth's Chris Steak House Inc., where Canning likes his strip steak rare. Although Illinois isn't a major market for Plano, Texas-based movie theater chain Cinemark Inc., in which Madison has about a 75 percent stake, Canning says he likes nothing better on a rainy weekend than taking in a movie.

The son of a doctor and a housewife, John Anthony Canning Jr. grew up in the small Long Island community of Bayport, where his high school had a graduating class of 75.

A brother, Frank, works for the Leukemia Society. A sister, Beth, is a nurse. When Canning was 21, another brother died in an auto accident at age 20, killed in a new car that he had just gotten that day. Less than a week later, Canning's mother, then 44, choked to death at a restaurant.

"I can remember every second of it. I can remember getting back [to college] from my brother's funeral. My roommate walked through the door" about to break the news, Canning recalled. But before the roommate uttered a word, "I knew my mother had died," he said of his premonition.

After high school, Canning attended Denison University in Granville, Ohio. He majored in economics and graduated in 1966.

"I wanted to go to a small school where I could play sports," he said in his Long Island accent. "I looked at a lot of schools in Ohio."

Almost on a lark, after doing poorly on the business boards, he took the law boards "and got the highest grade ever in Ohio" to that date, he said.

After earning a law degree from Duke University, Canning got a job as an attorney at First National Bank of Chicago, part of First Chicago Corp., where he worked for 24 years. In 1980, Canning began running the bank's First Chicago Venture Capital division. He held that job until 1992.

"In 1992, the rules related to bank-affiliate investing were really tightened up by the regulators, so we went to management of First Chicago, to basically [Chief Executive] Dick Thomas, and suggested we spin out," Canning recalled. "He has always been a great mentor of mine, and we did it."

Most valuable players

Canning said his other mentors include Stan Golder, a former First Chicago banker who was the "G" in GTCR, another big Chicago-based private equity fund, and Henry Kravis, co-founder of private equity firm KKR.

Kravis is familiar with his admirer. "Madison Dearborn is an investment firm with a strong track record and a good outlook for the future," Kravis said in a statement.

While the lines between private equity firms and hedge funds seem to be blurring, with the latter taking a more activist role at U.S. companies, Canning sees their rabble-rousing ways as a positive for buyout firms.

"They go in and stir up management, and management turns to private equity people to restructure, to go private, to sell a division," he said.

Canning noted that in the past 18 months, Madison has distributed about $2.7 billion to its investors. It has sold stakes in such companies as Nextel Partners Inc. and TeamHealth, and is about to close a deal to sell its interest in National Mentor Holdings Inc.

One of Madison's most notable purchases over the past year was a deal in which Reliant Energy Inc. sold three New York City power plants to an investor group led by Madison and U.S. Power Generating Co. for $975 million.

"They supply 25 percent of the energy to New York City," Canning said.

Canning admits that he never thought that Madison would get as large as it has.

"When we raised $550 million in '92 or '93, it was so impossible to imagine," Canning said. "If somebody told me then we'd raise 10 times that amount in that short period of time, I never would have believed it."

Many of the people that Canning started out with at Madison are still there. Of Madison's 14 founders, one died, four have retired, and nine are still with the firm.

"John's a very good leader," said Thomas. "The greatest testimony to that success is the fact he has kept a team of highly talented people."

It's unlikely that Madison will end up in the hands of any of Canning's six children, the products of a blended family with his second wife after his first marriage ended in divorce. Five live in the Chicago area and the sixth is a lead chef at a restaurant near Harvard University in Cambridge, Mass.

"We don't do that here," he said when asked whether any of his kids work at Madison. While there's not a strict nepotism rule, "we would not hire a relative or even a spouse."

----------

byerak@tribune.com

- - -

John A. Canning Jr.

Job: Chairman, chief executive of Madison Dearborn Partners LLC, a private equity firm that he co-founded with other former First Chicago Venture Capital executives.

Favorite minor-league baseball teams: Albuquerque Isotopes, Norfolk Tides, Bowie Baysox, Delmarva Shorebirds, Frederick Keys.

Pet causes: About 100 inner-city children in Chicago are attending parochial school in any given year thanks to Canning's family foundation awarding 25 four-year scholarships annually. "The idea isn't religion. The idea is a good education in a structured, safe environment," said Canning, himself not a regular churchgoer. "Catholic schools do a spectacular job in this city."

Canning's wife is active in domestic violence causes.

Last good movie seen: "Munich." Canning had read the book, "Vengeance," upon which the movie was based and thought the casting of Eric Bana was inspired. "You know how you have a mental view of people when you read a book? He was exactly how I pictured him," he said. He also liked "Match Point."

Admired brand: Black Dog, a New England retailer of namesake clothing and accessories.

A wish for his son, a chef in Boston: "I'd love to have him come back to Chicago and start a restaurant."

Birth order: Oldest of four children.

Astrological sign: Leo.

--Becky Yerak

- - -

Success stories

A sampling of some Madison Dearborn deals:

- Omnipoint Corp., which was bought by VoiceStream Wireless Corp. in 2000 and then purchased from VoiceStream by Deutsche Telekom AG; $31 million investment, sold for $603 million.

- Lake Forest-based Packaging Corp. of America; $200 million investment now worth $1.04 billion.

- Tuesday Morning Corp., a Dallas-based closeout retailer; $85 million investment now worth $735 million.

- Nextel Partners Inc., a Kirkland, Wash.-based wireless communications provider; $43 million investment, sold for $530 million.

- Magellan Midstream Partners, Tulsa, Okla.-based energy company; $165 million investment now worth $875 million.

"The biggest loss we ever had by far was a $170 million loss on Outsourcing Solutions," a St. Louis-based accounts receivables firm, said Madison Chief Executive John Canning. However, he added, "You can make five or six times your money, but can only lose one time."

--John Canning Jr., CEO of Madison Dearborn Partners LLC

--Becky Yerak