Tom Lee Putnam Build a Fund Family –

BOSTON – A marriage between Thomas H. Lee Co. and Putnam Investments looks set to spawn a family of alternative investment vehicles that will see the Thomas H. Lee name stamped on everything from hedge funds to investments in oil and gas.

The formation of TH Lee, Putnam Capital in June was the clearest indication yet of a trend in the buyout community toward brand building as large buyout shops seek to expand their franchises into the broader world of alternative investment management.

According to executives from both firms, TH Lee Putnam will act as a holding company for alternative investment products, which may include venture capital funds, fund-of-funds, real estate funds, alternative debt funds, hedge funds, timber funds, oil and gas funds and European private equity funds. In fact, the one thing the new venture will exclude is investments in U.S. buyouts so as not to compete with Thomas H. Lee Co.

Leveraging the Strength of a Name

Executives from Thomas H. Lee Co. and Putnam have yet to finalize a business plan for the partnership. Scott Sperling, a managing director at Thomas H. Lee Co. and the designated president of TH Lee Putnam, said Thomas H. Lee Co.’s role in the partnership primarily will be to oversee the selection of managers for the various funds. He said the buyout professionals at Thomas H. Lee Co. will not be called away from their current duties to work on any TH Lee Putnam funds. “I’ll still be spending 98% of my time doing LBOs,” for Thomas H. Lee Co., Mr. Sperling said.

TH Lee Putnam likely will not launch any funds until the end of 1999. But Steven Spiegel, a senior managing director at Putnam, said the two firms are considering raising a fund targeted at between $500 million and $1 billion that will provide capital for the development of Internet businesses in mature companies.

Thomas H. Lee Co. will have a 75% interest in the new partnership. Executives from both firms have yet to decide how much capital for the planned family of funds will come from individual partners’ pockets and how much from Putnam and Thomas H. Lee Co. investors. Mr. Sperling said the bulk of fund raising will be done by the managers of the TH Lee Putnam funds, with some introductions and networking arranged by executives at Thomas H. Lee Co. and Putnam. Putnam will aid in manager selection and fund raising through its large international client base and offices in Europe and Asia, Mr. Spiegel said.

A source close to Thomas H. Lee Co. said TH Lee Putnam eventually might go public. The source added that, despite industry speculation to the contrary, Thomas H. Lee Co. has no plans to pursue an initial public offering.

Both sides said the partnership was formed in response to demand from large institutional investors for a more diverse range of alternative assets, and, to a lesser extent, demand from Putnam’s consumer clients for these types of investments.

Mr. Sperling said some limited partners in the Thomas H. Lee Co. funds had been watching firms such as Bain Capital and Hicks, Muse, Tate & Furst Inc. expand their fund offerings, and wanted to diversify their private equity portfolios within a Thomas H. Lee Co. framework. The firm will provide a “quality assurance network,” Mr. Sperling said, by selecting the management teams for the new funds. Teams of managers interested in starting alternative investment funds under the Lee rubric frequently approach the firm, Mr. Sperling said.

One L.P. source, an investor in a Thomas H. Lee Co. buyout fund who spoke on background, said he had not requested an expansion of the firm’s family of funds. The partners at Thomas H. Lee Co. are “very bright” and capable of recognizing management talent, he said, but are more qualified to select private equity investment managers than managers of other forms of alternative investments.

The source also said it was becoming trendy for buyout professionals to dip their toes in non-buyout waters. “It’s the summer cocktail circuit up there,” he said. “The fashion in Boston these days seems to be that if you’re an LBO guy you can be a hedge-fund guy.”

Indeed, Boston-based Bain Capital and Summit Partners currently are managing hedge funds, while Berkshire Partners, another Boston private equity firm, is raising one, according to a G.P. source.

Old Friends Team Up

That Thomas Lee, the founder of Thomas H. Lee Co., would declare an intention to sponsor a Europe fund indicates how strong the desire among many general partners is to diversify their firms’ businesses. As little as two years ago, Mr. Lee said his firm would stay away from investing in Europe, despite advances from Chase Capital Partners, Hicks Muse and U.K. firm Schroder Venture Group to co-invest in the region.

The deal also shows a need among traditional mutual fund companies to offer more exotic investment products to their institutional and high-net-worth clients.

Thomas H. Lee Co.’s partnership with Putnam, of all financial groups, is not surprising – Putnam’s chief executive officer, Lawrence Lasser, has known Mr. Lee for 30 years and has invested personal money in his friend’s buyout funds. In addition, Putnam’s parent company, Marsh & McLennan Cos., has invested in Thomas H. Lee Co. funds. Mr. Sperling said that while the firm had been contemplating ways to diversify its fund offerings for more than a year, it had only begun talks with Putnam a few months ago.

Institutionalization Brings Peace

In addition to having a 25 % interest in TH Lee Putnam, Putnam reportedly will buy a 20 % stake in Thomas H. Lee Partners, the entity that runs the firm’s core buyout business. A source close to Thomas H. Lee Co. said the firm decided to sell Putnam a minority stake in order to cement the relationship between the two firms and to further institutionalize the partnership at the buyout firm. Both Mr. Lee and David Harkins, the senior managing director, are in their late-50s, according to the source, and as time goes by will become less involved in running the firm. Putnam’s stake in the firm will provide a structure that will effectively limit battles between partners involving generational changes and profit sharing, the source said, declining further comment.