Inside TPG’s playbook for Cushman

Private equity firm has loaded debt on top of the brokerage, which is operating at a loss

From left to right: Brett White, Jon Winkelried and James Coulter (Credit: Facebook, Youtube, and Pixabay)
From left to right: Brett White, Jon Winkelried and James Coulter (Credit: Facebook, Youtube, and Pixabay)

Cushman & Wakefield filed the preliminary prospectus for its initial public offering Wednesday, giving a glimpse into the private-equity playbook owner TPG Capital drew up for the brokerage.

TPG is hoping that a successful Wall Street debut will help pay down the substantial debt it’s saddled Cushman with since acquiring the firm in 2015. It will also look to reverse the company’s operating losses and put it on the road to profitability.

The private equity firm paid more than $3.5 billion between 2014 and 2015 to acquire Cushman and combine it with the other brokerages it snapped up, DTZ and Cassidy Turley. It’s looking to raise about $1 billion in the IPO at a valuation in excess of $5 billion, the Wall Street Journal reported.

It’s the same playbook other private equity giants like the Blackstone Group lean on time and again for investments like Hilton Hotels, and the Cushman IPO would represent TPG’s exit from its investment.

“That’s their liquidity event,” said Ross Carmel, a founding partner at the law firm Carmel, Milazzo & DiChiara. “That’s how they get out.”

Cushman’s filing with the Securities and Exchange Commission shows that the company’s been operating at a net loss for the three years it’s been under TPG’s ownership.

In its first year under TPG, Cushman posted a net loss of $473.7 million on revenues of $4.1 billion. As the firm ramped up, revenues grew last year to $6.9 billion, cutting its net loss in 2017 to $220.5 million.

In New York, Cushman’s consolidation with DTZ gave it more market share on the leasing front. And the acquisition of middle-market investment sales brokerage Massey Knakal, along with poaching the top-tier sales team led by Doug Harmon and Adam Spies from Eastdil Secured, gave the company a robust injection of commissions from investment sales.  A $5 billion valuation would put Cushman behind CBRE’s market capitalization of $16.6 billion and JLL, with a market cap of $7.7 billion.

Although revenues have risen as Cushman chases higher margins, TPG has also loaded the company with significant debt.

Cushman’s interest expenses have grown from $123.1 million in 2015 to $183.1 million last year, its filings show. At the end of March 2018, Cushman had debt totaling $3 billion on assets worth $5.9 billion.

“Debt is always a negative to a company on its balance sheet, and it certainly needs to be looked at in perspective,” said Carmel, who added that he didn’t think Cushman’s leverage levels looked too alarming.

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Cushman, however, did acknowledge the risk associated with its debt in its filings.

“We have a substantial amount of indebtedness, which may adversely affect our available cash flow and our ability to operate our business, remain in compliance with debt covenants and make payments on our indebtedness,” the company’s prospectus reads.

A spokesperson for Cushman declined to comment beyond what was noted in the prospectus, citing the SEC’s registration quiet period.

Cushman has $2.6 billion worth of debt coming due November 4, 2021, and another $470 million maturing a year later. The company plans to use the proceeds from the IPO to pay down that down, according to the prospectus.

One thing it doesn’t plan to do once it goes public is pay out a dividend. Cushman said it does not plan to pay dividends on its shares “for the foreseeable future,” opting instead to reinvest that money back into the company.

Carmel said it’s not uncommon for companies to forego paying dividends and that the decision shouldn’t impact investors’ interest in Cushman’s stock.

The move does stand in contrast, though, to rival brokerage Newmark Knight Frank. As the company was preparing for its own IPO last year, it told investors that it planned to pay out a dividend each quarter.

Newmark paid its first dividend last quarter of $.09 per share, and said it expects to maintain that level through the rest of the year.

The brokerage’s IPO didn’t receive as much attention as Newmark and its parent company, financial-services firm BGC Partners, had expected.

Newmark initially planned to sell 30 shares ranging from $19 to $22 per share. But after speaking with potential investors the company decided to sell 20 million shares priced between $14 and $15.

The company went public at $14 per share in mid-December. The stock closed at about $15.50 cents Wednesday.