Salmon: Private Equity Math, Nuveen Edition

NEW YORK (Reuters Blogs) -- The Wall Street Journal has the details of big asset-management news: TIAA-CREF is buying Nuveen Investments for $6.25 billion.

The sale marks the end of an ill-fated acquisition by private equity shop Madison Dearborn in 2007, just before everything fell apart. Madison Dearborn paid a total of $5.75 billion for Nuveen -- a premium of 20% to its market value. As the WSJ says, the buyers used $2.7 billion of their own money to pay for Nuveen, and then borrowed the other $3.05 billion. But then things got tough:

Within a year, Nuveen's borrowing costs had risen as the financial crisis set in. The company eventually refinanced most of its buyout debt, which now stands at $4.5 billion and will be absorbed by TIAA-CREF.

With the TIAA-CREF deal, Madison Dearborn will have at least broken even on its Nuveen investment, a person familiar with the matter said.

On its face, this doesn't seem right. If TIAA-CREF is absorbing $4.5 billion of Nuveen's debt, that means it's paying $1.75 billion in cash. That's a billion dollars less than Madison Dearborn paid in 2007. Is it credible that Madison Dearborn has managed to dividend out a billion dollars of profit between 2007 and today?

No, it isn't. If you look at Nuveen's financial report, it shows net income in the five years from 2009 to 2013 to be minus $495,516,000. There's another line, stripping out "Noncontrolling Interests" and showing net income "attributable to Nuveen Investments"; that one shows an even bigger cumulative five-year loss, of $540,752,000.