Q&A: TGC Financial Partners Chairman William S. Cohen

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The cause of national defense has always been good for business, and cynics might say the times have never been better. William S. Cohen, former U.S. Defense Secretary under President Clinton, talks candidly with eFinancialCareers about his new private equity firm, TCG Financial Partners.

Cohen covers raising TCGFP's first fund in light of the war on terror, contrasts his firm to the Carlyle Group, and explains why clients are chasing him and his colleagues, such as CEO and co-founder Ed Carter, for a piece of the national security action. He spoke with reporter Marcia Stepanek from his Washington, D.C. office.

How does TCG Financial Partners differ from other firms, specifically?

TCG Financial Partners consists of two complementary businesses: an M&A advisory arm which advises CEOs on strategic initiatives to maximize long-term shareholder value; and a private equity business, which will invest in companies with products or services designed to enhance national security.

Our M&A advisory business benefits from the insight generated by our experience in government, and more specifically, the Department of Defense (DoD). By combining our contacts in industry with financial experience, we help each of our clients in growing their business through a strategic transaction, typically either a merger or acquisition. For example, defense consulting firms do not possess the requisite financial acumen to advise on M&A transactions, and Wall Street firms do not have the industry knowledge to appreciate the shifting strategic landscape occurring within the defense and security industries. Our ability to successfully integrate these two areas of expertise provides us with a distinct competitive advantage.

The private equity business of TCG Financial Partners differs from other typical private equity business models in that we focus exclusively on the defense and security sectors and have key relationships with senior-level decision makers throughout industry and government. Most private equity firms are generalists in nature with a focused effort on a few areas. However, there

are only a few private equity firms with an exclusive focus on one sector.

Additionally, we differentiate ourselves in our strategy pre- and post-investment. In determining the best opportunities and most attractive areas for investment, we leverage the consulting expertise to identify medium- and long-term trends within the defense sector to best focus our investment professionals. This practice provides a "pulse" on government and defense-related activities ranging from policy decisions to DoD priority to funding allocations by Congress.

Our post-investment advantage is to fuel our portfolio company's growth. That means activities post-investment can range from helping win new government contracts to making bolt-on acquisitions of companies well positioned in growth areas. The flexibility of our business

model allows us to help optimize both the business and financial undertakings of our investments to successfully develop a vision for the future.

How will this firm be similar to, and differ from, the Carlyle Group in

organization and mission?

Organizationally, the Carlyle Group has approximately $10 billion in assets under management and a staff of more than 300 professionals. Additionally, Carlyle makes investments in a broad spectrum of industries ranging from telecommunications to venture capital coverage. While they

started out with a focus on defense-related companies, today only 3% of their total investments have been in defense companies.

TCG Financial Partners is focused exclusively on the defense and security sectors. Therefore, our resources and expertise are all centralized to serving clients within this industry. We add industry-specific value through our deep-rooted expertise and relationships in this sector. Today, we provide our consulting and M&A advisory services to over 20 clients, so we have a proven track record in this regard.

You mention relationships... who are some of your clients? Can you give an example of a deal you're currently working on?

We don't discuss who our clients are or deals we're working on.

A recent story in Financial News said TCGFP hoped to raise $300 million for a dedicated fund that will focus on investments in the defense sector. Has the company reached its goal?

Currently, TCG Financial Partners is in the initial stages of raising a fund.

Is the target accurate and do you have a date by when you'll close the fund? How much have you raised to date?

Yes, it's accurate. We haven't started asking people for money yet. We've had a lot of reverse inquiry, people making funds available to us if we can find interesting opportunities. We hope to have the fund completed by the end of next year. Advisers tell me it?fs a one-year process. We're not out marketing or making road show stops right now. When we do, we will be heading to Europe as well.

How is TCG Financial Partners' position unique in Washington, D.C. and New York?

Our operations in both cities allow us to be at the center of both the political and financial worlds. This dynamic is similar to what is the competitive advantage and core competency

of TCG Financial Partners. We hope to be the 'Best of Washington' and the 'Best of Wall Street'. Most importantly, we plan to fully integrate these two worlds.

What do you mean by 'integrate'?

We're thinking in using that term that we want the operation to fully utilize the capability of myself and my team of consultants in Washington with the team of investment bankers Ed Carter has in New York. There are a lot of people who have name association but who are not involved day-to-day on projects, and there isn't a complete flow of information from one team to the other. So we want to make sure we're fully using the capabilities of both sides of the house-- not just creating a name association.

Some people have talked about creating joint ventures; other groups have formed alliances. We're taking our business and comingling it and making sure we're completely involved in these projects to a greater degree than our competitors are. One way to confirm this is to look at our Web site to see the people we have with dual responsibilities within the Cohen Group and how they're spending their time part of it working with us and part in New York.

Who are some of the high profile political and investment banking figures on the team, besides yourself and Edward Carter, and what do they bring to the table?

Ed Carter brings a tremendous resource to our efforts and TCG Financial Partners given the incredible wealth of experience and expertise gained from over 20 years as a senior level Wall Street executive, including over 17 years at Merrill Lynch. Most recently, Ed was the head of global and corporate investment banking at Banc of America Securities; prior to that he was the head of North American investment banking at Deutsche Bank. Throughout Ed's career he has been client-focused and has had extensive experience and management responsibility over various aspects of banking including equity and debt capital raising, mergers & acquisitions, and

private investing. This varied background is important and makes him the ideal person to lead and manage TCG Financial Partners.

John Nelson is a managing director at TCG Financial Partners and has over 10 years of capital raising and M&A experience on Wall Street. In addition to having an MBA degree, John also has a strong understanding of military and political policy issues through his experience as a military officer with a graduate degree in international public policy. John's military background,

combined with his extensive banking experience, guides him in advising clients on their strategic objectives.

General Joseph Ralston served as the Nation's second highest ranking office when he was Vice Chairman of the Joint Chiefs of Staff. He also served as Supreme Allied Commander of NATO. Lord George Robertson served as Defense Minister of the UK and later as Secretary General of NATO. Their expertise and insights are unparalleled.

How does the global war on terror impact your plans for TCGFP?

I don't think they're directly related. However, the global war on terror has created a heightened interest for new technologies, new surveillance capabilities, new sensors, new early-stage frontline products and technologies, and as those are developed, it creates new opportunities for us to help emerging companies grow and help them validate and market their products and services. So in an evolutionary manner, as we get better fighting the global war on terror, I think you'll see new applications, products, new capabilities--all of which will create an added marketplace for us to serve.

What companies in the defense and security sectors are you not interested in and why?

I can't talk about prospect lists and clients, so I can't answer that question directly. We wouldn't, however, intentionally remove anybody because there might be some way to help them. We think we're uniquely focused on defense and security companies, whereas most merchant banks and private equity firms are covering eight to ten industry spaces. We're more focused than the normal, so we don't want to exclude anybody. You might ask whether defense and security industries are large enough to make it attractive. The answer is that these two industries are huge.

The U.S. defense budget is over $400 billion a year and we're seeing that with both research and development and procurement a number that should average for the next decade somewhere between $100 billion and $125 billion a year. That's a very large market, and that's an annual number. Each year, that's what will be spent on procurement, buying new goods and services and R&D for new products. If you look at the height of the technology bubble, in 2000, the IT industry was probably a $300 billion industry.

Two-thirds of the defense budget, the $400 billion for 2005 that has been approved by Congress, would be for personnel. You have to feed and house personnel and transport them and provide them with health care. A lot of that $400 billion is tied up in personnel costs, not products and services. But roughly one-third of the $400 billion goes for buying products, services and equipment. So, year in and year out, you wouldn't find too many industries spending that kind of money. Through force transformation to network-centric warfare-- the new buzzword in defense these days, the way DoD is transforming the way we equip and prepare our military for conflict--the government is creating a new opportunity for businesses which could fill that need. A lot of that need today is for technology-oriented products, ways to do combat better, lighter and more effectively through technology.

Will your new firm be hiring people, and if so, what types of people do you

hope to recruit? What skills are you looking for?

We are actively involved in recruiting personnel and resources for TCG Financial Partners. This process is likely to continue and accelerate as our firm expands. We are looking for M&A and private equity bankers, but we want individuals who have financial skills combined with an interest or experience within government or the defense industry. We are seeking bankers who can add sector experience as well as financial experience.

What will be your specific role in this new company? Mr. Carter's?

Through the knowledge gained from decades in politics and serving within government and the defense community, I hope to provide a framework for our firm and its strategic direction. Similarly, Ed's career on Wall Street and within the financial services industry will likely to be of great value moving forward, specifically as we execute our strategy to become a premier

merchant banking organization firm focused on the defense and security sectors. I am the Chairman and Ed is the CEO and we will work closely together as we build the organization.

While the culture and genetics of our organization are still being defined on a day-to-day basis, I believe our experiences and relationships throughout the government and within the investment community are a tremendous asset to achieving the successes we have envisioned.

mstepanek@efinancialcareers.com

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