Wednesday, February 27, 2013

Industry Thoughts | Private Equity's "Doughnut Hole" Is More Like A Steak Bait

Yesterday afternoon, Fortune's Dan Primack put together a piece on some of his observations during the SuperReturn International Conference in Berlin. It was an understandable tongue-lashing at the industry on how private equity investors and execs truly believe the leveraged prices are too high and yet are not calling for a pull back. Dan's line at the end sums up his piece perfectly:

To be clear, I'm not arguing that we're about to have another rash of TXU's on our hands. But that's due more to capital constraints than it is to changed attitudes or behaviors. What I am saying is that private equity investors are aware of a disconnect between their head and their heart. And they don't plan to do anything about it.

Dan is right in that PE execs are not openly calling for a pullback. This IS SuperReturn after all, where it's one of the major PE conferences designed to feature key speakers. Whether the Q&A session was more strict on getting answers or not is something to be seen, but we will have to rely on Dan's and Cristina Alesci (who Dan saw grabbing an interview right before he did - early BloomBird gets the worm, I guess) for the deep interviews at this point.
(UPDATE: Cristina responded to Dan's tweet in the most perfect way.)

While these execs aren't openly calling for the pullback, they are DEFINITELY saying it in private. In my many talks over the past few weeks with middle market, mega-size, and lower-market PE shops, many execs have told me that they are finally seeing deals pick up (everyone was in a rush to close deals at the end of December because of tax reasons) but the cheap debt is making everyone think twice. 

This is why I compare the doughnut analogy that Dan used to more like a "steak bait." 
(DISCLAIMER: I was hungry when I came up with this analogy.)

Private equity's investors (limited partners) have the upper hand again in this day in age of the private equity industry, and while there is cheap debt and financing out there, the equity dollars are still seriously crushed by the terms, conditions, and extra debt being loaned by the banks. It's like the banks drop out a big juicy Peter Luger porterhouse steak with a very strong hook and fishing line attached to it. You grab it, be prepared for a rough ride. As Dan put it in his post...

As one senior PE investor explained it to me: "You might get excited that someone is willing to put $1 billion of debt next to your single dollar, but remember that your bill is now sitting beneath one billion or them."

There is a heavy sense of trepidation among PE firms I've talked with in terms of deals with all the available financing out there; that is why you'll see much more structured, smart deals that will come out within at least the next 2 quarters. I will say this though: if I'm wrong, I'll go eat a paper steak, Dan.

- PE Feeds

Tuesday, February 26, 2013

Leveraged Stories | TSG Consumer Partners and Stumptown Coffee Roasters

Here's a nice and short private equity story: TSG Consumer Partners, one of the most well-respected consumer-focused PE firms (they helped grow companies like Vitaminwater and Smart Balance and currently own pretty well-known companies like Rebecca Minkoff, Pop Chips, Muscle Milk/Cytosport, and e.l.f. Cosmetics), bought a majority stake in Portland-based gourmet coffee company Stumptown Coffee Roasters back in May/June 2011 (announcement/closing). 
TSG was actually looking to expand within the gourmet coffee area, and from my talks with people in the firm, they've been looking at many specialty consumer sectors to work on.

It was reported in the New York Times that TSG had picked up a 90% stake in Stumptown with the "goal" of selling it to a larger company down the road. Now, knowing how the firm works, they would only sell to a larger company if the brand reputation their portfolio company (Stumptown in this case) was kept solid and not destroyed. 
(Also, I'm not surprised La Colombe Torrefaction, one of Stumptown's competitors, said this, as its founder Todd Carmichael wrote a scathing piece in Esquire's "Eat Like a Man" blog in May 2011, basically saying Stumptown sold out "to Wall Street." Stumptown's founder Duane Sorenson wrote a note shortly afterwards on the company website, and even TSG's head Alex Panos said that Duane is still calling the shots.)

However, it is definitely worth nothing TSG has done many short-term deals in the past with the goal of helping the companies it owns build its brand. The Portland Business Journal looked at the 2003 acquisition of Harry's Fresh Foods for example. The same article also mentioned that (and this is true) TSG execs even walk along store aisles for investment opportunities!

That same NYT article had mentioned that TSG talked with California-based coffee company Blue Bottle Coffee:

“If you want to grow your business you have to do it somehow, and if you can’t get a loan, you have to sell equity, unless you have a really, really well-off grandpa,” said James Freeman, the owner of Blue Bottle Coffee in Oakland, Calif. He said he’d met with two representatives from TSG in March, but would not say what they discussed.
The bigger story about TSG's acquisition is its plan for selective expansion. They opened two new shows in Brooklyn and added a bottling facility to expand the production of its cold brew coffee. 
Finally, Willamette Week put together a really good breakdown of TSG's desire to go into gourmet coffee. The quote on the social  media "backlash" is pretty funny:

The Internet was rife with conjecture: Stumptown was looking to break into Europe. Stumptown was broke. Stumptown had been bought by McDonald’s. “Did Stumptown just get sold to Vitamin Water? Maybe it’s time to switch to Clive [a small Portland roaster],” Decemberists frontman Colin Meloy tweeted.

So far, it looks like TSG is doing well with Stumptown. Sorenson is still running the show, and they're looking to expand into the right cities. A handful of PE firms are as successful as TSG in building up brands, and that will be one of the key futures of private equity.

Saturday, February 23, 2013

Industry Thoughts | Public-ifying PE (an update)

Yes, it's been a while since this blog has been updated. I greatly apologize for this, but please know it was not on purpose. I've been spending a lot of time utilizing Twitter to write my thoughts (albeit to the 140 character limit), and I know my feed has been a bit off topic recently. So I thought I'd do a little update and share what is going to happen on this blog moving forward.

While the Private Equity Growth Capital Council and ACG have been been doing good jobs on sharing some stories about private equity success stories, I am going to write about some others I've been seeing, both on the success and failure sides. The bigger story I will aim to tell is more like a forensics report, digging as deep as I can to show what went right (or wrong). More importantly, it will focus on companies people will recognize well (from Dave & Buster's to the makers of the Slinky toy), with the goal of showing how much work behind the curtain PE is doing. The curtain is slowly getting pulled back by various people. I intend to rip it down.

From the SEC registration to public enforcement, private equity will be under a larger magnifying glass moving forward. I plan to keep track of what happens and keep you guys and gals updated. While it's more paperwork for PE firms (and the majority of firms work within the law), it's better for its public image as it continues to be a work in progress.

Along with telling some PE success and failure stories, I'll pen a short post or two about a company that's well known among the general public that's, well, PE-backed. From Rebecca Minkoff to Rosa Mexicano, you never know what company I'll touch next.

While I'll definitely be tweeting during the many PE conferences I attend, expect some takeaway posts at the end of them. Intergrowth 2013 (the largest private equity conference in the world) is coming up in April, so expect some posts then.

I read and see a lot of private equity pieces. I'll share some of what I'm reading and give my take and/or responses to them. It could be data-centered or insight-centered. Heck, I'll throw in a snarky piece every now and then. Those will be fun.

Every now and then you'll see a non-private equity piece here. It may center around something fun (sports, animals, WWE - yes, it's my guilty pleasure) or something thought-provoking (personal thoughts, ideas, etc.). I promise they'll be worth the read.

Team PE Feeds has garnered a bigger following than I ever would have imagined. I cannot thank you all enough and plan to up my game and share with you a deeper insight about PE to those who may have never been able to understand it.
There are many great private equity journalists dedicated to the data and insight, but nobody has consistently helped educate the public, which is totally fine. Many of them (Jason Kelly with his book The New Tycoons, for example) have done great jobs when they have. But their jobs can't allow them to do it full time.
That's where I come in.

Enjoy the leveraged ride.

- PE Feeds