Industry Thoughts | Private Equity and the Investment Thesis

Dan Primack of Fortune penned a quick post today wishing that private equity firms would give a little more detail about their overall investment thesis when they buy portfolio companies. Reporters care less about the seller than the buyer, Dan writes, so explain at the closing of the deal why a firm bought the company and what's the game plan while they still have journalists' attention.

Yes, Dan, it would be nice for firms to be a little more specific. (It would also make MY job easier to determine deal flow for my work.) However, until there's more specific and targeted regulation on PE, you're not going to get as lucky and have PE firms be more welcoming in terms of sharing that information. Knowing firms I deal with every day, I'd be pretty surprised if they changed.

Now, while I say that, I'm not being bitter towards private equity firms. It's more so that there's no reason to share that information about the investment thesis, as the only people who REALLY need to know are the LPs and lenders. Again, when regulation hits, we'll probably see some compromises.

One other thing: I also think that because journalists in the private equity space have different sources, it's important to recognize their scoops. A good example is with HIG's Hooters of America deal: The Deal was able to uncover the mystery private equity firms that worked with Chanticleer (along with the purchase price), then Pitchbook was able to identify the Texas Wings buy that went along with the deal. It sucks sometimes that you have to go through 5-6 sources to get the entire story, but that's how the scoop world works.

Industry Thoughts | ACG And Lobbying, Part IV (A response to David's response)

After a lot of responses (including my own) over his recent article in PEHub, David Toll, the Editor-in-Charge at Buyouts, made a response of his own:

Thanks for joining the debate everyone, and all the thoughtful responses. I know that many portfolio companies grow, and sometimes rapidly, under PE ownership–we will be honoring one such company as a “Mid Market Deal of the Year” in about 45 minutes (via Twitter @Buyouts). As I noted in my column, I’ve also seen how effective promoting job-creation can be in lobbying Congress (by the NVCA and the Real Estate Roundtable). But I’m not convinced that, in general, the buyout strategy is about job creation–partly due to the borrowing imposed on my portfolio companies to pay for their acquisitions, partly due to the inefficiencies of many targets pre-acquisition (and the need to trim the fat), and partly because that’s what past research has shown. A PR strategy that centers on job growth arguably makes the industry an even bigger target for critics who feel they can prove buyout firms are about job cutbacks. All that said, the industry needs to do a better job of answering its critics and of getting a better shake on the Hill–I see that. One of my earlier columns had a headline that went something like this: “Is the industry going to accept SEC registration without a fight?” I meant it as a call to action. Perhaps it is a little unfair to criticize ACG for now acting. But I also don’t want to see the industry do anything that’s counterproductive.

I agree, David, that buyout firms do not have job creation as the primary motive behind their investments. I also am glad that your piece on SEC registration was a specific call to action; it's sad that only a few private equity firms were the only responders to the Dodd-Frank move while a lot of PE firms in general were whining about the upcoming regulation but not doing anything about it. 

That being said, it will be interesting to see how successful ACG's PR strategy about mid-market private equity is. There is no middle ground here: it is either going to do very well in convincing Congress that mid-market PE is the future or it's going to fall flat on its face. I guess we'll probably know in around 6 months or so.

Good luck, ACG! You're going to need it.

Industry Thoughts | ACG And Lobbying, Part III

Yesterday, David Toll, Editor-in-Charge at Buyouts, penned a piece on how ACG is putting together a mid-market PR campaign on how mid-market private equity firms are contributing to job creation in the USA. The site (click here), in Toll's view, is a waste of time and that it's not worth the effort to worry about what he calls an "unwinnable" PR battle.

Well, David, I absolutely disagree.

I've written a few posts about why ACG should have a lobbying arm or PR campaign for private equity firms. PE firms themselves had to push back against the growing moves from Congress (most recently via firms fighting the $150MM under management SEC registration legislation), and now that ACG (who has 3,300, or 23.5%, of its 14,000 members from private equity) is making a formal PR push focusing on middle market firms, it's a bright sign.

But what's important to recognize here is that something is better than nothing.

I've argued in the past that because the industry's PR machine was almost non-existent, when Congress sets its sights on the industry through implementing regulatory reform, firms were going to scramble and find backup plans themselves. The public has no clue what private equity can actually bring to the table in terms of restructuring companies, job creation, and actually creating some sort of value.
Hey, until the ACG's movement, the only type of PR going one was going to be Lynn Tilton's reality show. Do we really think that THAT'S going to leave a positive opinion on John Q. Public??

I believe that middle market (and lower-middle-market) PE firms are going to be the face of the industry over the next 3-5 years. Here's why:

1. The lower-mid-market guys are included in this SEC legislation mess as the threshold in terms of capital under management is about $200MM. Plus, most of the firms I talk with have at least $100-$150MM under capital! One of the exceptions is L2 Capital, which was a spin-off from Milestone Partners, a firm that focuses heavily on lower-middle-market.
2. If a growing negative sentiment from the public grows, it will lead to a populist movement from Congress that will slam heavier regulatory reform on the industry. I'm not confident that the government will be able to grow small and medium business jobs in the short term, and because companies of those sizes have the highest necessity for job creation, you can have PE firms who specialize in those types of businesses to come in and fix them up.
3. With the credit markets opening up again, these mid-market firms are getting more access to capital. However, lower-mid-market and mid-market firms in general are known to be significantly more cautious in their investments, so you'll continue to see low-multiple acquisitions from them. 
4. Mid-market firms majorly invest in companies in the US. They look to streamline operations and developing well-oiled machines. Besides, more and more firms are looking to talented 3rd  parties (e.g., turnaround experts, consultants) to help them fix their portfolios. Why now? Because they have the capital to pay for it again.

The private equity PR battle can be won. It's just that any voice lobbying for PE never existed before, and that if there was any organization that needed to spearhead it, it's ACG. The middle market is the future for PE, and by doing nothing to support it and educate the public, PE would be in for a hailstorm.

Again, something is better than nothing.

Industry Thoughts | Some More Thoughts On Private Equity's "Use It Or Lose It" Debacle

Last week I put up a post about Dan Primack's response to the 2011 Bain Global Private Equity Report. I agreed with Dan that firms are facing pressure from LPs to spend the last of their funds, which would in turn fuel "bad deals." However, I felt that this trend would not be seen amongst all private equity firm sizes, notably some mid-market and lower-mid-market shops.

Then today, courtesy of Stephanie McAlaine, Executive Director of ACG Philadelphia, I read a piece about how the public market turmoil could be a boon for the private equity industry. I agreed with the general opinion; the industry has diversified itself so well that it's becoming a safer play to look at fund-of-funds investments, and the fact that it will find ways to fight any sort of regulation (unless FINRA comes knocking, as David Snow pointed out in a Privcap post) will help it stay safely diversified.

However, one key statistic came to my attention:

According to Coller Capital Ltd., which tracks the industry, 60 percent of private equity investors, known as Limited Partners, or LPs, plan to increase their rate of new private equity commitments in 2011, and 34 percent intend to increase their target allocation to private equity, compared with 19 percent a year ago. 

Now I know Dan's right that there still is pressure from LPs that private equity firms are facing to use up the cash, but now I'm more convinced (thanks to Coller) that LPs are going to end up being ok with transferring that remaining capital to the next fund/commitment contract. While I'd like to get more details from Coller about the statistic (is this for the overall industry, does it differ significantly when look at PE firms by size, etc.), it's a promising piece of information.

That, plus the fact that my contacts and clients haven't taken a break from deal-making after a VERY busy Q4 2010 (and therefore keeping me busy) helps.

Industry Thoughts | Revisiting Private Equity, Public Relations,and Dividend Recaps

While catching up on some reading, I perused Dan Primack's recent piece on dividend recaps and how private equity firms should be frank about dividend recapitalizations. Dan mentions that at the recent Columbia Business School private equity conference, many executives were complaining that the industry has gotten bad press (see: "strip and flip") and hasn't done much at all in terms of PR. However, many firms continue to perform the ever-controversial dividend recap (create a term loan designed to pay a dividend to the investor or investors) and still state that they're adding value to their portfolio companies.

First off, regarding the PR effort, I have written many posts as messages to the PEGCC and ACG to help out the private equity industry; the ball is in their courts to help generate a good PR effort and show the general public (in some way) that private equity firms are helping portfolio companies and the American industries become better. However, there's been a limited push from both organizations (I can understand ACG's reasoning as I wrote here, but the PEGCC doesn't get let off the hook). Much more CAN be done and the clock is ticking until Congress moves its target from hedge funds and banks to private equity. The upcoming HCA IPO is probably going to quicken the countdown clock.

In terms of dividend recaps, I absolutely agree with Dan. You're NOT adding value by enforcing these loans; in some drastic cases, I've seen private equity firms take a too drastic approach, giving the portfolio company no choice but to file for bankruptcy.
Now while I am not a fan of the strategy, I understand that it is necessary to execute it at times; LPs may be wanting money back, the company may be on the right track to success that they are able to pay up the investors, or the firms want to apply pressure on their portfolio company to improve their performance.

However, like Dan said, private equity firms need to admit why they're executing a dividend recap. Admit your mistakes. Explain how it fits into the main plan for the company you're working on. As frustrating as it may be to admit in the short-term, firms will win support from consumers who will understand that there is a true and heavily successful growth strategy plan in the works and that there's a good chance that the plan will live up to its standards.

Be smart, PE firms. Stop beating around the bush with value-added fluff.

Industry Thoughts | Private Equity, Dry Powder, and "Bad Deals"

Dan Primack of Fortune, a man worried about the results of 2011 private equity deal flow, posted this article today after reading Bain & Company's annual Global Private Equity Report (which was published today). The firm agrees with him in that GPs holding a significant amount of dry powder with an expiration date on it (courtesy of the LPs) feel pressured to invest that capital. This "use it or lose it" feeling is definitely there, and I agree with Dan that it's going to affect 2011 PE deal flow.

But what I think is important to recognize here is if the size of private equity firms matters. For example, many lower mid-market firms I met during the end of 2010 and the beginning of 2011 were being extremely cautious in terms of finding the perfect deal. However, that cautiousness I've seen amongst lower mid-market firms is due to many deals dropping dead in the water as they were working out the terms. That circumspection they are feeling is going to continue along the year, but coming back to the size issue, LPs may not favor firms because of their investment criteria in terms of size and apply the same amount of pressure to everyone.

Rich Lawson of Huntsman Gay Global Capital also raises a good point here: debut funds have it easy, but you could potentially see more growing. Another thing that could happen is that GPs could convince LPs to move that expiring dry powder into new funds. By rolling over the capital into the next fund, you get new terms and the approaching expiration worries off deal teams' backs.

2011 private equity activity is under a very large microscope; if the year's deal flow turns out to be better than expected (and so far it's looking ok), 2012 deal flow is going to exponentially increase. If not, I think the industry will be in a logjam for at least another year.

Not Private Equity, But Still Important | Quick iPad 2 Thoughts

Yes, this post isn't related to private equity, but after reading the relatively underwhelming iPad 2 release today, I had a few thoughts that I wanted to share:

1. Weight Matters: It's thinner than an iPhone 4. Pretty awesome. But it still weighs more than 1 lb. As a current first-gen iPad owner, trust me; it makes a difference.
2. Incase Must Be Angry: The new Smart Cover designed for the iPad is nice and all, but the folding design is exactly like a case that Apple accessory maker Incase made for the first-gen iPad. By the way, Incase is now backed by Swander Pace Capital, a private equity firm (smart buy for them). 
3. It's All About the Accessories: I currently have the first-gen iPad (thank you ACG CT!) and was more excited to see the new iOS upgrade and HDMI adapter. ANY app or website can share video and audio to an Apple TV with the new AirPlay update on iOS 4.3, and full mirroring is available with the HDMI adapter. I can see that option being BIG for classrooms.
4. Cheaper First-Gen iPads: Don't care about the hardware but excited about the software? Apple's online store is selling new and refurbished (aka basically new, Apple cleans them up really well) first-gen iPads starting at $350. Click here.

That all being said, I'm happy with my first-gen iPad. I think Apple is slowly realizing that it's running out of innovation idea regarding hardware and is going to start focusing on software. 

Moreover, one company was like Apple in its heyday and after a few products where the hardware didn't make sense, that same company focused on making its strongest products better software and specific components-wise.

That company is Sony.

Industry Thoughts | Private Equity Goes Into Reality TV, Thanks to Lynn Tilton

Talk about an interesting story for private equity today: New York Magazine announced that TV network Sundance is launching a "nonfiction" show about Patriarch Partners CEO Lynn Tilton. The show will be called The Diva of Distressed.

Known for her powerfully blonde hair, 6-inch stilettos, and tight-fitting clothing, Lynn is also a tough and demanding head of the distressed-focused private equity firm she named after her father. (More background info about her, including her hilarious "I only strip and flip men" comment, is in this well-written WSJ piece.)

After watching the clip in the link, I realize what Lynn's trying to do, and it's honorable. Private equity firms haven't tried any successful way to show the general public that they are helping the economy by acquiring portfolio companies. If anything, this is a good start for a helpful PR movement for the industry.
Sadly, because of all the rotten programs that fall under the "reality TV" category, I feel that people will initially judge the show more on Lynn's looks versus what she's actually doing with the companies she now owns and is working on.

Still, it's a good start. Best of luck, Lynn! You can follow her on Twitter here.

Industry Thoughts | Private Equity and the Oscars

What a night for the Oscars. James Franco acts like, well, James Franco, Anne Hathaway continues to show why she's awesome and extremely gorgeous, and Inception didn't get Best Original Screenplay (though hats off to The King's Speech for winning it). While watching the show (and switching between it and the awesome Knicks-Heat game), I realized that, like how I mentioned in my Fashion Week post, private equity firms have significant stakes in film studios!
I thought I'd share a few of them, with the help of Pitchbook:

• MGM (through Spyglass Entertainment/Cerberus Capital Management)
• Miramax (through Colony Capital among other firms)
• Spyglass Entertainment (through Cerberus Capital Management)
• Legendary Pictures (through ABRY Partners, Ridgemont Equity Partners, Falcon Investment Group, and a few others)
• Village Roadshow Pictures (through Tailwind Capital, among other firms)
• RealD (formerly through Shamrock Capital) - great piece from WSJ PE Beat here

It's important to note that you'll see private equity firms put stakes into stronger film production studios in general; MGM, Miramax, Spyglass, Legendary, and Village Roadshow all have strong films within their portfolios. I haven't seen PE interested more in the independent film studios, but it's always good to keep an eye there.

Let's end with a hat tip to Kirk Douglas in light of his amazing appearance at yesterday's Oscars.

Industry Thoughts | Private Equity and Fashion Week

Yikes, sorry for the delay in posts, guys. With our clients keeping us ridiculously busy coupled with lots of deal flow, it's been tough to get a chance to put in a post. Luckily, the wonderful week of color, style, and design known as Fashion Week came to New York, but it didn't slow down deals either.

More importantly, during Fashion Week, two fashion houses were acquired by PE firms: Sun Capital Partners (through Kellwood Co.) acquired Rebecca Taylor, and Castanea Partners acquired Donald J. Pliner. It's no surprise which firms ended up buying the storied houses; Sun Capital has a strong consumer division and Castanea happens to own a few other recognizable fashion labels, including Urban Decay, Ippolita, and Betsey Johnson.
Also, take a look at the WSJ's blog Private Equity Beat on a post-deal interview with Castanea partner Troy Stanfield on Donald J. Pliner.

Fashion and luxury apparel are popular sectors with PE. Margins are very high, brand reputation is getting stronger, and it's not difficult to grow a label if you have the right team behind the brand. Many fashion labels have been PE-owned before, including:

• Stuart Weitzman (Irving Place Capital at one point)
• Jimmy Choo (TowerBrook Capital Partners)
• Harry Winston (Fenway Partners at one point)
• Rafaella (Cerberus at one point)
• J. Mendel (The Gores Group)

It's always exciting to me when a recognizable consumer goods company is acquired by a private equity firm, as brand strength and reputation are powerful keys to a company's growth. It'll be interesting to see if more fashion houses are on the way to going to buyout shops.