Moderating a panel discussion on the last day of the Main & Wall conference, Gary Prager, managing director of conference sponsor GB Merchant Partners, Boston, posed the question: “What will private-equity companies be looking for in the months ahead and what should you look for in a private-equity firm?”
David Heidecorn, partner, Greenwich, Conn.-based Catterton Partners, answered, “We are being patient and thoughtful. We look carefully at the demographics and the psychographics served by a company, and we are looking for companies that fit with our overall investment thesis.”
With more than $2 billion of equity capital under active management, Catterton Partners is one of the largest retail- and consumer-focused private-equity firms in the United States, and its focus is on growing middle-market consumer companies in North America.
Describing his company as a “growth investor,” John Burns, general partner, Highland Consumer Fund, a division of Boston-based Highland Capital that focuses on consumer goods and services, responded to the question by saying, “We look for companies with a steep growth projection; we are working harder to find these [candidates] and we are being more selective.”
“The great thing about America,” Burns continued, “is that there are always pockets of growth, so we are still finding opportunities.”
To Prager’s next question, “What should a seller look for other than price?,” Steven Liff, managing director of Sun Capital Partners’ Los Angeles office, advised to look closely at the company’s management team.
“Especially in challenging times, you want to be with a group that is decisive and not afraid to support growth,” noted Liff. “You want a group who understands how retail and consumer cycles [evolve] through good times and bad times—and who isn’t afraid of the tough times.”
Since joining Sun Capital in 2000, Liff has led more than 25 buyout transactions. His fellow panelists agreed that the management team is one of the most important aspects to any corporate sale or turnaround.
Burns added, “We look for one to three people who we can build a good team around. They need to be strong entrepreneurs who have had successful experiences building companies. Diversity of experience is also important; it needs to be a well-rounded CEO.”
On the flip side of the equation, Steven Silverstein, CEO of Spencer Gifts, Egg Harbor Township, N.J., responded to the question “What should an entrepreneur look for in an investment firm?”
“It’s not just about capital,” he said. “You want to know what kind of partner they will be, how they react in good times vs. bad times, can they add value, and do they support aspects of the business such as operational upgrades.”
Silverstein was recruited to Spencer Gifts in 2003 when the retailer was purchased by GB Palladin, a joint venture between Boston-based Gordon Bros. Group and New York City-based Palladin Capital Group. Having spent 11 years at Linens ’n Things culminating in his role as president of the company and having grown company sales from $180 million to $2.1 billion, Silverstein was precisely the kind of “well-rounded, experienced” CEO that investment firms seek.
Another critical point made by the Main & Wall panelists is that investors and executives need to enter new ventures with an exit plan. In some instances, investment firms will not consider purchasing a company unless they perceive that it has the potential to become a public company or, as a plan B, that there is a list of potential future acquirers.
Heidecorn noted that Catterton spends time researching the category before investing in a retail company. “We expect to see continued consolidation in the industry and we want to evaluate who will be the winners and losers in a category.”
While everyone agreed it is imperative to enter deals with “eyes wide open,” Silverstein cautioned, “Management cannot appear to be mercenary and looking for the door. It’s a double-edged sword, there has to be an exit strategy but management also has to be committed to running the company.”