Fundology: Hi, we’re here with Richard Baum. He’s the managing partner with Consumer Growth Partners. Richard, if you can please briefly introduce your company and what you focus on?
Richard: My company is Consumer Growth Partners, which you mentioned. We are an independent sponsor. We focus exclusively on investing in retail companies and in branded consumer products companies.
Fundology: I’d like to talk about the recently closed transaction today. If you could give us a brief overview of the deal you’ve worked on.
Richard: Sure. So we recently closed the transaction of a consumer products company. The company was about 10 years old, and it was founded by father and son. The transaction was for the son to be able to buyout his father, who was the majority owner of the company. The way we got involved is through a partner in a large fund where this company had been a relatively small piece of their portfolio. The fund was winding down and the partner, who had the relationship, wanted to be able to help the son put together a transaction which he could buyout his father.
The problem was that the funded partner really didn’t have an independent access to capital. Having existed in the fund for a number of years, he would simply, under normal circumstances, call up his chief financial officer and have him call the limited partners to send their checks. This is a much smaller deal than that. He really didn’t have access to, or knowledge of a lot of the types of investors and the size of investors that would be appropriate for this transaction.
So we were introduced to him through a mutual investment banker firm. Has a firm who could help him with his transaction. We met, we discussed the company. The company generally met our investment criteria, so we liked that. Together with him, we then went and visited the company, met the management, liked what we saw, kicked the tires. Explained to them how we would approach the transaction in terms of process that we would run, and who are some of the types of investors that we would approach.
The private equity partner, if you will, wanted to see what would be the arrangement if we were to partner together. We’re pretty collaborative and it wasn’t a deal that we found. We worked out with him that we would split everything 50/50, right down the middle. So closing fee, annual advisory fee, and then the back-end promote. Consumer Growth Partners, we get 50%, and he would get 50%, which frankly was more than I think he was expecting as to give up. We said, “You’re going to have to work for your 50%.”
From start to finish, the transaction took us about 6 months, which was really pretty good. Particularly because it was a complex transaction including the buyout of his fund. We still have his minority interest. It required a creative financial solution, so that the son could wind up … Son who had no money, except what he was rolling over into the transaction, still wanted to wind up in the control position. We were able to structure a deal in which that happened.
Our new partner, if you will, is now … He’s the board member. We do not have a board chief we have what’s called the observation ranks. We head every single board meeting. It was great working with him. We helped him out of a pretty serious situation that he was hoping to get resolved. The bottom line is that the company is very happy because that transaction happened. The son is running the business, doing a great job. Our partner obviously got his deal done, got paid.
We got another portfolio company that we’re really excited about. We actually, we have told our former private equity funding guy that if he finds another deal, we would love to partner with him.
Fundology: That’s great. You talked about the complexity of this transaction. What was the most challenging aspect for you?
Richard: The most challenging aspect was the fact that we were presented with the situation where the son only had a certain amount of capital that he was rolling over, and that was going to become the equity of the company. For him to be able to retain control, we needed to bring less than what he was rolling over. For example, if he was rolling $4 million, we couldn’t bring any more than $4 million of equity, because he wouldn’t control the company.
But the amount of money that we’re going to bring on the equity side would not have been enough to buyout his father. We needed to add some debt to the business in order to get it to the required amount, and so we ended up bringing as our investors to SBICs, which is small business investment companies, which is part of a government program that are able to do accommodation of equity and debt in every transaction.
So we didn’t have to go out and get a separate funding source. We were able to do the whole thing with 2 SBICs who put in the total amount. It was about 25% equity, and 75% debt. A fairly complex situation for which we found a simple and elegant solution.
Fundology: That’s wonderful. And now, Richard, I have one last question for you. Are there any lessons learned from this transaction?
Richard: There are plenty of lessons learned. One is you got to think you have to be … As an independent sponsor, you have to really be open to being very collaborative. If deals come to you not in the normal course of events or things that fit your profile, you should think about reasons how to get them done, not reasons not how to get them done. One of the other important lessons that we learned is that we have to be really patient with these complicated deals, because there’s a lot of parties involved.
In this case we had the son who had his own agenda. We had the father who had his agenda. We had the minority partner who was the fund, who had their agenda. We had to figure out a solution that really worked for everybody. It took a lot of negotiating back and forth. It took a lot of patience. In our world, we like to say, “If a deal doesn’t die 3 times, it’s not a good deal.” We went through this near-death experience more than once in this transaction. There’s different parties who weren’t quite getting what they wanted. They want to walk away from the deal. We can, if we’re always having to make sure that we get people back to the table and eventually get it over to finish line.
Fundology: Great. Richard, thank you so much for taking the time to sit down and talk with us today.
Richard: You’re welcome. Thank you.