May 15, 2015
Interviewed by: David Snow
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The Private Equity Opportunity in Consumer and Retail


How are GPs creating value in a disrupted, rapidly evolving market? This live webinar and accompanying digital report will explore the state of the private equity opportunity for retail and consumer-facing businesses. Key topics will include how the right internet strategy can make a difference in an investment and important branding and marketing strategies that a good PE sponsor will be able to navigate.


How are GPs creating value in a disrupted, rapidly evolving market? This live webinar and accompanying digital report will explore the state of the private equity opportunity for retail and consumer-facing businesses. Key topics will include how the right internet strategy can make a difference in an investment and important branding and marketing strategies that a good PE sponsor will be able to navigate.

The Private Equity Opportunity in Consumer and Retail

David Snow, Privcap: Hello and welcome to Privcap. This is David Snow, CEO and Co-Founder of Privcap, and today we are going to be learning about the opportunity in consumer and retail for private equity. I’m excited to say that we have a couple of seasoned experts who have invested in years consumer and retail companies. And so they are going to be sharing their insights into the opportunity in this disrupted and rapidly evolving market. Why don’t we begin by asking our experts to briefly introduce themselves, and why don’t we start with Tricia Patrick from Bain Capital.

Tricia Patrick, Bain Capital: Great, thank you David. Hello everyone. I’m Tricia Patrick, a Senior Leader of the consumer, retail and restaurants vertical here at Bain Cap. I’ve spent most of my time leading new retail and restaurant deals in the Americas. I started my private equity career investing with Goldman Sachs, but I joined Bain Capital eleven years ago. Today I sit on the board of two of our investment – Burlington Stores, a publicly traded off-pricer and Bob’s Discount Furniture, which is a New England-focused furniture chain.

Just a minute on Bain – so Bain Capital has been investing in retail for 30 years, and we’ve been one of the largest investors in the market over the past three decades. We invest globally, primarily with a focus on growth, and we try to find opportunities where a combination of our strategic and consulting backgrounds, the global footprint and our industry expertise will be helpful to management as they position themselves to be competitive in the long-term.

Snow: Great, thank you. And Richard, if you wouldn’t mind talking about yourself and your firm.

Richard Leonard, Angelo Gordon & Co: Absolutely, thanks David. So I’m Richard Leonard, Managing Director in private equity at Angelo Gordon and I lead our consumer middle-market, growth-oriented private equity practice. So we primarily focus on multi-unit consumer investments, and mostly as a wait to leverage off of Angelo Gordon’s broad expertise in real estate. And at the moment, we have investments in supermarkets and restaurants. We have four restaurant brand, two consumer – excuse me – two supermarket brands and also a sporting goods business.

Snow: Great, well why don’t we get into the main part of our conversation. I’d like to remind the audience that there will be an opportunity to ask questions of our experts. Your questions are anonymous from the rest of the audience, so please think of some good ones. We will probably reserve 10 to 15 minutes at the end of this conversation for questions, but really at any time if you have a question please send it in. And you never know, maybe it’s – the time to answer it will be right away.

So why don’t we begin, maybe starting with a question for you, Tricia. Why don’t you paint a picture for us of the pace of change that is happening right now in the consumer and retail market and how this compares to the pace of change perhaps in an earlier market cycle?

Patrick: Sure. I don’t think it’s a surprise to anybody focused on this market obviously that ecommerce and internet-enabled commerce has been a massive shift in the last ten years. It’s fascinating though, how quickly you can build a business today. So you’ve got big, big players in the U.S. retail landscape. You’ve got Amazon. You’ve got Walmart. You’ve got Macy’s, right? These are big players, lots of boxes or lots of footprint and reach to customers.

But if you look at each of them, Macy’s was 100 years old before it hit a billion in sales. Walmart was 35 years, and that was fast, right? And once they hit that billion in sales, they took off from there. But Amazon was able to build a business that’s a billion dollars in sales in just five years. And if that’s the opportunity for a new entrant to hit the market, you just need to be really cognizant as you’re investing in this space of what can happen.

We tend to make five year invests. Now I mean, are they really all five years? Of course no, they’re as short as three years. Sometimes as long as eight or ten years. But if that’s the amount of dynamic change, right, and Amazon – who today is just a massive piece of the market, but more importantly, a massive piece of the growth in the market – can come into existence within an investment period, you need to be incredibly cognizant of what could come. Where the dynamic changes can be ahead of you when you’re investing in retail today.

Snow: Richard, do you agree? Can you talk about the pace of change and what’s really notable about what’s going on in today’s market?

Leonard: Yeah, absolutely. I would completely agree that the pace of change is certainly at a faster tempo than it has been historically. There’s the old saying, the more things change, the more they stay the same though. So we never historically could stand still, and it really is just a question of using different tools to stay in touch with our consumers and to listen to what they’re. But also, to be able to communicate with them about what we’re doing to be relevant in their lives.

And as investors, we’ve looked at a lot of the traditional hard-line and soft-line retailers as a very challenging space – mostly because of the disintermediation from the internet. And so as a result, we’ve focused more recently on food which is harder to disintermediate cause – you can certainly buy groceries over the internet depending on what city you’re in. But if you look at our restaurant and supermarket investments, these are really a defensive position relative to the internet because those are experiences that are harder to get on the internet.

Patrick: Yeah, I don’t disagree that there’s still really interesting places to invest. I think there’s certainly some – the best investment decisions you make are the ones you don’t make. I think being cognizant of what is out there and then picking your spots, is really what we need to do every day in this market. Ecommerce is not just a channel shift, right? It changes price transparency. It enables a longer tail of retailers to get to market, which makes interesting investments that historically weren’t able to get out there. And then it affects consumer engagement, or it enables consumer engagement. And I think that’s part of what you’re talking about also, Richard. If you can use the internet as a tool to engage new customers, you might have that ability to grow a brand for instance, right? We’ve invested in two brands in the last year – Canada Goose, a luxury outerwear business, and Tom’s Shoes, the pioneer of the one-for-one model.

And in both of those cases, if you’ve got a brand that means something, that’s another area where even more than just being protected, we think there’s opportunity to use the internet to your advantage to reach more customers more quickly and be a benefit from that pace of change. It doesn’t have to be a negative.

Snow: Quick question for either of you and that is, is there a sector or a type of business that has shown vulnerability to disruption recently where maybe – even in recent years – that sector was viewed as being relatively safe or stable?

Leonard: I don’t know if anyone would say that mall-based, specialty retail was historically viewed as safe and stable, but I would say that it’s become a lot more challenging. Anytime – and think about it. People talk about the demise of the mall, and I think that that is probably an exaggerated narrative cause malls will continue to be important and powerful retail centers. But there won’t be a lot more of them being built. And the ones that are in marginal markets will have increased vacancy rates. And so what does that mean if you’re investing in a business where you’re counting on unit growth? That’s a lot more challenging to say that you’re going to do that if you’re going to require opening hundreds of small footprint, specialty retail. I think that is an area that is going to continue to be pressured and have a lot of headwinds – probably more so than other things. And without a very, very solid omni-channel approach, those investments are probably very hard, challenging to make.

Snow: I’d love to hear, before we get in to the particulars of how each of you select and vet and add value to your deals, would love to hear an overview from you about what you think the state of the consumer market is now in the United States – the mood of consumers, what they want to spend on and how much they have to spend. Maybe starting with you Tricia, what’s your macro overview?

Patrick: Sure. We don’t spend a ton of time thinking about the macro economy as a whole. And I don’t mean that to say that it’s not important, of course, but whether it’s going to be 2%, 3%, 4% GDP, what the timing of the next recession is, is important in the investment. But within that, we focus a lot on consumer segments, right, because all consumers are not created equal in the U.S. Everybody doesn’t have the same spending power. Everyone doesn’t have the same opportunity. So while gas prices being low right now and employment improving is definitely a good thing, and you hope that that can continue to spur continued growth and the government can figure out its way from the deficit issues. It’s hopeful that you can see an upside to that. But we spend more time thinking about consumer segment groups.

So 60% of Americans are still worse off today than they were before the recession in 2007. On the other end of the spectrum, luxury consumers – which are more driven by the state of the financial markets rather than the state of gas prices or employment levels – that consumer’s been really strong. So when we look at any given business, we’re spending a lot of time figuring out who exactly are we selling to, right? Who is that consumer? How are they doing, and therefore, what are the right bets to make?

We certainly still believe value is an important reality for most U.S. consumers, and also a mindset frankly, after living through the last recession. And you can see that in an investment like Bob’s Discount Furniture, which we made, which produces great value, quality furniture. And frankly, gets a lot of market share in the markets in which it competes because it provides that value to consumers. So it’s more the lens. I understand the question, but from each of our companies, we’re taking such micro bets, it’s the lens on that particular consumer group which we spend more time on.

Leonard: Yeah, and I would agree. Yeah, I would agree with Tricia. I think the – if you look at our portfolio, we very much mirrored that approach. So at the moment, with our two grocery store brands – Kings Supermarkets and Baldacci’s – both of those are focused on the high end. And so they – Kings is a largely suburban grocery store chain in the New York area and primarily New Jersey and increasing into Connecticut and Long Island. But we’re focused on high-end, prepared foods. And these are very wholesome and high-quality ingredient prepared foods, whether it’s proteins or salads or party catering, that kind of thing. That really appeals to the higher-end consumer who has disposable income to spend either entertaining their friends or they want to have a family dinner but they don’t have the time to sit down and prepare a chicken or what have you. And that consumer is doing quite well, and they’re there to spend and they’ve got the money.

On the other side of the spectrum, we have an investment in Benihana, which is a very well-known Japanese restaurant chain. And in that demographic, we actually skew a little bit lower in terms of income, and it’s more of a special occasion restaurant. We do have a significant amount of people who are frequent user, and increasingly so at lunch, but the core customer is somebody who is there to celebrate a special occasion whether it’s a child’s birthday or a group of friends getting together. And so we actually skew a little bit lower on the income scale, but we’re delivering them a tremendous experience and a great value, so they splurge. And you’ve really got to recognize who you’re targeting and where you’re trying to grow – particularly in multi-unit – because the most important decisions that we make are where are we going to build the next ten restaurants. And we have a tremendous amount of data that we try to use to make those bets property, but understanding are you a value play or are you an indulgence or are you an affluent customer’s every-day experience. Those are very important questions.

And in terms of the general trends, we’ve certainly seen some benefit from gas, but I would not say – and things are better year over year – I would not say that we have a particularly ebullient consumer environment right now. People are not out there spending the way they were before the recession. They’re being a little bit more conservative, deleveraging. They’re not accessing home equity lines to go out and buy expensive toys the way that they were. So I think that things are better, but not great.

Patrick: I agree with that. I also think – just one more thing. In the luxury market particularly, that market has always been – especially in luxury apparel and accessories – has always been, I don’t know exactly what portion, but driven by international tourists as well, right. So international luxury tourists that is, with interests in the American brands. And given the strength of the dollar, you’d expect that is certainly going to be a headwind over the course of the next year or two, or however long this lasts spurting that higher end-market.

Snow: Interesting, well why don’t we segue to the ways that you two vet your deals. What are some of the most important items of due diligence that you have to get right before you invest in a consumer-facing or retail company – maybe starting with Richard.

Leonard: Yeah, so I think I would separate that into two broad categories. One is a company where things are really humming and you’re presumably going to pay a high multiple for a high-performing company and the growth is going to come. I would separate that from a fixer-upper. And they have different challenges and different questions.

With a fixer-upper, you’ve really got to focus on what is the core bedrock, customer proposition that as we try to change this thing and fix it up, let’s make sure we don’t throw the baby out with the bathwater. And that certainly applies to the other situation, the high-growth situation, but it’s probably actually more critical in the fixer-upper because the high-growth one you’re not actually trying to change too much. You’re just trying to improve and build infrastructure for growth. But the basic nuts and bolts of the business, you’re probably not going to monkey with them too much. But in the fixer-upper, you know that you’ve got to change something fundamental, and when you do that, you’re making a pretty big bet and you just want to make sure that you’re not pulling the wrong lever. And so doing a lot of work on understanding upfront, talking to consumers – what do they like, what do they don’t like – to make sure that you don’t make changes that are really going to scare away the only thing that’s keeping the company afloat.

And then on the high-growth side, we are certainly focused on consumer research and understanding net promoting scores. That’s probably the most important piece of research that we do, is understanding are there advocates. Are there people who are passionate about the brand, and are they talking about it. Cause that – consumers talking about your brand is really critical. And understanding are there people out there who are evangelists and they’re spreading the word about what a great product is. And I’m sure, Tricia, you could talk about the Canada Goose example, cause that is a really strong brand.

Patrick: Yeah, no absolutely. We’re in the same place by the way. Happy to talk Canada Goose, but consumer research is just massively important no matter what type of bet we’re making. And in the world of retail, just walking the stores. I think you can do all of the consumer work, all of the focus groups, all of the internet surveys, but getting out and walking the stores. Seeing what consumers do in their real environment, seeing how engaged they are, is just massively important. And we do that on every deal we get serious about. We get out in the stores, and I spend real time.

We also spend a lot of time trying to get to know management because for all of the changes you need to go make, having a management team who knows their business, believes in their brand and is out there able to out-execute everyday is just – it’s incredibly important. We don’t run businesses, we partner with management teams. So that combination. Knowing you got the consumer right, knowing you’ve got the right team and then every deal has its own issue that you need to go get smart about. But across pretty much every deal, we’re dealing with those first two.

In the Canada Goose research, just for fun facts, we went in on Canada Goose thinking this brand should stand for something differentiated, right? It is the warmest jacket. People wear it on Arctic expedition trips. But the consumer research really, really held it up. You’d think that at least some people would be coming back and saying fashion or luxury – and they do – but the biggest thing people say when you ask them about Canada Goose unaided is just that it’s incredibly warm. It’s the warmest jacket I own. And that made us feel great about what we were seeing in the product, what we thought to be the case. But when it matches up with the consumer research, you know you got something.

Leonard: And I would add, we definitely do a lot of store visits. And my colleagues will tell you that visiting 100 restaurants in a chain in a span of a few weeks is a challenge. And when you go in, you’re not just walking in necessarily and checking things out, and walking out. You’re actually going in and ordering off the menu. And you can gain ten pounds in one diligence trip, as grim as that is. And you get pretty sick of the food, but it does definitely – particularly if you’re going through unannounced, which is what we like to do – you really, really see the dark underbelly of the good things they’re doing. And invariably there are things that don’t work, and you tend to see – you see the same problems in store after store. And that does give you – it certainly goes on the list of the 100-day plan of things that we want to work with management to change.

Snow: Richard, it sounds like jogging is essential for a restaurant investor.

Leonard: Yeah, or some form of exercise certainly.

Snow: Tricia, without naming names, can you think of a time when you were doing due diligence on a store or a chain and you noticed something that was just off that killed the deal for you?

Patrick: That’s a good question. I mean the answer is going to be certainly. You certainly walk in and realize something is just different from what you expected, right? Different from whatever you were thinking going in. And that may not mean it’s not a good business. It could be a fine business, but it just wouldn’t warrant the multiple you thought upfront, right? You may go in thinking that this particularly concept generated interest from a number of different age, demography or psychographic groups of customers. And when you see the store, it actually is a lot more focused than you ever though. And that can be fine, but maybe it just has a different growth potential or if it’s a different market size. There’s certainly just operation improvements – I think that is one of the bigger things. When you walk enough retailers, restaurants, seeing where training is great, where the customer service is consistent, can give you a really good sense for how good management actually is at their job or whether there’s opportunities ahead of you.

Snow: Why don’t we move on to a conversation about the internet. It’s impossible to talk about retail and consumer businesses without talking about the internet. I’m wondering – and question for either of you – to what extent can a private equity firm tap into a social media or a similar campaign to revive a tired brand or to bring a brand or a product or service to a new set of consumers using social media strategies?

Leonard: Well we certainly used it at Benihana, and if – it’s both people signing up for our email program where they opt in, but it’s also through other social media which are more of a pull than a push. And I think it – any company that is successful today has to have that. And whether it’s a new brand or an older brand, Benihana is a good example. It’s 50 years old, but we’ve been very effective in generating interest on social media and in the mainstream media around our passport club or our birthday club, and you don’t have – not too many days go by before you see we’re in the press. Sometimes for reasons that you don’t like, but generally for things that are very positive. And the difference being, that mainstream press, you put it out there and it goes out there once. But with the social media, it can echo and you can get people talking about a topic for weeks as opposed to days. And there aren’t too many 50-year-old brands in the restaurant space that are still really relevant. And I’d like to believe that we are one of them, and the programs that we have put in place in the past three or four years I think are a big part of that.

Patrick: Yeah, I definitely think that’s right. I think that social media, done well, can be a really interesting tool in your marketing tool kit. I also think that social media should be – can and should play a bigger role, right? It should have the marketing component where you’re pushing to consumers and engaging with them and telling them how to think about your brand in an authentic way. But it also should just be a place where you listen to your consumers. These are people who have an affinity – positive or negative. Have a strong feeling about your brand, positive or negative. And you can actually get a lot of consumer feedback. You can listen to what people think is going right or wrong with your brand or your products or your most recent product launch. So having somebody who is focused on creating a dialogue in that channel, and then learning from it, I think is a must for any retailer today. And all of our companies are focused on gleaning what information we can and engaging with folks to make sure they get the right perception of the brand that is true and authentic. And frankly the combination of all of those things should help you revive a brand. I think if you’re brand is just tired, social media alone is not going to do anything for you. But if you fix the value so you’re giving something really differentiated and unique and important to customers, it’s a great outlet and mouthpiece to go talk to them.

Leonard: Yeah, we also use it as a way to follow-up on customer complaints. And whether it’s somebody who had a bad experience that we can rectify, or in some cases it’s someone who – there’s something fishy about the complaint. And so you follow-up on it and if you can prove that it is not legitimate, than you can take it down. And so we use that as a complaint follow-up mechanism. We also have pretty much stopped doing formal mystery shopper programs in our stores. It used to be that you would hire a professional who would go out there and they would pretend to be an every-day diner. They would come in and they’d have a checklist of things that they would need to go through, and then management would get a score based on that. And we’ve gone away from that, and we go to – whether it’s aggregating companies.

There are companies that we hire to go and basically pull all the information that’s being said about us online in social media, and it gets aggregated. And you can – they use natural-language algorithms to basically score a customer feedback point. And they say, okay. This one review had 12 points of information. Four of them were positive. Some were neutral. Some were negative, and the ones that were negative, here’s what they were complaining about. So you can see whether it’s the condition of a store or the service or a menu item or what have you. You get that information very quickly, and it’s a ton of data, and it’s very useful. And we do – by the way when we’re investigating a business, we always do this ahead of time. And we try to compare what the customer is saying from our research, relative to what management thinks the customer is saying based on their tools. And if there’s a difference, does that imply there’s a blind spot?

Patrick: Yeah, we do the same thing. At Bob’s Discount Furniture we focus on looking at the web presence to see where people might have had a bad experience and then go after and find that consumer and try and fix it for them. But I think your point is a really good one, Richard. It’s always hard to get great consumer data, and we certainly track net promoter scores at our companies too, and try and figure out if they’re improving over time or not improving. But there’s always selection bias in whoever you’re getting to fill out that phone survey or web survey or whatever it is – calling the number on the bottom of their receipt. And sifting through the – not just social medial right, what’s on Yelp!, what’s out there on blogs – but sifting through all of that web presence for your company or your brand, figuring out if it’s positive or negative and tracking how that trends over time., we think gets you a better sample set depending on the industry. Some people don’t want to write in about, I’m picking a random brand ceiling fans, but depending on the industry you can get pretty engaged consumers and great intel. I think all we’re trying to do is really get to the broadest set of our consumer we can, with the least bias to figure out what’s actually going on.

Snow: We have a few more minutes until we go to questions and so I’d like to remind our audience to please start thinking of good questions. You can even send them in now using the question asking tool that you see here. But in the meantime, why don’t we just move to one final topic, and that has to do with the food and restaurant sector – a subset of course of consumer and retail. Richard, given – you’ve already spoken a bit about your interest in food and restaurants which can’t be, of course, entirely digitized. But can you give an overview of where you see winning strategies in food and beverage, and maybe some aspects or subsectors of this world that you’d like to avoid.

Leonard: Sure, yeah. So whether it’s food sold through grocery stores or in restaurants, it comes as no surprise that one of the big themes that we pay attention to is the quality and the authenticity. And so with packaged good, you’re seeing the decline of the highly-processed, poly-syllabic, multi-syllabic ingredients that look like they’re out of a chemistry set. That really doesn’t work except maybe at the very bottom end of the value, the price scale. People want to pay more to get better quality ingredients and better quality food. And so that anything that’s sold through a grocery store, you need to be mindful of that.

On the restaurant side, the value equation comes into it. Our focus has been on polished casual. So Benihana is a higher price point than say an Outback Steakhouse or an Applebee’s. We also own Firebird’s Wood Fired Grill, which is closer to a Ruth’s Chris than it is to an Outback, probably a $30.00 dinner check average and maybe $25.00 check average overall, so lunch is cheaper. And the idea is that you’re offering much higher quality food, and people are willing to pay a little bit more. So the $19.00 steak at a Firebird’s is a lot better than the $14.00 steak that you would get at an Applebee’s. And so people are willing to pay for that.

And that quality and authenticity is really what people are looking for. And you see this is the fast casual. What is fast casual? Well fast casual is food that you would normally have to go to a sit-down restaurant to get, but it’s in a service format that means that it’s cheaper and it’s more convenient. So if you’re comparing the quality of the ingredients and the authenticity and the messaging around Chipotle, and you compare that to Taco Bell, there’s a reason that that’s more expensive and people are willing to pay for that. Now Taco Bell is still one of the great brands in the world because it plays a value piece, but the quality piece has been taken away and it’s a little higher.

And the different between a sit-down restaurant and a fast-casual restaurant basically at the same price point, you can get higher quality at fast casual because the labor component is dramatically different. Fast-causal restaurants are fundamentally a labor-saving device. We can generally pass through commodity costs, but you really have to – if you want to offer a dramatically different P&L, you’ve got to get the labor out. And that’s what fast casual is relative to full service.

Snow: We’re getting some really good questions here. Some of them are about food and restaurants, so why don’t we throw the first question to Tricia. Tricia, we have a question that I guess I could summarize as, how do you think about risk premium for investing in the emerging markets. And maybe combine that with another questions, which is how do you think about the consumer opportunity in different geographies?

Patrick: Sure. So one thing we haven’t spent a lot of time in this conversation – we’ve been very focused on the micro bets we’re making, right. These companies, these industries, which is important but at least within Bain Capital and I think at Angelo Gordon – although Richard’ll speak – we’re making leverage buyout investments in the space. So we’re investing in markets where the capital markets are also incredibly important – debt and equity. And therefore, we’re investing in emerging markets where there’s more mature debt markets than some. So if you think about where we invest globally, we invest in Europe and have a team and a fund, investors on the ground there. We invest in Asia, primarily China and Japan. We invest in Australia and we invest in India. And in each of those places, we have people on the ground, folks who are investment professionals, full offices who have been with Bain Capital for a long time.

We share an investment philosophy. We share, frankly when we know each other it’s not that big a place. We talk about our global positions and our global opportunities. But I think to really invest in consumer, you need to be able to understand the local consumer market and the local trends. And we just think that’s incredibly important. So each of the bets we’re making, we are putting boots on the ground. This walking the restaurants – I wasn’t just throwing that out there. It’s an incredibly important piece of the job. So it’s hard to do this from one location if you’re really going to be investing globally.

As we think about risk premium for each of those markets, it’s an interesting question. I think the types of bets you may make in each of these markets are different and it’d be most interesting done probably in a conversation about each of those markets. But how mature is the retail model? How easy is the retail model? There’s some geographies in the world where ecommerce is a lot easier, frankly, because the distribution network can just be built once. So I guess to sum up, I’d say it’s hard to generalize continent by continent. I think the most important thing if you’re going to be investing in retail businesses is to have the local expertise to really understand the consumer on a local level before you make any of these bets. Because again, these are long-term bets, right, and things change quickly.

Snow: Richard, I have a quick question for you from an audience member who asks how does the Food Safety Modernization Act impact the way you look at food and beverage investments.

Leonard: Yeah, sure. So that primarily relates, I believe – and I’m not an expert on that one – but I believe it relates mostly to the ability to do recalls quickly, accurately and to be able to trace where the ingredients came from. Food safety – anybody who deals obviously with something you’re putting into your mouth or on your skin – food safety is really, is your primary mission. You can – whether it’s Tylenol the example, or problems with listeria in ice cream or the norovirus that can attack cruise ships and restaurants – the health and wellness of the consumer has to come first. So you need to make sure that you’ve got solid systems.

So I believe that what that Act does is, it institutionalized what the best companies were doing all along. And so they’re trying to bring everybody’s standards up. Probably if there’s private equity involved, most of the companies that we would be looking at either already have very robust food safety and recall, and know-your-ingredients tracking. They already have that, but this is really taking it to the next level. So it does make it harder for small producers. There’s no question about it, because it adds a layer of administration. But it’s something that we would have done anyway, and maybe to a somewhat greater degree.

But it – knowing which farm a particular piece of lettuce came off of, it is kind of important. And understanding if you’ve got fresh products, is there a kill step particularly with organic produce – that’s something that highly-processed foods have different problems. Listeria is usually introduced. It’s an anaerobic bacteria that’s introduced during processing stages. So it’s not something you get from the field, whereas e-coli comes right out of the field and that can be – and there’s a couple of different places it can come from. But they have very different food safety requirements, but both of them very important. Particularly in a levered company, if you hit a hiccup, you can lose control of things pretty quickly.

Snow: Interesting. I’ve got a great question here from a GP, and I’m going to divide it in two for both Richard and Tricia. And the question is, what are some key red flags that you might find during due diligence. And he asks about the restaurant sector and the shoe and apparel sector. Maybe I’ll throw the show and apparel sector to Tricia. Can you think of one or two red flags for these kinds of companies?

Patrick: Sure. Look, it’s incredibly noted how healthy your sales are, how healthy your consumer following is. And that sounds simple, but you’ve got to look within the trends of what’s actually driving growth, right. Is this a business where they have been promoting increasingly over years, finding cost opportunity and not passing it along to consumers. Not providing real value, and at the end of the day, you might be driving more transactions in a short period of time but at a much lower profit margin. And frankly even degrading your brand, right?

The flip side of that, right, this business which is using promotions to make things cheaper, cheaper, but not differentiated. The flip side of that would be a brand, frankly like a Canada Goose, where the price is what the price is. You’re driving volume. People are willing to pay the dollar amount associated with that item because they think there’s real value. They think there’s real brand equity there. And the growth is units, frankly, at the end of the day. It’s units and it’s new opportunities. It’s new product lines. That’s a much healthier type of growth than an increasingly promotional where frankly, promotions are fine. But they run out at some point. At some point it’s hard to promote more than you were in the past. So looking at the components of growth, no matter what business you’re looking at, what’s actually driving it is an incredibly important first step.

I think the second piece is infrastructure, right? So that food safety point that Richard point that Richard was just talking about, that’s incredibly critical for – certainly for the restaurant business. The flip side of that is your supply chain efficacy and safety if you’re an apparel or shoe business, or other brands where you’re sourcing overseas. What are your processes in place to get your products to consumers? How safe? How reputable? How well operated is this company, because we live in a global world and getting ahead of any of those issues – making sure that the product is going to be delivered well – it’s incredibly important. It may be an opportunity to fix those things, but you’d certainly want to understand what you’re actually buying, what the business is today and what liabilities you’re stepping into also. And then weight that carefully when you think about making your investment.

Leonard: Yeah, I think that’s the biggest point is, know what you’re getting into. And there are red flags that would cause us to walk away, walk away. And then there are red flags that are like okay. I guess our list of things to do is a little bit bigger in this company than we thought, and that’s going to speak to price and on the margin, how aggressive we’re going to be.

I think the critical red flag has to do with culture. And most of these businesses that we’re investing in are service businesses. And so you’ve got a lot of people who are out in the field interacting with your customer. And these businesses – you make or break these businesses based on the store-level management. So who is the GM? Who’s the general manager of that store, and how are they training, hiring, firing, whatever all of the rank in file? And that’s something – if you get into a situation where it’s very clear that the culture isn’t a positive culture and it isn’t a culture of continuous improvement, then you’ve really got your work cut out for you. And that would either have a binary impact on our interest in the deal or it would have an impact on the price.

On the other side is, if you see that there are a lot of things that are really working and that the employees are well trained – they’re happy and they want to be there and they are engaging with the customer in positive ways – then that’s a real sign of strength. Particularly because as Tricia said, most of these things have to do with building more stores. And so you can’t go out and build more stores until the ones that you’ve got are well run because hiring new people to come in and run the new stores – you know that you’re going to need to increase the workforce. And having a solid foundation of training and culture is really probably the most important.

Snow: We’ve got a great question from an LP, and I’ll ask it to both Richard and Tricia. And that question is, if you were an LP and you were thinking of backing a retail or consumer-focused GP group, what would be the secret sauce that that group would need to demonstrate in order to win a capital commitment?

Leonard: Well I can jump in there. I think obviously, everybody looks at the statistics in terms of your performance and loss ratio. Those are the technicals. From a culture side, it’s what do you do once you buy the companies? I think there’s an old saying. Any fool can buy a company. The question is what do you do with it, and can you improve and make it better and really help it grow? And that’s pretty subjective, but most of the sharp LPs who have invested with consumer-based funds in the past, there is a toolkit. And you want to make sure that the important tools that are in there where you’ve got solid plans for understanding what the thing is before you buy it, and coming up with that 100-day plan. It’s an overused term cause there’s always 100-day plan. And then did they actually execute on the changes that needed to happen. Did they enhance the things that were good about the company and get rid of the things that were bad? The old saying, if you can – you manage the company well and the exit will take care of itself is certainly true. And if we’re sitting here saying that we’re relying on market timing or macro trends to make our investment successful, then we’re probably not doing our jobs. So that everyday nuts and bolts of helping these management teams be more successful is really the thing for the LPs to look for.

Patrick: Yeah, I agree. And besides knowing that those GPs know their investments cold as Richard was saying, and understand what’s actually going on in the trends – I’d also ask for references. And not necessarily the ones they might have off the shelf, but look at their portfolio. Look at who’s been the CEO of those businesses, and ask to speak to them because we are making long-term bets, as I’ve said. But those are long-term partnership, and you get to know someone incredibly well over the course of years. So I wouldn’t be shy about asking that. And I think a firm that knows their business as well, and is active and engaged – you’re going to get much better flavor through those one-on-one CEO conversations than you’ll get in any diligence session.

Leonard: We actually had an LP tell us that they wouldn’t make a GP commitment if they couldn’t find at least one person out there saying something bad about the GP. So it goes – we aren’t always seen as angels, but having references that give the full picture of what we’re good at and what we’re not good at is certainly important.

Patrick: I agree.

Snow: Well, great. Well, we really only have about a minute left, so I think that we should probably wrap things up. I’d like to thank both our experts, Richard Leonard from Angelo Gordon and Tricia Patrick from Bain Capital. Really appreciate your sharing your expertise with our audience today, and I hope we can invite you back to be part of a future Privcap program.

Leonard: Thank you.

Patrick: Thank you. Thank you very much.

Snow: And everybody in the audience, thanks very much for joining a Privcap webinar. This conversation will be turn into a transcription, which will be turned into a Privcap briefing available for everyone to download. So look for that in the coming weeks, and in the meantime, have a great day.

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