Independently Sponsored: Consumer Growth Partners

TONY HILL

Richard, great to be speaking with you for this edition of Independently Sponsored. Thanks for joining us. So, today we’re going to be discussing the pros and cons of having a laser-sharp sector focus. Can you start out by telling us the backstory of how Consumer Growth Partners came to be, and why the focus on retail and branded consumer products companies?

RICHARD BAUM

After a lengthy career on Wall Street as an Equity Research Analyst covering specialty retail and consumer-related companies, I co-founded Consumer Growth Partners (“CGP”) in 2005 along with two partners with extensive private equity experience successfully investing in retail and consumer-based companies. Our decision to focus on these two sectors was simple: combined, the three of us had over 50 years of experience in operating and advisory roles with a multitude of retail and consumer companies! It was our DNA, and all we knew how to do it! Thus, our description of “Two Inches Wide & Two Miles Deep.”

TH

Interesting. So, let’s jump right into it. Here at Trivest, we’re fairly industry agnostic. Tell me, how does sector specialization give CGP a leg up with origination and deal execution? And, can you recount a specific example of how it made the difference between winning or losing a deal?

RB

First, we wanted to pick a name for our firm that reflected what we wanted to do, that is, focus on Consumer-facing businesses that were considered Growth opportunities, and doing so as Partners with our portfolio companies and capital providers. We felt that If we could become recognized for these three attributes, more deal flow would come our way. Over time this has become the case, and we consistently see 75-100 opportunities each year that fit our sector focus.

Second, with our narrow sector focus we are able to develop close relationships with investment banks, M&A firms, PE funds, lenders, family offices, and industry experts who can be a source of deal flow for us. We regularly engage with this sizable network of firms and individuals, so we are top-of-mind when they see deals that fit our investment criteria.

When it comes to deal execution, we find it advantageous to “speak the language of the seller.” Every industry has its own unique terms, expressions, and metrics that are common to the industry participants but may be foreign to outsiders. Being able to sit down with a founder or entrepreneur and speak the same language goes a long way in establishing trust and credibility in the mind of the seller that generalists simply cannot do. Moreover, because our equity and debt capital providers typically have investing and/or lending experience in our sectors, we are able to run a more efficient process in selecting our capital partners.

Actually, with all of our prior portfolio company investments, we were able to obtain exclusivity from the seller to find the right capital partners, because they felt comfortable that we could add significant value to the company in its next iteration. At the same time, given our sector experience, our capital partners also felt comfortable that we could help make them stronger buyers and better owners.

TH

Great explanations, thanks. I’m becoming a believer! And, do you see this kind of highly-targeted sector expertise growing or waning in popularity among the independent sponsor community?

RB

I honestly believe that sector specialization will grow among the independent sponsor community. When we first founded CGP, there were only a handful of what were then called fundless sponsors. In the past fifteen years, fundless sponsors have gained respect in the investment community, are now called Independent Sponsors, and number literally in the thousands. With so many active Independent Sponsors in the market, it is now essential for these firms or individuals to distinguish themselves and stand out from the crowd. Having a sector focus, if possible, is one of the best ways to do this.

TH

I’d also think that the knowledge, experience, network, etc. you’ve accumulated over the course of years and numerous deals makes you a stronger, more-effective partner after you’ve closed on a deal. What are some of the ways that CGP can outperform, say, a more industry-agnostic PE firm or independent sponsor in portfolio company management?

RB

Given our expertise as former equity research analysts, consultants and operators, we have an extensive knowledge base and capabilities in a variety of industry disciplines including strategic planning, benchmarking, financial analysis, governance et al. But our industry is changing so rapidly that we can’t be experts in all aspects of retail/consumer. So, we have developed a strong bench of Subject Matter Experts (SMEs) in areas like digital platforming, social media, branding, sourcing, executive recruiting, etc. We often will introduce one or more of these SMEs to our companies or clients and assure them that their work product will be quicker, better and less expensive than if the company were to try and find a suitable resource on their own. An industry agnostic PE firm or generalist independent sponsor will simply not have as focused a network as we do.

TH

That makes perfect sense. Now, let’s discuss the flip side of the coin. What’s challenging about developing this kind of expertise and what, if any, are the pitfalls or drawbacks of taking your firm in such a narrow direction?

RB

What’s challenging about developing this type of expertise is that you either have it or you don’t. My partners and I spent decades developing our expertise. If an independent sponsor wants to have a sector focus, they need to hire or partner with one or more individuals who already have the requisite industry experience and expertise.

The drawback in being sector-focused is that your sector may not always be in favor. When that’s the case (as it has been with retail during Covid-19), then deal flow will slow down considerably or even be non-existent. We have countered this drawback by expanding our advisory practice as a means of generating cash flow during lean times.

TH

That’s interesting. Can you tell me more about your advisory practice, how you started it, and how does it mesh with your investing platform?

RB

Sure. We actually fell into our advisory practice almost ten years ago, when a deal we were working on failed to close. We recommended an outside CEO to the company’s owners, one of whom was the CEO at the time. They ended up hiring our recommended candidate and shortly thereafter retained us to assist them through a transition to outside professional management. Although the company intended to have an eventual exit, they continued to engage us over a multi-year period on a variety of different projects.

We realized that this type of role could be valuable to other companies with a transaction in their future, but wanted to improve their profitability, infrastructure and/or competitive position prior to an exit. When the company would eventually be ready for a transaction, we could put on our Independent Sponsor hat and voila we have a proprietary deal which in the world of private equity is a true unicorn. Alternatively, if the company decides to seek a complete sale whereby there is not a role for us going forward as an independent sponsor, we have an agreement with our client that we will continue to act as their advisor through the process but not as their investment banker. In that case, it’s a win-win for everybody.

TH

Thanks for the lay of the land there. So, I was looking at CGP’s portfolio earlier and noticed some interesting realized investments. Can you tell us about one of your most successful exits?

RB

Sure. Our best return was with Baskins, a family-owned chain of Western and work wear apparel, footwear and accessories in small towns in Texas. We bought the company from a local family office that had purchased the company from the founding family a couple of years earlier. They had cleaned up the company but weren’t interested in growing it. We recognized that under the right leadership the company could expand into other towns and states outside of Texas. In the ensuing four years, we brought in an experienced retail CEO to lead the charge, doubled the store count, and tripled the EBITDA. A strategic investor was rolling up the industry but didn’t have any stores in the Texas market. They concluded that it would be cheaper to buy our chain than coming into the market on their own and compete with our company and one other well entrenched competitor. We sold the company to them for a handsome multiple, and the buyer subsequently took their entire platform public, realizing a nice profit on the IPO. The company has continued to roll up the industry, performs consistently well, and today is the clear specialty retail leader in the Western and work wear sector.

TH

Ha. Love it. Are you looking at anything interesting right now? I’ll waive my standard triple-Lehman referral fee.

RB

Yes, the retail and consumer products sectors are starting to come back into favor, as the country begins to open up post-Covid. During Covid, many retailers and consumer brands accelerated their on-line channels. But it’s become very challenging to build a brand totally online without an omnichannel strategy. So, we are looking at a number of opportunities with digitally native brands that could benefit from developing a viable wholesale and/or bricks-and-mortar (B&M) channel strategy and vice-versa for B&M retailers that need to develop a more robust online presence. Multiples continue to be elevated, but we’re optimistic about finding one or more companies at a reasonable valuation that could significantly benefit from partnering with us and a suitable capital provider. Stay tuned!

TH

Good luck and keep us posted. We’d love to partner with you. So, Richard, I warned you when we first talked about doing this interview that the price of admission, in addition to your time and insights, is the retelling of a humorous or very interesting story from your deal-making days. I hope you came prepared because I’m afraid there’s no way around this. It’s time to pay the piper! Go for it.

RICHARD BAUM

There’s honestly very little that’s humorous about being an independent sponsor, but I will tell you an interesting story. It is said that sometimes the best deal is one you didn’t do. Well, a number of years ago we were working on buying a really unique specialty jewelry retailer with almost unlimited growth potential. The company was family owned and run by two brothers who were brilliant entrepreneurs. We spent well over a year getting to know the business and the founders really well. Our capital partner was a well-established family office that had a long-term investment horizon.

One of the sellers’ goals was to be able to take enough chips off the table that they could live comfortably if the company went south, even though they would remain completely in charge post-acquisition. After much back and forth, we agreed to most of what they wanted. On the day of funding, we were anxiously awaiting their wiring instructions. The hours ticked by and nothing happened. We tried to reach the brothers to no avail. Eventually we did by early afternoon, and they told us they had changed their mind…that they simply could not come to terms with the fact that they would have to report to a board and outside owner after so many years of building and running the business on their own. We only wish they had had their epiphany a few months earlier. What a shame, since as far as we know the Company today has about the same number of locations as it did back then, having not increased its store count at all. But at least the brothers still do not have to answer to anyone except each other!

TONY HILL

I see, so they gave you the ol’ “ghosting at the closing”, eh? I guess you can lead a horse to water, but you can’t make it drink.

Well, Richard, I greatly appreciate your perspective and insights today. Also, let me congratulate you and CGP on a great run. I’ve always assumed that a laser-sharp sector focus, if you can develop one and back it up, carries with it a lot of benefits. But, I guess I underestimated in just how many ways it’s advantageous not just for the sponsor(s), but for the company and its owners and managers as well. Great stuff. Thanks again and good luck with that deal you’re working on. Hopefully, it’ll be another Baskins!