With the Right Partner, Private Equity Can Offer Much More than Capital

Feb 15, 2012

Topics: Business, Sustainability

While finding the right lender for your company may require lots of dating, choosing an equity investor is more like picking a spouse. If partners choose unwisely, they can be trapped for years in an unhappy marriage.

With that in mind, Outdoor Industry Association (OIA) recently worked with Nathan Pund, a managing director at the investment bank D.A. Davidson & Co., to assemble a panel of private equity experts for a session at Outdoor Retailer Winter Market. Entitled “Outdoor Investment Idol – Equity Judges Debate What’s Cool to Invest In and Why,” the panel included representatives from VMG, Bertram Capital and TSG Consumer Partners. All three boutique investment houses invest in active lifestyle companies. VMG and TSG, for instance, were early investors in Timbuk2 and Under Armour respectively, while Bertram is an investor in One Distribution, which owns the skate footwear brand Supra.

These firms are geared toward helping companies with consumer brands navigate the financially challenging growth phase that can take them from $10 million in annual sales to $100 million in three to five years.

Getting the most out of such partnerships involves much more than securing that first, second or third round of funding.

“Just getting money is not necessarily the solution,” said Pund. “You want counseling about how to manage the money from people that have been there and done that. You need networking, talent and expertise.”

The right private equity (PE) firm can help a CEO fill out his leadership team, find acquisition candidates and tighten up operations. They can help transform a brand from one that caters to a small niche of core enthusiasts to an “aspirational” brand that appeals to a much larger market without undermining the authenticity that gives the brand its power.

“Brands have natural sets of permissions, and knowing how to navigate them is an art all in itself,” said Blythe Jack, a principal at TSG.

A good equity partner also compensates for a CEO’s or founder’s weak spots.

“Most people can only be good at one or two key things,” said Ryan Craig, a principal with Bertram Capital, which won’t invest in a company unless it thinks it can take it to $100 million in sales. “There are founders, operators and innovators. A founder can hit $20 million in revenue and not be making any money because it’s all tied up in working capital or bad vendor arrangements. That’s where we can sometimes help.”

PE firms, meanwhile, often find the following traits attractive in outdoor companies:

  • Strong, authentic brands that are creating or reshaping their category;
  • Active founders with a strong sense of their brand’s potential to expand into adjacent categories;
  • Strong viral marketing potential to reduce advertising and other marketing expenses, which can easily consume eight percent of a consumer company’s revenues, and;
  • Positive cash flow and a willingness to reinvest it in growing the company.

Go to OIA’s web site to view a recording of “Outdoor Investment Idol – Equity Judges Debate What’s Cool to Invest In and Why,” including discussion of how each panelist weighs 10 criteria to assess potential investments for their firm. The recording is free of charge for OIA members and $99 for non-members.