GEORGE AVALOS | CONTRA COSTA TIMES
May 14, 2009 – It’s a firm that few outside of Wall Street have heard of. But TSG Consumer Partners LLC ("TSG") bankrolls companies that are familiar names on Main Street.
And that’s just fine with Charles Esserman, a long-time Orinda resident who is co-founder and chief executive of TSG, a major private equity company driven by a simple guiding principle: Invest in companies with great consumer brands.
Mauna Loa Macadamia Nuts. Glaceau vitaminwater. Famous Amos Chocolate Chip Cookies. Terra Chips. Purelogy hair care. Smart Balance Foods. Benicia-based CytoSport. Those are some of the brands that TSG has financed over the years.
More than a few investors, venture capitalists, banks, and financiers have scurried to the sidelines amid a relentless recession. In contrast, TSG continues to prospect for promising, consumer-oriented companies that would make good investments.
“This downturn doesn’t change our strategy a single bit,” Esserman said. “Our current portfolio demonstrates remarkable strength.”
TSG’s quest to invest also shows that alternative forms of financing are available for the right kinds of companies that would prosper from a cash infusion.
“With many banks closed for business, TSG has become an attractive source of capital for small and medium-sized consumer companies,” said James O’Hara, a managing director for TSG, which was founded in 1987.
Some of TSG’s portfolio companies powered to sales increases of 25 percent to 50 percent during 2008. The value of the companies in TSG’s current portfolio is up about 40 percent.
“What we are really focused on are businesses and products that offer consumer benefits that people won’t trade away in a down economy,” Esserman said. “Consumers want real value.”
CytoSport, Mona Vie, Smashbox Cosmetics, Perricone Skin Care, Pevonia Spa Products, Alterna Hair Care, PetSafe, YardHouse Restaurants and Don Miguel Mexican Foods are currently in the TSG portfolio.
“We are ultra-conservative in our investing approach,” Esserman said. “We don’t invest in businesses that are faddish or have cycles.”
Just a couple of months back, in mid-March, TSG disclosed it had invested $100 million of equity in four high-growth small and mid-sized companies. TSG wouldn’t identify the firms. But TSG did say the companies are in the “better for you” food, specialty pet food and food service beverage industries.
TSG is also bucking sour trends in the general private equity industry.
During the first three months of 2009, U.S. private equity firms raised $15.5 billion. That represented an 81 percent nosedive from the $82.7 billion invested in private equity firms during the first quarter of 2008, according to a recent study by Dow Jones Equity Analyst.
“Due to declines in other parts of their portfolios, many investors have passed their private equity target allocations, so they are taking a wait-and-see approach before committing more capital to the asset class,” said Jennifer Rossa, managing editor of Dow Jones Private Equity Analyst.
TSG now has about $1.5 billion under management. In 2007, when TSG raised its most recent fund, which generated nearly $900 million in capital, demand far outstripped what TSG wanted to accumulate.
“We are more than $1 billion over-subscribed,” Esserman said.
TSG operates differently than many other private equity firms. TSG shuns highly leveraged transactions that tend to heap a lot of debt on a company.
Instead of a debt transaction, TSG buys an equity stake. About half the deals were minority shares and the other half majority positions. TSG then uses its cash to bolster balance sheets and provide capital for growth and expansion. The equity firm takes a hands-off approach to the operation of portfolio companies.
That was the strategy TSG employed with CytoSport, which offers and array of protein-enhanced powders, shakes, bars, and now a ready-to-drink beverage, Muscle Milk.
“They provide input and they have been very helpful, but they don’t interfere,” said Greg Pickett, president of CytoSport. “I am so pleased with how our relationship has worked out with TSG.”
Pickett founded CytoSport 10 years ago. He scraped together every penny he could get his hands on.
“We begged and borrowed to raise money and my father was very nice to loan money to me,” Pickett recalled. “I took out a second mortgage on my house. I leveraged everything I had to make my dream come true. We got the company to a certain level of success where I just wanted to de-leverage and take some of those chips off the table.”
CytoSport is now about three times as large as it was when TSG invested, about three years ago, Pickett said. The privately held company was reported to have $200 million in sales during 2008.
That investment had to weather tough times that included skyrocketing fuel and commodity prices, followed by the recession.
“We have had some very difficult conversations where they saw our bottom line under siege,” Pickett said.
Yet TSG’s confidence and support never wavered, he said.
“I would never go into business without TSG as my partners,” Pickett said. “They would be my first stop if I wanted to start a business.”
Esserman says he loves to see businesses flourish with TSG’s backing.
“It’s gratifying when you see companies that you invested in that are doing well,” Esserman said. “You want to be associated with companies that are creating great products.”
ABOUT TSG CONSUMER PARTNERS LLC
TSG Consumer Partners, LLC is a leading investment firm with
approximately $5 billion of assets under management, focused
exclusively on the branded consumer sector. Since its founding
in 1987, TSG has been an active investor in the food, beverage,
restaurant, beauty, personal care, household and apparel & accessories,
and e-commerce sectors. Representative past and present partner
companies include Duckhorn Wine Company, vitaminwater, thinkThin,
popchips, Muscle Milk, Yard House, Stumptown, Pabst, Planet Fitness,
REVOLVE, PAIGE, Smashbox Cosmetics, Pureology, Sexy Hair, e.l.f. Cosmetics
and IT Cosmetics.
Meghan Gavigan / Dan Goldstein
Sard Verbinnen & Co
Meghan Gavigan - 212.687.8080
Dan Goldstein - 310.201.2040