After Atkins Meltdown, Parthenon Rebuilds

Firm: Parthenon Capital

Capital Under Management: $1.8 billion

Offices: San Francisco and Boston

Year Founded: 1998

Portfolio Glimpse: ASG Security; Medical Consultants Inc.; Triad Isotopes Inc.; Wildlands Inc.

Investment Sectors: Health care services, financial and insurance services; and business services

Parthenon Capital was having a near-death experience. It was August 2005, and fundraising had come to a standstill.

Existing limited partners were so down on Parthenon Capital’s Boston office (which included the firm’s two co-founders), that many of them had offered to fund Parthenon Capital’s San Francisco team as an independent spinout.

Prospective limited partners were even more unresponsive. Some were scared off by the Atkins Nutritionals debacle, and others believed that the San Francisco team would walk. The flatline was deafening.

Two years later, Parthenon Capital is alive and kicking hard. It’s more a story of rebirth than survival, with some LPs referring to the current effort as “New Parthenon.”

Parthenon Capital was founded in March 1998 by Ernest Jacquet, previously a partner with Summit Partners, and John Rutherford, a former Bain & Co. consultant who had gone on to found a strategic advisory firm called the Parthenon Group. Rutherford’s private equity firm and consultancy were independent of one another, but still shared an informal symbiosis—much like Bain Capital originally did with Bain & Co. Parthenon Capital also shared some carry with the Parthenon Group, in exchange for deal flow and access to research.

The investment strategy was industry-agnostic, with a focus on recapitalizations of mid-market companies. Parthenon Capital’s entire team was based in Boston, and the firm closed its oversubscribed debut fund in 1999 with $350 million. Investors included General Motors, General Mills, the Oregon Investment Council, Duke University and the University of Chicago.

Parthenon Capital stuck to its knitting for a while, but eventually began to stray. A February 2001 article in Buyouts noted some style drift as the firm held a $500 million first close on what would become its $750 million second fund. Buyouts reported on the atypical nature of a deal in which Parthenon Capital had teamed with Berkshire Hathaway and Cort Furniture to launch Relocation Central, an information database company that would cater to corporations that needed to relocate personnel.

There also were a series of particularly small transactions, which probably wasn’t surprising given that Jacquet’s average deal size at Summit was just $10 million.

Later that year, Parthenon Capital hired former GTCR partner Will Kessinger to help launch a San Francisco office. Kessinger had an existing relationship with Rutherford, and liked the idea of applying GTCR’s rollup strategy—except that Parthenon Capital would help managers grow existing businesses rather than forming new companies around managers plucked from outside organizations. Among his first San Francisco hires was a local tech executive named Brian Golson.

In October 2003, Parthenon Capital seemed to have stepped into the batter’s box for its first grand slam. It led a $533 million leveraged buyout of low-carbohydrate diet company Atkins Nutritionals, with Goldman Sachs Group participating as a minority co-investor. The deal was so hot that Summit Partners accused Parthenon Capital of violating a deal-sharing agreement that had been negotiated as part of Jacquet’s departure. Parthenon Capital quietly paid Summit $20 million to go away, and everything seemed to be chugging along.

Just as Parthenon Capital began raising its $1 billion-targeted third fund the following fall, Atkins began hitting turbulence. For example, The New York Times used the company as its test case for an article titled, “Is the low-carb boom over?”

Parthenon Capital assured investors that the situation could be worked out and received its $1 billion in soft circles. But once the air went out of the low-carb fad, Atkins proved to be an intractable problem. Parthenon Capital was forced to mark down Atkins’s value by 50 percent at the end of December 2004, installed a new CEO in February 2005 and wrote off the entire investment by the end of March 2005. In the meantime, LPs had recalled their Fund III commitments.

Not only was Atkins a failure, but it had been exacerbated by the fact that Parthenon Capital had invested around 25 percent of its second fund into the deal. This didn’t violate the LP agreement, but it raised questions about the firm’s investment strategy.

Atkins had been sourced by the Boston team, as had some other black holes like Pharmedica Communications and Wolverine Proctor & Schwartz. Parthenon Capital’s strongest returns, on the other hand, were coming out of San Francisco. LPs had noticed the discrepancy, and some had vocally lost faith in Jacquet and Rutherford (although many still had close personal ties to the two men), according to Kessinger.

Parthenon Capital took a gamble at restructuring the partnership, at around the same time it legally extricated itself from Atkins. Kessinger became chief investment officer, with the investment committee being broadened to include Golson in San Francisco and Dave Ament in Boston. Most of the remaining Boston team was replaced, save for co-founders Jacquet and Rutherford, who filled out the investment committee. Parthenon Capital also refocused its investment strategy on majority recaps around a trio of industry verticals: health care services, financial and insurance services and business services, Kessinger said.

LPs appreciated the remodeling effort, but weren’t yet sold. The succession plan was a work in progress as long as Jacquet and Rutherford were still around, and some investors suggested it made more sense for the San Francisco team to spin out on its own.

To placate critics, the firm pointed at the numbers. Even after having to write off around a quarter of Fund II due to Atkins, Parthenon Capital was still projecting a 17 percent net IRR and at least a 2x net return multiple, according to Kessinger. And the data looked even better if the San Francisco-led deals were looked at in isolation—and those were the guys now in charge. For example, Golson sat on the board of Rackable Systems, which went public and today is projected to land Parthenon Capital a 12x return.

As for the two co-founders, Parthenon Capital argued strenuously that the management shift would allow them to spend more time on where they provided the most value. Rutherford had never really been a deal guy, but instead was a consultant whose operational knowledge had led him to sit on more Parthenon Capital portfolio boards than any other partner. Jacquet would have more flexibility to do the smaller deals he specialized in at Summit Partners, albeit as add-ons to existing Parthenon Capital portfolio companies. Kessinger and company also emphasized the value of their reconstituted Boston deal team, including Ament.

Many existing LPs finally began to bite earlier this year, and the firm announced a $700 million final close in June. It’s not the $1 billion targeted back in 2004, but it does give Parthenon Capital plenty of runway to re-establish itself as a trustworthy fiduciary.