Golden Gate Sees More Exits In Its Future

At Golden Gate Capital, the view from the bridge is improving.

Golden Gate, which has $9 billion under management, is planning for a somewhat more active year than it has had in the past two, said Jesse Rogers, a co-founder and a managing director of the San Francisco buyout firm. “Things are unfreezing a bit,” Rogers said on April 15 at the Buyouts West conference in San Francisco, where he made a keynote presentation. Even so, he warned, “It’s still very cautious, very tepid.”

Rogers compared the U.S. economy, coming out of a historic recession following an enormous asset bubble earlier in the decade, to a patient with heart disease and diabetes who also managed to get into a car wreck. “We’re happy to be alive, but we’ve still got a lot of issues to deal with,” Rogers said. Golden Gate—which counts Yale University, the Harvard Management Co. and Carnegie Corp. of New York among its investors—has won support from its backers.

“Those guys have been outstanding performers. They have a really thoughtful approach that has generated strong returns over cycles,” said one limited partner at the Buyouts West conference, asking that he not be named because of the sensitivity of partnership relations. “At some level, it’s just basic blocking and tackling.”

Golden Gate is taking advantage of a market that is gaining strength in 2010. The day before Rogers’s presentation, the firm reached a definitive agreement to sell its portfolio company Teridian Semiconductor Corp. of Irvine, Calif., to a strategic buyer, Maxim Integrated Products Inc. of Sunnyvale, Calif., for $315 million in cash. Golden Gate has two other portfolio companies in registration for initial public offerings, Rogers added.

“Credit markets are great right now,” Rogers said. “If you’ve got some scale and a relatively clean story, things are great.”

The firm also has been active on the buy-side, where it makes a specialty of investing in technology, retail, consumer products, financial services and other areas. In March, Golden Gate struck an agreement to buy the restaurant chain On the Border Mexican Grill & Cantina from Brinker International Inc. of Dallas, a major operator of restaurants under the Chili’s Grill & Bar brand. It was the second deal that Golden Gate had done with Brinker in 15 months. In December 2008, the buyout shop bought 80 percent of another Brinker chain, Macaroni Grill, for $88 million.

From Debt To Equity

For Golden Gate, founded in 2000 by Rogers and a group of Bain & Co. veterans, raising money has never been a problem, having closed a $5.5 billion third fund in 2008, an $1.85 billion second fund in 2004, and a $700 million debut fund in 2001, according to Dow Jones. Now the market thaw is providing renewed opportunities to get back to its main business of buying and building companies. During 2008 and 2009, the firm took advantage of the “asset class flexibility” in its current fund, and focused on buying corporate debt rather than equity, Rogers said. “That was a very important profit contributor during that period.”

The markets’s roller coaster ride in the past couple of years also has had impacts on Golden Gate’s portfolio. The firm took some “fairly material markdowns” on portfolio assets at the end of 2008, but with the recovery last year—to use one example, the Standard and Poor’s 500 index was up nearly 80 percent as of April 15, compared to its low in March 2009—“things have been marked up in aggregate pretty materially,” Rogers said, bringing assets back to where they were in 2007.

Limited partners, which were hit hard a couple years ago by the overall slump in the economy and the markets, face ongoing concern about their ability to meet capital calls due to depleted liquidity, Rogers said. “They took major losses. They need to find ways to make that back.” But with the rebound in the conventional stock and bond markets, investors are reassessing their risk and exposure to illiquid asset classes, a concern about which Rogers said Golden Gate is sensitive.

“We have excellent relations with our LPs,” he said. “We view them as partners and treat them as such.”

One investment of which Golden Gate is particularly proud is its August 2002 deal for Herbalife International, a maker of nutritional supplements. Golden Gate, in conjunction with Whitney & Co. LLC, for $176 million of equity capital. Herbalife went public in December 2004, raising up to $345 million, and Golden Gate earned 12x return with more than 100% IRR. “That epitomized everything we hold dear in private equity,” said Rogers.

Although Golden Gate has invested in a wide range of companies—including financial services, business services, security and technology—it also at times has appeared to try to corner the market on catalog retailing. The company currently counts Eddie Bauer and J. Jill among its portfolio holdings, along with a platform called Orchard Brands, which takes in the labels Norm Thompson, Appleseed, Blair and others.

Regardless of the industry, the firm remains resolutely focused on the middle market, which executives have described as deals requiring equity investments of $20 million to $80 million. As the restaurant chain deals with Brinker illustrate, Golden Gate also has an appetite for corporate carveouts, and the firm also is looking at companies in bankruptcy as candidates for investment, Rogers said. “Our investment style is to seek out deep value, companies undergoing change.”

Rogers expressed misgivings about the trend among large buyout firms to go public themselves. The Blackstone Group led the way, selling stock to investors in 2007. Apollo Global Management and Kohlberg Kravis Roberts & Co. are in the process of registering now. “I think it’s antithetical to the concept of being a long-term investor,” Rogers opined, emphasizing that he was speaking only for himself, not for the firm.

The nature of private equity leads to “lumpy returns” with large but infrequent payouts, in contrast to the consistent, projectable quarterly earnings that stock investors favor and that could skew fund managers’ decision making, he argued. “What’s going to give us a competitive advantage for long-term returns for investors? We don’t think that helps. It’s a distraction.”

Rogers also voiced concern about the strength of the economy, noting that Golden Gate’s portfolio companies are running on cash flow rather than top-line growth, and he predicted that the government would have a larger ongoing role in more sectors, which is not necessarily conducive to growth.

The bailouts and stimulus efforts, dating from September 2008, were necessary, Rogers acknowledged. “That helped us from falling into the abyss.”

But the government’s expanded role in the economy raises long-term concerns, he said. “Having the government involved in many more sectors of the economy is not a good thing. They are not a fount of innovation for the economy.”

Private equity will have “a strong role to play in helping the economy recover,” but a weak expansion could have implications for the industry, Rogers said. “Without a strong macro tail wind, which I don’t think we’re going to have, I think you’re going to have much wider dispersion of results across asset managers.”