J.W. Childs Claws Itself Out Of The Grave

Firm: J.W. Childs Associates LP

Headquarters: Boston

History: Founded by John W. Childs, a senior managing director with Thomas H. Lee Co., in 1995.

Strategy: Buyouts in the retail and consumer sector with enterprise values of $300 million to $1 billion. Started investing in health care with second and third funds but has since jettisoned that vertical.

Key Professionals: John W. Childs, Chairman and CEO; Adam Suttin, partner and co-founder; Jeff Teschke, partner; David Fiorentino, partner.

Number of Investment Pros: 10

J.W. Childs Associates LP just doesn’t want to die.

A failed effort to raise its fourth fund, a struggling portfolio, and a mass defection of executives desperate to abandon a failing franchise run by an imposing personality crippled this firm and left it for dead after the mid-decade buyout boom.

But the Boston-based shop, which hasn’t invested in a new company in four years, is back to some degree. The firm is currently scouting deals with a $125 million special purpose acquisition company—a humbling prospect for a firm that, for a time, was considered among the elite of buyout shops, but a sign of life nonetheless. J.W. Childs is also determined to raise its fourth fund after the SPAC is deployed, and founder John W. Childs has agreed to relinquish some control.

On the exit side, the firm distributed $750 million to its investors in 2010—its second best year for distributions, according to the firm—through dividend recapitalizations of four companies and the sale of marketing agency Advantage Sales and Marketing, which generated 3x J.W. Childs’s invested capital.

J.W. Childs very well could have been the poster boy for a post-buyout boom zombie firm—a shell structure surviving on fee fumes while managing out a few remaining companies after reaching too far in the heady days of 2005 through 2007. But instead, it offers a story of how J.W. Childs survived challenges that would, and did, kill many firms.

As the contemporary deal market approaches an environment oddly similar to 2005—with rising deal prices and a thawing financing market—the firm’s story should also serve as a warning sign to the many up-and-coming mid-market funds that are the toast of limited partners today. And finally, for the would-be buyer, J.W. Childs’s portfolio is filled with companies it has owned for years and should be ripe for sale.

So Much Promise

The private equity world was abuzz in 1995 when Childs left Thomas H. Lee Co. to start his own firm.

In retrospect, Childs’s departure from Thomas H. Lee seems logical. He was Lee’s number two, and he had led the now-legendary Snapple Beverages deal, the iced tea company the firm bought for $135 million in 1992 and sold two years later for $1.7 billion. Other deals he’d led included Ghirardelli Chocolate Co. and Restaurants Unlimited, the operator of Cinnabon shops.

Childs is also known as a smart, hard-charging, authoritarian, and even abrasive executive. His is the type of ego occasionally found in private equity, the kind confident enough to put $20 million of his own money to support a new firm with his own name on the door. But it’s also the kind of personality that didn’t endear him to some of his colleagues when the firm later ran into trouble. “I’d like to be my own boss,” Childs, then 53, told The Boston Globe in 1995. “I’d like to have my own fund…And this was a good time to do it.”

Joining Childs from Thomas H. Lee was Steven Segal, a managing director, and Adam Suttin, an associate. In 1996, the firm closed its first fund with $430 million in commitments. With his new outfit, Childs would pursue a similar strategy to that of his old firm, investing in consumer product brands and retail. But he planned to target smaller deals than Lee did. And they were to maintain a loose affiliation, with Childs passing deals too large for his firm on to Lee, and Lee doing the same for Childs with smaller deals.

The firm’s rise was almost immediate, and meteoric. Two years after closing its first fund, Childs easily raised $980 million for its second fund, more than double the size of its debut and easily surpassing its initial target of $750 million. In 2002, the firm upped the ante once more, raising $1.7 billion for its third fund. The rapid raising of ever-larger funds, by this time, was giving some investors pause.

“When Childs left Lee, part of the thing was Lee had gotten too big, and [Childs] was going to do smaller deals,” one LP told Buyouts. “And then lo and behold, in a few years his funds had ballooned.”

Suttin, a partner and co-founder, said he felt the fund sizes evolved naturally, while the firm continued to invest in the same sized deals, with enterprise values of $300 million to $1 billion. But with its second and third funds, J.W. Childs also expanded its mandate to pursue health care deals. These concerns—and others simmering beneath the surface within J.W. Childs—would come to a head in 2006.

Unraveling In Boston

In 2006, the private equity industry was taking off, with new and experienced firms easily raising huge funds as LPs scrambled to get a piece of the market. U.S. buyout and mezzanine funds raised close to $230 billion that year, a shocking amount considering the market raised only $32.5 billion three years earlier, according to Thomson Reuters data.

J.W. Childs was among the herd that sought to capitalize on the demand. The firm set out to raise $2.5 billion, more than five times the amount it had raised 10 years earlier. But LPs wouldn’t have it. The firm had only exited one or two companies from its previous fund, and investors wanted to see more returns before they committed more capital. Furthering their concern was the firm’s foray into health care investing, and the loss in 2005 of Segal, who was widely seen as Childs’s heir apparent. Segal teaches at Boston University and is a “special limited partner” to the firm. Toward the end of 2006, the firm shelved Fund IV.

“We didn’t get the response we’d expected,” Suttin said. Meanwhile, discontent spread among some executives. Their beef concerned Childs’s control of the firm as well as its strategic trajectory. “I think there’s almost no doubt [Childs] was calling the investment shots there,” the LP said. “If they had an investment committee, which I’m sure they did, my guess is it supported whatever his personal decision was on each deal.”

Dana Schmaltz, president of the firm, and Ted Yun, a partner, took the bold step of issuing an ultimatum to Childs, demanding changes be made regarding the “structure” of the firm, as well as the roles and responsibilities of its senior leadership, according to Suttin. “Yun and Schmaltz wanted to move things in a certain direction, and they went about it in an aggressive fashion,” Suttin said.

In May 2007, Yun and Schmaltz left to start their own mid-market firm, West Hill Partners LLC. Principals James Rhee, Jeff Teschke and Mark Tricolli joined them. (In 2009, West Hill abandoned efforts to raise a $500 million fund). J.W. Childs’s staff had shrunk to seven investment professionals from around 14

Meantime, some of the firm’s companies began to struggle. At least two of them, bathroom fixtures maker MAAX Holdings Inc. and diagnostic imaging services company Insight Health Services Corp, eventually went bankrupt. The firm recovered $60 million of its $80 million investment in MAAX, and lost its entire $70 million investment in Insight Health. Morale at the firm was low, to say it mildly.

“It’s hard when your partners walk out the door and they’re people you like and respect and enjoy working with,” Suttin said. “It was a difficult time for the firm. But we got through it.”


Following the turmoil of 2006 and 2007, J.W. Childs spent the majority of the next few years focusing on its portfolio and regrouping its staff. In 2008, it filed to raise a SPAC, but ultimately didn’t pursue it as that market deteriorated.

In 2007, J.W. Childs was among a group of sellers that sold Pinnacle Foods Group Inc. to the The Blackstone Group for $2.2 billion. The firm also sold most of its health care portfolio in 2007: Universal Hospital Services Inc., a medical equipment outsourcing company; Sheridan Healthcare Inc., a company that manages neonatology and other department services for hospitals; and Cornerstone Healthcare Group, an operator of health care facilities.

Ironically, the firm distributed more money to its investors in 2007—more than $850 million on Fund III—than it had in any previous year. In 2010, the firm distributed more than $750 million, its second-best year. Fund III has so far generated a respectable 1.9x the firm’s invested capital, and a 20 percent gross IRR, according to Suttin. “I think it’s noteworthy that we were able to achieve solid performance given the backdrop of organizational disruption and the financial meltdown in 2008-2009,” Suttin said.

In 2009, the firm welcomed back Jeff Teschke, one of the West Hill defectors who had been a principal, as a partner. It also promoted David Fiorentino, who joined the firm in 2000, to partner. The firm now has an investment staff of 10.

J.W. Childs still manages nine companies, mostly from Fund III. Suttin said the firm isn’t actively shopping any of them. But considering how long they’ve been in the portfolio, the firm has to be thinking about exiting them soon. They include Fitness Quest Inc., a marketer and distributor of home fitness and healthy living products the firm bought in 2004; and Brookstone, a specialty retailer the firm bought in 2005. The firm has owned one company, Simcom, which provides simulated flight training, since 1998.

Ebitda for J.W. Childs’s companies in 2010 increased, in the aggregate, by 13 percent in 2010 over 2009, according to Suttin.

Committed To Fund IV

J.W. Childs has 21 months to find a deal with JWC Acquisition Corp., its $125 million SPAC. That’s a stunning fall for a firm that once thought it could raise $2.5 billion. But the firm views the vehicle as a bridge to get back into the LP-supported buyout market.

“We’re not looking back, we’re not feeling sorry for ourselves,” Suttin said.

J.W. Childs could start marketing Fund IV in the next 12 to 18 months (the firm can start marketing the fund once the SPAC is deployed). But this time around, the firm is making serious changes.

It will only focus on its core consumer and retail expertise. Gone is the health care vertical, which Suttin said was Segal and Yun’s purview. And whatever the fund’s target, it will be much more modest than the firm’s initial plans for Fund IV. Suttin said the target would be bigger than the fund’s $430 million debut, but smaller than its $1.7 billion third fund.

Perhaps most importantly, Childs, 69, has agreed to give up some control. He will transition to partner from CEO for Fund IV, and the firm will implement a more democratic leadership structure with a partnership committee, according to Suttin.

Sixteen years ago, J.W. Childs looked like it was on the verge of creating a respected LBO franchise along the lines of Childs’s predecessor firm, Thomas H. Lee Co. Three years ago, it looked like the firm was finished.

The firm has displayed remarkable resiliency against grave challenges amid the worst economic environment in modern history. It will be interesting to see if in ten years the firm will have earned some of the gravitas that was prematurely bestowed upon it when it began.

“I would expect that we’ve invested Fund IV and we’re on to Fund V,” Suttin said, when asked where he thought the fund would be in 10 years.