Marlin Equity Off To A Fast Start

Name: Marlin Equity Partners

Offices: Los Angeles

Founder: Dave McGovern

Strategy: Take a controlling interest in businesses that are experiencing different levels of operational, financial or market-driven changes.

Number of Investment Professionals: 6

Number of Operational Professionals: 5

Latest Fund: $300 million Marlin II closed in December 2007

Principal Backers: DuPont Capital Management, Goldman Sachs Asset Management, Private Advisors and The Robert Wood Johnson Foundation.

In early 2005, McGovern left his job as head of M&A at Gores Technology Group to found El Segundo, CA.-based Marlin Equity Partners. The idea was to pick off struggling technology, consumer products, and other kinds of businesses, improve their performance, and expand them through acquisition.

Working out of his house, McGovern set up six meetings with six institutional investors, including a fund of funds, two big foundations, a bank, a trust and a pension plan. Within a few short weeks, all six agreed to commit to the debut fund. The linchpin turned out to be McGovern’s relationship with fund-of-funds manager Private Advisors, which as an investor in Gores Technology was familiar with McGovern’s success turning around mid-market companies like the Learning Company, Micron PC, and VeriFone. Private Advisors introduced McGovern to two of the other other limited partners that ended up committing to the fund.

Armed with a fresh pool of $60 million, Marlin brought Nick Kaiser with him from Gores Technology as his first hire, and later added two other investment professionals from his old firm. Marlin Equity then quickly acquired and combined three enterprise software companies—Intuitive Manufacturing Systems, Relevant Business Systems, and Supplyworks. Less than a year later, the firm sold the company to Thoma Cressey Equity Partners and Battery Ventures, earning four times its money.

“I guess the stars were aligned for us,” said McGovern of the first and only exit to date for the firm. “Obviously, it was a very nice return.”

Altogether the firm has made 15 acquisitions through the debut fund. Its portfolio includes SolarSoft, a platform for buying and building enterprise software companies; UltraPro, a platform for consumer products like novelty gifts, fashion accessories and scrapbooking items; and Ronco, another platform for consumer products. The firm has 11 professionals on staff—six on the investment side and five in operations. Two of the five operating partners, Adam Lerner and Shawn McMorran, also serve as CEOs for Marlin Equity portfolio companies.

Second Fund

Marlin Equity’s early success putting money to work let it close a second fund at $300 million last year in a short fund-raising that lasted from just after Labor Day to just after Thanksgiving.

With the credit crunch already in full swing, LPs liked the idea of a mid-market fund focused on special situations and turnarounds. “Fund I was an establishment of the firm,” said McGovern. “It gave us an opportunity to build our infrastructure as well as to buy some companies.” Still, at just $60 million, the fund was too small to let the firm get involved in some up-market opportunities it would have liked to pursue. Fund II was actually three-times oversubscribed, but Marlin Equity decided to cap it at $300 million based on the deal flow it was seeing in the market and the dollar volume it felt it could put to work in a reasonable period of time. All six original investors came back, joining about a dozen new institutional investors.

With the new fund, Marlin Equity plans to invest up to $60 million in equity per deal, with $20 million to $40 million being the sweet spot for companies generating revenue of up to $500 million. (With its first fund, the firm typically put no more than $10 million in equity to work per deal.) McGovern describes his ideal equity-to-debt ratio as 50:50, but the firm has been known to purchase companies outright without borrowing.

On the technology side, the firm is currently rolling up a number of enterprise software firms via Solarsoft, including the recent $10.2 million take-private of VantagePoint. The company provides ERP software to manufacturers, distributors, and wholesalers and merchants. It generates about $100 million in annual sales

On the consumer side, the firm’s principal holding is Ronco, which it snatched from bankruptcy last August for $6.5 million in cash. Infamous for its kitchen gadgets like the Veg-O-Matic and Pocket Fisherman—and for its legendary pitchman Ron Popeil—Simi Valley, Calif.-based Ronco remains a powerful name brand.

After its acquisition of Ronco, Marlin Equity’s first order of business was to stop the bleeding. It accomplished this in part by reducing the size of the company. Marlin Equity also moved the company from a fixed-cost structure to a variable-cost structure by outsourcing things like logistics and fulfillment. The company now operates on solid ground, McGovern said. “We are currently evaluating whether to sell it and realize some value, or whether to take it to the next level via an add-on strategy,” said McGovern. “There are a lot of unbranded products out there that we could acquire, and then use the Ronco brand to drive additional value for those businesses.”

Opportunities Ahead

Obviously, the credit crunch affects everyone in private equity. But Marlin Equity believes the turmoil offers even greater opportunities to buy struggling companies. “For us, the current situation is a net positive,” said McGovern. “The types of businesses we buy are not hugely levered anyway.”

Deal flow has also improved, thanks to a growing number of cases in which banks are becoming owners of companies they don’t want. It’s a source of deal flow that didn’t really exist when there was plenty of liquidity in the market. The firm is even open to the idea of buying debt if it can ultimately take control of the business.

Some distressed debt investors have reputations as vultures, but Marlin Equity wants to be seen as the good guy. “We like to think of ourselves as a solutions provider,” said McGovern. “We will bring in our operational resources to help the existing management team, while providing liquidity to lenders that want out. We do not have a trading mentality. We believe in supporting all the various constituents and playing the white knight when we can.”

Indeed, Marlin Equity’s strategy with both its funds is to take a controlling interest in businesses that are experiencing different levels of operational, financial or market-driven distress. The firm is industry agnostic, but to date all its investments have been concentrated in two sectors: enterprise software and consumer products.

While these two industries may seem diametrically opposed—one is low-tech and the other is, well, high-tech—McGovern insists they share a number of common features, especially when it comes to turnaround opportunities. Both industries have plenty of mature businesses with identifiable revenue streams to pick and choose from.

In technology, recurring revenue typically comes from mission-critical software products with ongoing licensing fees or maintenance contracts. And in consumer products, the revenue stream comes from brand name goods with a pre-existing sales channel.

Not So Easy

Running a start-up private equity firm is a lot harder than it looks, McGovern insists. At Gores Technology, McGovern worked in an environment where he had a lot of resources at his disposal. Suddenly, he was trying to build an institutional fund from scratch. One day he was the IT guy setting up the computer system, the next he was answering the phones. “The first fund was established before we even opened an office,” he said.

“There have been lots of challenges along the way,” added McGovern, “but also lots of rewards.” One of the best things about building a firm from the ground up, he said, is the ability to decide exactly how the firm should operate, without having to worry about how things were done in the past.

McGovern and his partners knew early on they wanted to create a firm employing both deal-oriented investment professionals and operational experts all working under the same roof. “A lot of firms in the buyout world outsource their due diligence, but I like the idea of having in-house operators who help in the acquisition process and who work with us post-closing for the success of the deal,” said McGovern. “Not only does this create mutual accountability, it provides a greater level of comfort in the businesses you buy and the decisions you make.”