Take us back to the capital-raising period for this fund – it was your first. How much did you raise and what was the fundraising environment like at the time?
Our firm was successful investing out a pool of founders’ capital since 1995. We were generating deal opportunities that really fit our criteria, and we had the capacity to access those deals, but we had reached the limit of what we could get at in terms of self-funding. We figured it was an appropriate time to bring in institutional capital that would allow us the ability to do more deals and more complex deals in what we thought was a terrific environment for us. We spent a good portion of 2002 and 2003 weighing the pros and cons of being a nimble, entrepreneurial organization or an institutional private equity firm. We figured if we could navigate the fundraising market and identify limited partners that really understood our model, that it would be a terrific opportunity for us and them. We launched the fund in the middle of 2003.
It was tough going. Raising a first-time fund is no easy business. On top of that…we have a pretty complex model. It’s very people-intensive and operations intensive. It derives from business characteristics, not sector characteristics. There are aspects of our model that require explaining. It was good experience for us…[but] it was a tough fundraise. We ended up raising $700 million, and our target was $750 million.
We figured it was debilitating to be on the road, so we decided, ‘let’s close the fund and start investing the capital and trust if we do a good job…we’ll have a institutional track record.’ So we shut the fund down, we went to work and started making those investments, and we knocked it out of the park.
Once you closed it, what was your next move?
We really set to work identifying what we would call a Platinum deal. We bought ACR Logistics from London-based Hays plc for $174 million. It was a European logistics firm with a lot of operations and a lot of heavy lifting required to turn it into a strong, free-standing business. We did that. We were out of the investment within 22 months, with an 11.6x return. Right out of the gate, we had a terrific investment. [It] became a signature investment for the fund and established all the things that smaller, scrappier, entrepreneurial shops could achieve.
How did you navigate the tough years of 2008-2010 in that fund?
You hear us talk about operations – we’re populated mostly by people that come from operating backgrounds. We recognized what was coming and the implications for our business. We began taking steps to prepare for what we believed would be a relatively deep and relatively extended period of downturn.
We issued an operations call to action across the portfolio: You need to button down your cost structure and manage for a downturn and get close to customers so you could manage your volumes. You can take down your projections, but if you’re loading up on inventory you’ll cause a backlog that’ll create problems for you.
We put this call to action in place and started preparing companies for a long downturn and to make sure they survived no matter what happened. We wanted to make sure our businesses would survive. And then we were in a position to thrive, not just survive. We’ve never had a bankruptcy in any of our businesses. We were able to keep our businesses alive because we understood at our core what the operational levers would be in a downturn and got in front of problems in that regard.
We have always had a very high appetite for operational risk as it relates to changes inside a business. We know how to execute and we can get comfortable with that. But we’ve had a low appetite for leverage. We were able to manage through that period in part because we didn’t chase high entry multiples on businesses. We’ve never confused leveragability with value.
Judging by your IRR, you’ve already delivered solid returns to your LPs, but do you still have companies in the fund?
There are four businesses in the fund now: Ryerson, a big steel services business; Acument Global Technologies, a maker of fastening and assembly systems for the automotive and aerospace industries; Wheel Pros, a maker of branded custom wheels, and TurfCare Supply Corp, a lawn care specialist for large industrial customers. Unlike certain funds that may have assets left over that they’re stuck with because they don’t have value, the aggregate performance of these four is 1.9x as of June 30. We’re optimistic about these investments. The bulk of them are in the phase of a life cycle when we’re looking at some form of sale or monetization. We’ve never been in the business of trying to force an exit.
How do things work between Platinum Equity founder Tom Gores and his brother, Alec Gores of Gores Group? They teamed up to buy Alliance Entertainment in 2010, partly because of the role of the third brother, Sam Gores, who heads up entertainment agency, Paradigm. Gores Group and Platinum Equity are both based in LA. Any other possible deals in the works with the two firms?
The businesses are similar — they’re also an operations-focused buyout firm. We saw them more when we were both investing in tech. Early on, we moved beyond technology into other spaces: logistical, manufacturing, distribution. And we’ve done larger fund sizes and larger transactions. We were the operations partner on Alliance Entertainment. [The firm was sold in September to California-based music and video wholesaler Super D for an undisclosed sum]. There’s not a lot of overlap between the companies. The brothers are close and see a lot of one another in social settings, but there’s not a lot of overlap between the businesses.
Platinum Equity Capital Partners III announced in September its final close with $3.75 billion in commitments — congratulations. In a prepared statement, Tom Gores said the new fund plans to “entail the same fundamentals that helped create success.” Could you elaborate?
More and more people have begun trying to inhabit our space and put on that operator’s suit of clothes. Simply putting on a suit doesn’t make you an operations expert. It doesn’t mean you really know how to get into the gears of making a company work and to create incremental growth over time. From our standpoint, that discipline is more important than it has ever been.
As we saw in the 2012 presidential election, private equity often has an image problem as an industry that sometimes takes over companies, levers them up, and then sheds jobs. Any thoughts on how to turn this around?
We’re focused on real value creation. We take businesses that are often struggling or close to failing and help them succeed. As long as we continue to do that, we’re contributing to the communities the companies serve. The returns we generate — it’s not just large numbers somewhere. The investors here are public and private pension funds and retirement funds that include police, teachers and firefighters.