The Gores Group Turns More Industry-Focused

Firm: The Gores Group LLC

Founded: 1987

Key Executives: Chairman Alec Gores; Senior Managing Directors Scott Honour, Mark Stone, Steve Yager

Strategy: Buyouts of corporate orphans and standalone businesses facing strategic, financial, or operational challenges

Investment Pros: 13

Operating Pros: 35

Fundraising History: An upward march. Raised $400M for debut in 2003; $1.3B for Fund II in 2007; $2B for Fund III, closed in 2011.

Select Investors: San Diego County Retirement Association; Massachusetts Pension Reserves Investment management and Teacher Retirement System of Texas.

In 2009, Steve Yager and his colleagues noticed that their firm, The Gores Group LLC, was losing deals more frequently to more firms with aggressive teams dedicated to certain industries.

“We found ourselves running up against guys who knew the space top to bottom,” Yager told Buyouts. The upshot: The firm made only one platform investment in 2009, compared to seven two years earlier, not the kind of pace needed to put a $1.3 billion fund to work.

By late 2009 and early 2010, the Los Angeles-based firm known for buying struggling businesses and corporate orphans knew it had to make changes. It undertook an internal re-organization, or what it prefers to call a “strategic re-focusing.” It added investment staff and divided employees up to focus on seven sectors, including the Gores mainstay of technology but also new sectors such as media and consumer. It also beefed up an already deep bench of operational professionals and its business development team.

“We decided if we had that vertical experience in the sector we would be much more efficient, our relationships with bankers would be stronger, and we’d see more flow sooner,” Yager said.

So far in 2011, the change appears to be bearing fruit, with the firm on track to log its most productive year in its 24-year history (see adjoining table breaking down annual platform investments). The strategic reorganization also illustrates how one promising firm both broadened and more clearly defined its investment strategy in a maturing industry that increasingly demands expertise in certain sectors to compete for deals.

The Realignment

The Gores Group is the brainchild of Alec Gores, the oldest of six children in an extraordinary family of go-getters. One younger brother, Tom Gores, runs another Los Angeles-based buyout shop, Platinum Equity LLC, while another, Sam Gores, runs Paradigm Talent Agency, which represents famous actors and bands.

Alec Gores immigrated to Michigan from Israel in 1968. He earned a computer science degree from Western Michigan University, and, after working as a computer programmer for a few months at General Motors, launched his own software company, Executive Business Systems. In 1986 he sold the company to Continental Telecommunications.

From 1987 until 2003, Gores ran The Gores Technology Group, which invested his personal money in technology companies. In 2003, he raised $400 million for his first private equity fund, and changed the firm’s name to The Gores Group. In 2007, the firm raised $1.3 billion for its second fund. It is currently investing from Gores Capital Partners III LP, a $2 billion fund it closed in February.

The Gores Group first made a name for itself in buying technology companies, often as corporate carve-outs of business lines that aren’t performing well. The firm was also dipping into other markets on an opportunistic basis. Executives at The Gores Group basically waited for deals to come in and took turns managing new investments, Yager said.

There was still plenty of room in the LBO market for these generalist firms when The Gores Group started. But in the mid-2000s, the LBO market took off, with more firms raising record amounts of cash. Although there had always been specialist firms, the boom produced many more shops dedicated to certain industries to differentiate themselves from the competition.

Prior to the firm’s reorganization, it had nine investment professionals, five business development professionals and 31 operating pros. The Gores Group’s reorganization broke down into three inter-related parts: expanding staff in each area; assigning them to one of seven sectors and expanding the number of sectors it targets (see adjoining table for a breakdown of the firm’s professional staff pre- and post-reorganization). By deadline, the firm had 13 investment professionals, 14 business development professionals and 35 operating professionals.

The firm assigned two investment professionals to technology; one to telecommunications, two to industrial, one to consumer, one to business services, two to health care, one to media, and two to European deals. Yager, the 13th investment professional, monitors the day-to-day progress of all deals while looking at new deals across all sectors. Gores, as chairman, oversees everything and is involved in executing most deals.

The Gores Group nearly tripled, from 5 to 14, the size of its business development team, which is tasked with analyzing target sectors and cold-calling managers at potential acquisition targets. In the reorganization, the firm assigned two business development professionals to technology; two to telecommunications; two to industrial; one to consumer; one to business services; one to health care; one to media; and two to Europe (two other executives, David Fredston and Frank Stefanik, oversee the group).

The firm always had a large stable of operational professionals, former executives who help execute new deals and manage existing companies. During the reorganization, the firm added about four more to the group, which now totals 35.

The Gores Group has also added to sectors of focus, including media—radio, television and music in particular—and consumer and retail, where the firm is especially interested in apparel. These companies often suffer from inexperienced management as well as poor sales and marketing and other business processes, Yager said.

So far in 2011, The Gores Group has been one of the most active buyers in the LBO market (in addition to exiting four companies). At deadline, it had closed or agreed to close six platform acquisitions, four of which came between Aug. 4 and Sept. 2. The firm credits its strategic reorganization with enabling it to be more aggressive.

Jeff Schwartz, a managing director who joined the firm in 2010 from Ares Management to focus on consumer and retail, and Lee Bird, a former executive at Nike hired in April to work with Schwartz, have recently led two of the firm’s first investments in consumer and retail. In June, they led the firm’s acquisition of Big Strike Inc., a designer and manufacturer of women’s apparel. Earlier this month, the duo led the firm’s agreement to buy Liz Claiborne’s Mexx line of “metropolitan casual” clothing. The firm’s first investment in consumer and retail was its acquisition in August 2010 of high-end fashion designer J. Mendel.

The firm expects to close three to four more acquisitions by the end of the year, Yager said. By then, the firm will likely have invested about 40 percent of Fund III.