Yucaipa yet to close on Connecticut’s 2013 pledge

  • Year founded: 1986
  • Investment strategy: Buyouts, particularly in the grocery industry
  • Key Executives: Ron Burkle, founder
  • Office Locations: Los Angeles
  • Fundraising status: Marketing Yucaipa American Alliance Fund III, with a $1.65 bln hard cap
  • Web address: http://yucaipaco.com/

Featuring a hard-cap of $1.65 billion, Fund III marks a follow-up to the successful Yucaipa American Alliance Fund II, which at roughly $2 billion is The Yucaipa Companies’s largest institutional pool. The 2008-vintage fund had generated an 18.1 percent net IRR and a 1.8x investment multiple as of December 31 for long-time backer California Public Employees’ Retirement System. Those returns place the vehicle in the top quartile by investment multiple and close to the top quartile by IRR for all 2008-vintage domestic buyout and turnaround funds in the Buyouts returns database. 

The firm has performed well enough to merit interest from Connecticut Retirement Plans and Trust Funds and its advisory firm Franklin Park Associates. Franklin Park labeled Fund II top quartile in a June 2013 due diligence report. The same report recommended Fund III to Connecticut and in November, the $29.4 billion retirement system announced that it would follow through on the recommendation to the tune of $75 million.

Still, the firm’s earlier vehicles appear to have failed to live up to the expectations Burkle set as an investor in the grocery and food industries prior to the launch of his private equity funds in 2001. Yucaipa Companies’s first American Alliance Fund, a 2002-vintage pool, had generated an 8.1 percent net IRR as of December 31, according to CalPERS. The 2001 and 2008 vintages of its Corporate Initiatives Funds, earmarked for companies that operate in urban communities, are still underwater. 

That mixed track record may explain why as of late August the firm had yet to hold an interim close on the third American Alliance fund, and why Connecticut Retirement Plans had yet to formalize its commitment, according to Connecticut Treasury spokesperson David Barrett. Documents from the state suggest Connecticut had expected a first close to be held in late 2013. 

“The fund has not yet held its initial closing. The Treasurer’s Office continues to be in contact with Yucaipa and is prepared to finalize its commitment when the closing date is announced,” he wrote in an email.  

Yucaipa Companies did not respond to repeated requests for comment.

Humble beginnings

Burkle began his career as a teenager in a Pomona, California Stater Brothers grocery store working as a box boy. By the mid-1980s he was one of the most successful investors in the country.

Using the Yucaipa name to acquire and consolidate grocery stores on the West Coast, Burkle purchased Jurgensen’s Market in 1986 and then used that company as a launching pad for a string of larger deals that ultimately culminated in the company’s 1999 sale of grocery chain Fred Meyer to Kroger Co. for more than $13 billion.

“Ron is as good a chess player as I know,” investment banker Ken Moelis told The New Yorker in a 2012 profile. “He had to do a half-dozen complex deals to get to Kroger, and it turned into one big sale.”

The success of those early grocery deals, along with Yucaipa Companies’s friendly relationship with organized labor, led to the launch of the firm’s first private equity fund in 2001. It was a natural progression for Burkle. Having already established a reputation as a dealmaker, Burkle had also become increasingly adept at raising money for Democratic Party candidates and charities, including the Boys and Girls Club of America, American Cancer Society and the National Urban League.

His talent for fundraising helped foster powerful connections with (among others) former President Bill Clinton (who was a senior advisor at the firm from 2002 to 2007), former California Governor Gray Davis and Willie Brown, the former mayor of San Francisco and a noted California powerbroker, according to reports.

Those connections, along with his pre-fund track record, paved the way for private equity commitments from a number of blue chip limited partners. American Alliance Fund I counts The New Mexico State Investment Council, American Airlines Pension Fund, and several Los Angeles and New York City-based retirement systems among its investors, according to the Franklin Park due diligence report. Fund II LPs include Western Conference TeamstersCarpenters Northern CaliforniaNew Jersey Carpenters, and Automotive Machinists Pension Trust.

Perhaps the largest and most formidable of Yucaipa Companies’s early supporters was CalPERS. The $301 billion retirement system had active commitments with five Yucaipa funds as of December, and at one point held a 13 percent stake in the firm.

Strategy shift

Among some of the more signficant holdings in Fund II are supermarket Great Atlantic & Pacific Tea Company (more popularly known as A&P), natural foods company Wild Oats, as well as investments in the Morgans Hotel Group and Brew Hub, a St. Louis-based startup brewery.

In one of its most lucrative deals from Fund II, Yucaipa Companies acquired a 7 percent stake in Whole Foods Market for $98.9 million in 2009. That investment, since realized, generated a $176.1 million gain, according to presentation materials. Yucaipa Companies grossed a 176.1 percent IRR and a 2.8x ROI on the deal, according to the Franklin Park report.

But while Franklin Park recommended that Connecticut back American Alliance Fund III it did discuss concerns in its due diligence report.

For one thing the advisor found that the investment strategy had become increasingly difficult to define. American Alliance Fund II had been marketed as a vehicle for buyouts in the logistics, distribution, grocery/food and retail industries. Yet, according to Franklin Park, the firm shifted heavily into investments in public companies, debt investments, non-control investments, start-ups, as well as companies in the hospitality and entertainment industries. Only a quarter (26 percent) of Fund II’s invested capital went to deals that met Yucaipa Companies’s investment strategy criteria, according to Franklin Park.

“The General Partner asserts that the drift in strategy was a necessity during Fund II’s investment period given the recessionary economic environment beginning in 2008,” according to the Franklin Park report. “Yucaipa believes that this window of time afforded a unique opportunity to take advantage of market dislocation.”

Other investor concerns with Yucaipa Companies have also surfaced.

In 2013, The New York Times reported that the underperformance of Yucaipa Corporate Initiatives Fund II compelled the firm to forgo charging its annual management fee until LPs had recouped their investments. That concession came after a three-hour meeting with CalPERS and other LPs in New York during which investors “conveyed their disappointment,” according to the story.

CalPERS declined to discuss its relationship with Burkle and Yucaipa Companies for this article.

Franklin Park raised some other red flags in its report. Yucaipa Companies had not formed a succession plan as of last year, and Burkle’s large role in generating deal flow and his compensation—he receives 40 to 50 percent of the fund’s carried interest—could affect its ability to retain talent, according to the report. Ira Tochner, Richard d’Abo, Derex Walker and Scott Stedman are also principals of the fund, according to the report.

The report also observes that one of Fund II’s largest investments has been a weak performer. Yucaipa Companies invested $212.8 million in bookseller Barnes & Noble beginning in 2008, eventually building up a 20 percent stake in the company. Yucaipa Companies eventually distributed its stake to investors in 2012 after gaining just $26.5 million on its investment. Franklin Park pegged the investment as having generated a gross internal rate of return of 3.1 percent.

Summed up Franklin Park in its report: “The General Partner has a mixed track record.”