September 27, 2002 PrivateEquityCentral.net Charles H. Esserman Take a look around your home – chances are that San Francisco-based private equity firm TSG Consumer Partners owns or used to own the producers of many of your household goods. The firm focuses on branded consumer products, typically in the food and household good sector. Brands in its portfolio include Spic and Span, Denorex, Chloraseptic, and Comet. The firm has also realized an investment in Met-Rx nutritional supplements and, most famously, made a sweet profit from its 1989 buyout of Famous Amos Chocolate Chip Cookie Co. The firm recently closed its fourth fund on $500 million after just six months in the market. PrivateEquityCentral.net recently spoke with co-founder and managing director Charles Esserman about the firm’s latest fund, the branded consumer products marketplace, and the firm’s focus on improving operations at its portfolio companies. PrivateEquityCentral.net: TSG Consumer Partners focuses on consumer brands. What do you like about national brands? Do you ever invest in regional brands? Charles Esserman: We do both. We focus on branded consumer products, in particular staples in four categories: Food, over-the-counter pharmaceuticals, household products, and personal care products. What we like about them is that they are generally non-cyclical and they can keep very well established markets with predictable cash flows and earnings. They can also leverage multiple distribution channels to get great growth rates. They have long life cycles. Also, successful companies are easy to sell because there’s keen interest by large consumer products companies in acquiring companies that are both innovative and have good growth. PEC: Is your typical exit strategy to sell to those larger consumer products companies? CE: Exactly, we hardly ever go to the public markets. We’ve only gone to public markets one time in 16 years and that was to get additional co-investment capital, but we ended up holding the stock and selling the company for cash. Virtually every single one of our exits has been to a strategic buyer for cash. PEC: Are you worried about the threat of generic brands? CE: We really invest at the premium end and in highly differentiated products. We’re not investing in commodity-oriented consumer products staples. PEC: With consumer spending somewhat unpredictable, do you think now is a good time to be buying these branded products? CE: What we’re doing is really focusing on staples. If you have dandruff, you’re going to go buy Denorex. You’re going to clean your house with Spic and Span and Comet. You’re going to eat Mexican food [Authentic Specialty Foods]. None of those things are going to change. We avoid high-ticket items, durables, and certain consumer services. Our focus is on staples because they are generally non-cyclical. We’re not seeing any impact from the current economy with respect to sales for our companies. PEC: You just closed a $500 million fund in less than a year. . . CE: Actually, it was about six months PEC: That’s extremely quick these days. But why stop at $500 million? Why not go for more? CE: Our goal was $400 million, and our demand was in excess of $500 million. Our goal was really twofold. Number one was, we wanted to stay in the smaller middle market, because of lower transaction multiples. Also, those companies are traditionally undercapitalized and can really benefit from growth capital. The second reason was that we actively participate in creating value with these companies and we simply couldn’t do that if our portfolio had too many companies. PEC: How involved do you get on the operational level with your portfolio companies? CE: We’re very involved. We’ve got significant operating capabilities in our group. In fact, of the 25 people or so, two-thirds of them have operating backgrounds. We’ve set up two platforms, one in food and one in household, personal care, and over-the-counter pharmaceuticals. These two platforms consist of operating managers who actively oversee the companies we’ve invested in. We have an individual named Vern Brunner, who was former executive vice president of Walgreen’s, and an individual named Nick White, who was an executive vice president of Wal-Mart, who are active advisors to our companies. We have significant strategic capability. My partners Jamie O’Hara, Gary Shansby, and myself all were involved with strategy consulting. Gary was also operating businesses for some 30 years. The top executives in our group have an average of 30 years of experience doing what we’re doing. PEC: Are there any plans to branch out and look into other sectors of the consumer products marketplace? CE: Not really. We’ve been very successful at doing what we’ve done. We’ve done 38 branded investments and every single one of them has been successful. The lowest IRR is 8% and goes up to 18%, 21%, 35%, up to 530%. We’ve done two transactions in the last 10 years outside of consumer products and they were less than successful. We’ve decided to focus where we have the capabilities and unique skill sets to differentiate ourselves and pursue those investments and capitalize on the growth opportunities. PEC: Are prices getting better in consumer products? CE: They’ve always been good. We’ve been fairly relentless and unwavering in terms of our focus on consumer and we didn’t venture into technology or telecom. We haven’t seen significant changes in pricing over the last 10 to 15 years. Things have been fairly static. PEC: Is there a typical percentage of equity to debt ratio that you use? CE: We tend to use lower levels of debt and higher levels of equity because our focus is more on creating value through operations, as opposed to creating value through financial engineering. Typically, the total debt multiples are two-and-a-half to three, as opposed to other funds that might focus on trying to push that higher. PEC: The firm got its start with the Famous Amos acquisition in 1989. Was that an 80s-style LBO? CE: Famous Amos was successful because we were able to grow the company significantly, both from a sales and earnings basis. There was no leverage used in Famous Amos, so it wasn’t an 80s-style leveraged buyout. It was basically a company that we grew from $6 million to $80 million in sales because we were able to come out with better products that were focused on specific distribution channels. We also assembled a much better management team to run and develop the company. I don’t perceive that to be anything different from what we’ve done with any of our transactions for the last 15 years. We’re just really focused on growth through product line extensions and through developing distribution. There were transactions back in the 80s that people refer to where you were able to put in 5% equity or less. We never did any of that. PEC: Do you think being in San Francisco has any effect on your deal flow at all? CE: No, our deal flow is national. While we’re not a household name, generally speaking, in our categories most people know who we are and we see over 1,000 transactions a year from all around the country. Copyright © 2008 TSG Consumer Partners. All Rights Reserved.