Via SOMA: The Art Of Brand Building
TSG Consumer Partners founder, Chuck Esserman, is widely lauded as having a gift for picking winners. For three decades, his private equity firm’s net returns topped 24%, growing to nearly 30% over his last three funds and more than 35% for TSG’s most recent fund. Yet thirty years ago, Esserman’s brand-centric approach was met with skepticism.
TSG was founded in 1987, the same year the film “Wall Street” debuted, and Michael Douglas’ character Gordon Gecko famously hissed “Greed is good.” In this iconic era of art imitating life, many investment firms focused on leveraged-buyouts and often destroyed companies in the process. Esserman, who graduated with a degree in engineering from MIT and an MBA from Stanford, had a different idea. He wanted to invest in sector- specific companies that his team could help grow through product innovation, expanded distribution and consumer marketing. Esserman and his team concentrated on non-cyclical goods like foods, beverages, and household products.
TSG started with Famous Amos, the cookie brand founded in the 1970s by talent agent Wally Amos, which by the late 1980s was losing $250,000 a month. With an injection of new management, capital, and strategy, TSG made back 20 times its investment. Throughout the decades, TSG has found its sweet spot with middle-market consumer and retail companies that provide authentic value rather than merely inspired marketing, as well as companies that create new product categories, like Vitamin Water.
These days, sector-specific investing is the norm, rather than a risqué anomaly. But, despite other firms playing in his field, his three decades of experience give him a home-court advantage. Esserman no longer has to convince people of his strategy; his most recent fund was heavily oversubscribed with investor demand exceeding $6 billion just one week after printing the placement memorandum. Esserman sat down with us to share his story and his winning, long-view strategy.
There’s a certain cohesive quality to the companies in your fund. We’re interested in how you make investment decisions among the vetted opportunities that come your way. Does it come down to a visceral gut feeling at some point when you’re deciding between opportunities that are evenly matched on paper?
We evaluate opportunities individually, as different investments are never evenly matched on paper. The quality of the team, the chemistry of management and our partnership, the consumer franchise that a company has built, market tailwinds (or headwinds), cyclicality, competition, and pricing and transaction structure are each dimensions that vary widely from one opportunity to the next. That said, the experience garnered from thirty years of investing is more important than any analytical work.
When you were starting out, did anyone try to dissuade you from taking a long-view approach to investing before you proved this was a successful approach? If so, why did you decide to stay the course?
In 1986, a consumer focused private equity fund was a novel idea and not endorsed by the gatekeepers to capital (consultants who advise pension funds on investments). We had little success convincing these gatekeepers that sector-focused investing allows for specialized expertise that is relevant in evaluating investment opportunities and working with portfolio companies. The track record we achieved through multiple funds contributed to changing the perspective of consultants. Today, it is very difficult to raise funds without sector experience.
We’ve all heard of vulture capitalism, but TSG seems to have the opposite approach to private equity. What drives you to take this conscientious route to investing?
We have no interest in zero sum investments. We have carefully crafted a conscientious and collaborative culture within our organization – and we win when our partner companies win.
Do you immerse yourself in your companies’ products? If so, what do you learn that you might not understand without acting like an avid consumer?
We are the biggest fans of our companies’ products. In fact, we were also the first private equity firm that I know of to proactively seek a gender balance amongst our senior and junior investment professionals to reflect the fact that purchase decisions for many of our companies’ products or services are made by women. Despite what might appear to be the obvious advantage of our approach, gender balance is still a major point of difference between our partnership and other funds today.
What are some of the most creative and strategic internal resources you’ve provided your companies with at TSG?
We have significant category experience and functional capabilities within our partnership that provide real value to our portfolio companies. We have assisted companies in product line development, packaging, geographic expansion, joint ventures, digital strategies, supply chain management, and hiring and organizational development. We pride ourselves in thinking differently and are focused on investing in companies that think likewise.
As someone who appreciates contemporary art, do you find that there’s any overlap in the way you evaluate an art piece and a potential investment?
I am not personally focused on art as an investment. I think of art as being very personal. My wife, Ivette, and I enjoy collecting visually captivating works from artists who also think differently such as Joe Bradley, George Condo, Anish Kapoor, and Richard Prince. At the same time, we are focused on curation to create a dialog among the different works in our collection. The art that we collect, not unlike the brands that we invest in, evoke a very positive emotional response that is also thought-provoking.
How have you stayed innovative throughout the three decades since founding TSG? And how do you plan to stay competitive and innovative going forward?
Probably the most innovative idea since founding our partnership is to simply stay the course as opposed to investing in areas that don’t relate to our experience or expertise. We have generated top quartile returns for three decades. It took 13 months for us to raise $51 million for our first fund; we had over $6 billion in demand one week after we printed our last offering memorandum. Focusing on what you do well is easy to say but not often easily done.