TSG Consumer Partners is a private equity firm that refuses to work by the books. But for all its “wrongdoings,” the company has been very successful, averaging approximately 60% returns throughout its 20-year history.
In 2003, the company purchased a 30% minority stake in Glaceau Vitamin Water, which it went on to sell in 2006 at a price that translated to a profit of more than 12 times the initial investment. In 2004, TSG purchased majority control of Smart Balance Foods, which it went on to sell in 2007 with a return of more than six times the initial investment. Deals like these are not uncommon in the world of TSG.
Since it was founded more than two decades ago, the investment firm has built itself upon the ideals that working in just one specific industry is more profitable than investing across industries (the company refuses to expand past its base of consumer companies), and short-term losses can often translate into long-term gain.
As a company that invests in middle-market consumer businesses, TSG works with companies that have annual revenues as low as $20 million and as high as $1 billion. The team at TSG only invests in branded consumer companies, which has allowed it to hire and train an investment team of consumer specialists.
As a result, the company is a value-added partner that can provide customized expertise unlike other financial sponsors who may invest in businesses across an array of industries.
“We make our team available to all of our partner companies,” said Hadley Mullin, managing director. “We help with the basic blocking and tackling of businesses, as well as with strategic priorities like market entry, product line extension, and M&A.”
Chuck Esserman co-founded TSG in 1987. Although the company invests in businesses across the country, its headquarters is in San Francisco, Calif. The West Coast office houses 10 investors, and the company’s New York City office is home to three more. The firm currently manages more than $1.5 billion of institutional capital.
Although many private equity firms are sitting on the sidelines as a result of the state of the economy, TSG is blooming. “We’re not a company that drives our returns by the typical leverage buyout model,” Mullin said. “We’re very conservative in regard to using debt to finance our investments, and because of that our partner companies can easily allocate their free cash flow to growth initiatives, such as building out the management team, investing in consumer brand building, or entering new markets.”
TSG encourages its partners to use this money wisely but not conservatively. More often than not, Mullin and her team encourage new partners to put large amounts of money into advertising. Although the short-term result may be a profitability loss, it’s the long-term effect they’re focused on.
“The money we advise them to spend on advertising usually allows us to drive above market growth,” Mullin said. “We’re often willing to take a near-term loss if we believe it’ll pay off in the end.”
In addition to advertising, TSG encourages its partners to invest in building a high-quality management team and field force. Although hiring and training new employees can be expensive, Mullin and her team want the companies they work with to be able to offer top of the line service and support to their retail partners. Because of this additional help, TSG specializes in turning businesses with small profits (whether it be a young business or one in trouble) into ones with large revenue and profit numbers.
Looking ahead to 2009, Mullin and her team are in the midst of constructing budgets for their partner companies. “We’re encouraging them to focus on maintaining a nimble cost structure,” she said. “A variable cost structure is important if our partners want to drive top-line sales in today’s economy without over-exposing themselves on the downside.”
At TSG, the team firmly believes in the long-term viability of the consumer sector, and it sees the next year as an opportunity to provide capital to companies that might otherwise flail. Because the economy is drying up, capital is becoming more difficult to find, so TSG looks forward to striking deals with companies that might not otherwise have considered taking on an outside equity partner.
Although the firm only deals with US companies to date, Mullin and her team are always on the look out. “At any given time, we’re willing to work with companies outside the US, but as of today, the right opportunity has yet to arise,” she said.
In 2009, TSG plans to continue to encourage its partner companies to invest in brand-building activities. In an environment where consumers are spending less money and being more cautious in regard to what they buy, brand loyalty is critical. According to Mullin, one of the key ways to win the brand loyalty war is to build strong relationships with consumers.
“You have to let consumers know that your company has their best interests in mind,” Mullin said. “When focusing on brand loyalty, advertising campaigns should send a message that says, ‘It’s okay to indulge in this product.’”
Since many of TSG’s employees have been with the company for years, there is a sense of fluidity among them. Mullin, for example, has been with the company for five years. Prior to working at TSG, she was employed by Bain & Company, a strategy consulting company.
“A substantial portion of our investment team has worked together for a long time,” Mullin said. “We all share the same drive, vision, and morals, so we’re always on the same page. We all have confidence in what the team is doing and the value we’re able to provide our partner companies.”