Friday, April 6, 2012

These Boots Are Made for Walkin’

Sorry ladies, high heels do not boost your intelligence
These boots are made for walkin’
And that’s just what they’ll do.
One of these days these boots
Are gonna walk all over you.

Lee Hazlewood

Her favorite position is beside herself, and her favorite sport is jumping to conclusions.

— Danny Kaye1

Tamara Mellon, social climber, entrepreneur, and enfant terrible of cosmopolitan society everywhere—in addition to her not inconsiderable achievement as cofounder, builder, and seller of high-end global shoe retailer Jimmy Choo—has apparently followed through on her longstanding threats to bite the private equity hands that fed her. In a brief article in the fashion section [sic] of the Financial Times, Ms Mellon lays into her former partners with relish:

“What happens in private equity is they come in and they say we’re going to be a great partner. We want to hold this long term and we’re going to help you nurture and build this brand,” Ms Mellon, who left Jimmy Choo in November, tells the Financial Times. But “the day after signing, they talked about selling the business”.

She complains that, in addition to having a frustratingly short investment horizon—Jimmy Choo changed hands among three financial sponsors from 2001 to 2011—her (all male) private equity partners did not understand the business, fought her creative decisions, and refused to put additional growth capital into the firm. She came away with a very sour taste in her mouth:

Ms Mellon says that she has no problem with “people creating wealth and entrepreneurs and building businesses. It’s just how you do it. I think the private equity model is open to people who are more vultures and parasites because it’s a chaotic business . . . it draws a different type of personality.”

But don’t feel too bad for her, O Tender and Sympathetic Readers. Notwithstanding her struggles, Ms Mellon has been well paid for her forbearance. She reportedly made £85 million liquidating her remaining ownership stake in the most recent sale to Labelux. This is in addition to any money she may have already taken off the table in two preceding buyouts by successive private equity partners.2

I highly doubt the lady is short of pin money.

* * *

I am slightly surprised, however, that so obviously clever a person as Ms Mellon seems to have emerged from ten years of close tutelage at the hands of private equity investors and partners so entirely unscathed by the most basic understanding of what they do. It does seem at first blush that her successive financial partners might be fairly accused of rather unseemly haste to divest their investment in her company, given that none of them held its position much longer than three years. This is on the quick end of the normal three- to seven-year portfolio churn in the private equity world, although it is not unheard of nor particularly uncommon. But in addition to potentially itchy trigger fingers, the short tenures of each of her sponsors may have been due to little more than the outsize success of Ms Mellon’s efforts in building Jimmy Choo into a global lifestyle brand so rapidly. After all, private equity firms are in the business of making returns on their limited partners’ investment, and if a sponsor can return 2.5 to 3 times its initial investment within two to three years, it would be crazy—and arguably derelict in its fiduciary duty—not to do so. Surely this most basic fact should have seeped into Ms Mellon’s consciousness sometime over the past ten years.

It may also be true that her particular partners were unduly meddlesome in creative decisions and reluctant to put more equity to work to help build the company, but I find this hard to believe as she so baldly states it. Financial sponsors are in the business of helping their portfolio companies’ management teams build value, if only for no more complicated reason than that is how they make money: by buying a company at X and selling it some years later for a multiple of X. Most buyout firms are eager to invest additional money into their companies on top of initial buyout amounts, where it can be justified as creating additional value. Where private equity professionals are downright parsimonious, however, is making frivolous, ego-driven, or irrelevant investments to satisfy the whim of their management partners. Ms Mellon, for example, may have felt quite put out that her partners did not buy that juicy piece of New York or London real estate she mentions as a “good long-term buy” (what was it, a fancy office mansion in Mayfair or a pricey retail townhouse on Madison Avenue?), but she gets no sympathy from me. Jimmy Choo is a shoe and clothing company, not a goddamn real estate investment trust, and any investor in his or her right mind should not be remotely interested in tying up capital in an asset which has nothing to do with whether Jimmy Choo succeeds as a shoe and clothing company. Rent the damn building, fer chrissakes.

Countermanding her creative decisions about which merchandise to offer seems less justifiable, however, and runs counter to normal private equity practice. Most financial sponsors do not pretend to have the creative or operating knowledge required to run their investment companies on a long-term or day-to-day basis. That is why they hire and partner with management. But they do expect management to explain and justify significant decisions and actions to them, especially those requiring substantial investment or having material impact on the strategic direction of the company. After all, it is their (limited partners’) money which management wants to spend. Making major changes to merchandise lines for fashion reasons fits squarely into the kind of decisions financial partners on a buyout company’s board should expect to be informed and consulted about beforehand. I suspect an imperious and egotistical entrepreneur, which Ms Mellon gives every impression of being, might find that constraining or petty, but tough cookies.

For if there is a common pattern of breakdown in relations between private equity investors and their partner management teams, it is to be found in situations like this. Hard-charging, imperious entrepreneurs often mix with financial sponsors like oil and water. Private equity professionals are smart, driven, and entirely unsentimental investors who are absolutely unafraid to say no to a company CEO who wants to do something he or she cannot convince them to support. If the loggerheads continue, they are also completely unfraid to fire the charismatic visionary who founded the company and replace him or her with someone more pliant. The only thing which saves many of these bullheaded entrepreneurs is the fact that they are, in fact, very hard to replace. It is a measure of Ms Mellon’s talent, irreplaceability, and/or pliancy while her partners held the ultimate reins of power that she survived at Jimmy Choo as long as she did.3

There is a reason why financial sponsors call majority buyouts of companies “control investments.” They acquire a controlling share of the company’s shares and a majority of Board seats. They have the controlling vote, and they are not afraid to exercise it. If prima donnas like Ms Mellon don’t like it, they are more than welcome to pound sand in private.

Or cast public aspersions at their former partners in the Financial Times once the non-disparagement clauses run out.

1 As quoted in Daniel Kahneman, Thinking Fast and Slow. New York: Farrar, Straus and Giroux, 2011, p. 79.
2 I have no idea whether she did so, but it is common practice for existing management of a company bought by a financial sponsor to sell a portion of their current holdings for cash in the deal, in addition to rolling over the remainder into a minority equity stake in the newly recapitalized business. Putting aside Phoenix Equity Partners’ initial majority purchase of Mr. Choo’s stake in 2001 (in which she may have participated as well), it is likely that Ms Mellon had at least an opportunity to take three separate bites at the apple over the course of her tenure there.
3 Or fear/greed. It is also true that managers who are fired from private equity companies often lose most or all of the unvested portion of their equity stake in the company. Ms Mellon probably had strong financial incentives to submit to the wishes of her majority owners in these squabbles.

© 2012 The Epicurean Dealmaker. All rights reserved.