While business schools and investment banks are known to be rich breeding grounds for young private equity talent—host a nice cocktail party, wave a few dollars around and watch the eager Ivy Leaguers pound down the door—recruiting a chief executive officer for a portfolio company is not always so simple. As many LBO specialists will tell you, the right management team is often the critical component that can make or break a given investment. Running a company may be one thing, but running a company saddled with billions of dollars in debt is something else entirely.
How do private equity firms go about finding the right CEO? In the world of retail, they hire an executive with a stint at department store behemoth Federated on their resumé. Over the past few years, as the retail sector has increasingly drawn the interest of leveraged players, at least six former Federated executives have found—or may soon find—themselves at the helm of a private equity-owned company.
It probably comes as little surprise. As the largest department store owner in the country—last year’s $17 billion acquisition of May’s was the biggest M&A deal ever in the sector—Federated is a logical pit stop for ambitious retail executives. But whereas in the past, the department store chain was known for developing and keeping talent, the waves of employees that have left over the years is a glaring example of the lure of private equity.
Last week, Women’s Wear Daily reported that KKR, possibly in conjunction with Apollo, was preparing to launch a $4.7 billion bid for Foot Locker, helmed by chairman and chief executive officer Matthew Serra. A veteran of the retail industry, Serra spent five years at Federated in the mid 1990s running the company’s Stern department store chain before jumping ship to join the shoe retailer. KKR is no doubt familiar with Serra’s work: he was recruited to run Seaman’s Furniture in the early 1990s when the KKR-owned company was struggling due to a heavy debt load and a poor economy. Unfortunately, the legendary buyout firm may not have fond memories of their time together: two years after Serra became CEO of the company, Seaman’s filed for bankruptcy.
Though Apollo may not be as well-versed in Serra’s work, they are certainly chummy with some of his former colleagues. An active investor in the retail sector, Apollo’s real estate arm recently acquired New York-based department store chain Lord & Taylor—a division of Federated. Earlier this year, the buyout firm also took private household goods retailer Linen’s ‘N Things, installing Federated veteran Robert DiNicola as the company’s new CEO. As an investor in—and an advisor to—Apollo, DiNicola is, by now, a private equity veteran as well: in addition to turning around jewelry retailer Zale Corporation in the mid 1990s, now a potential takeover candidate according to The Wall Street Journal, he also helmed vitamin store chain GNC, an Apollo portfolio company that may go public later this year.
In addition to Serra and DiNicola, a few other Federated veterans are making the rounds among the private equity set:
Myron Ullman: The chairman and CEO of Macy’s (prior to its acquisition by Federated), Ullman eventually went on to run duty-free retailer DFS before joining luxury brand manufacturer LVMH and, upon Questrom’s retirement, taking over at JC Penney’s—which is once again the subject of private equity takeover rumors.
Howard Socol: The former CEO of department store chain Burdines, a division of Federated, Socol was recruited by Texas Pacific Group to be the CEO of J. Crew in the late 1990s (he left after only one year). Socol eventually landed at Barney’s, where he took over for Questrom. At the time, Barney’s was owned by private equity firms Bay Harbour Management and Whippoorwill Associates.
Vanessa Castagna: A veteran of Lazarus, a Federated chain, as well as discount retailers Marshall’s and Target, Castagna left JC Penney’s last year after being passed over for the top spot (which went to Ullman). In 2005, she was hired by Cerberus to oversee their investment in the discount chain Mervyn’s.
Though the departure of so many executives to the private equity world may worry Terry Lundgren, the CEO of Federated, retail insiders note that the department store chain still has a strong stable of talent. And, if Lundgren ever bores of his current job, there will certainly be a few private equity bidders for his services.