The bestiary of private equity has long been replete with dogs, sharks, and pigs (both with and without lipstick).
While the venture world may famously have its “unicorns”, I am reminded that the private equity community has long had its own fantastic beast, the Griffon. A “Griffon”, in the private equity sense, is a portfolio company that returns on exit an amount greater than the entire size of the investing fund.
Like any proper mythological beast, these are rare birds indeed. They tend to be whispered about across tables or referred to cryptically in the locker room of the racquet club rather than spoken about too broadly. In fact, one long-time client of mine who had achieved a Griffon in an earlier fund made me solemnly swear to not discuss that fact with anyone – he didn't want to draw any of the “wrong sort” of attention, whatever that means.
But Griffons do exist. They are more likely to exist in concentrated portfolios (that's just the math), and they are more likely to be found in smaller funds (that's the nature of asymptotic growth curves). They were, like their mythological cousins, more likely to walk the earth in some dimly remembered golden age of private equity than they are in these dark and degenerate days of compressed returns. But the Griffon has not gone extinct.
I found myself meditating on the nature of the modern-day Griffon after one particularly successful sale earlier this year. Houlihan Lokey was hired by Uni-World Capital (which recently re-branded as Verus Investment Partners) to sell a portfolio company of theirs called CAPS Inc. CAPS provides outsourced employee services for the media and entertainment industry.
Since these companies are by their very nature somewhat ephemeral, they need to outsource functions that might be handled in-house by more traditional businesses. The large-scale outsourced providers of these services to other industries are unable to compete with CAPS because they have too much trouble adapting their processes to the esoteric guild rules of media-industry unions.
This is an attractive business in an industry with high barriers to entry. It is also in an industry where technology can drive enormous cost savings and cashflow improvement. Uni-World had seen all of this, and had partnered with the management team to enable tremendous performance improvements through investments in technology, even while opening up adjacent markets to materially improve the size of the addressable market.
We saw this, too, and were able to successfully articulate the market opportunity to a great strategic buyer, Cast and Crew, a portfolio company of Silver Lake. The result of all of this: an actual modern-day Griffon, with the company returning to Uni-World an amount in excess of the size of their fund. Their co-investors did pretty well, too, I might add. Many Champagne corks, I have reason to suspect, left their safe haven nestled atop their bottles.
All of this caused some conjecture as to whether there were certain characteristics that some of the famous Griffons in private equity history shared. True, some of the most storied investors in the history of our industry had owned Griffons: Blackstone, Warburg Pincus, EQT, Forstmann Little, and Apollo Global Management. But so too had a number of high-quality firms that are not household names: Uni-World, Ripplewood, and (possibly, soon) Cortec.
In terms of industry, there has certainly been some clustering of Griffons around the branded consumer sector, where sudden “hits” can drive outsized and unexpected performance. Examples of this might include PAI's Yoplait or Thomas H. Lee's Snapple.
But the industrial sector, the financial institutions sector, the business services space, and the natural resources industry have all produced Griffons as well. Interestingly, the acquirer of CAPS, Cast and Crew, may well have been a Griffon-like investment for its previous owner, Zelnick Media. Some neighborhoods, it seems, are simply more likely to have beautiful homes in them than others.
But the biggest determinant of Griffon-level success seems to be simply that the sponsor owner was executing on their core competencies; unlike unicorns, Griffons seem to be attracted to the experienced rather than to virgins. In Snapple, Thomas H. Lee was doing what they did best: growing a consumer brand while enhancing distribution; they had used a similar playbook with Rayovac and other investments. Similarly, in CAPS, Uni-World was executing on what they do best: professionalising an entrepreneurial business, paring unprofitable segments while identifying attractive growth areas, and investing free cash flow in technologies that would prove transformative.
This is perhaps the ultimate lesson of the Griffon: funds are most likely to have a truly outstanding transaction when operating in familiar territory. This is hardly a shocking conclusion, but it is comforting to know that even in relation to the most fantastic (and desirable) beast in the private equity bestiary, there is no place like home.
Justin Abelow is a managing director with Houlihan Lokey in its financial sponsors group and is also co-head of the firm's private equity practice, focusing on private equity coverage in the United States and in Europe.
Statements and opinions expressed herein are solely those of the author and may not coincide with those of Houlihan Lokey.