Friday Letter Back to the roots

From hotel chains to wineries, private equity is still a great solution when family owners want out – even when there’s a credit crunch.  

This week’s Hyatt deal is a reminder that, regardless of credit market turbulence and external criticism, private equity can still prosper by playing to its strengths and relying on tried and trusted investment strategies.

Goldman Sachs and Wal-Mart-affiliated Madrone Capital Partners were able to buy a $1 billion minority stake in Global Hyatt Corporation because its family owners were seeking liquidity. The hotel group is now owned by eleven cousins from the founding Pritzker family, and in 2001 they gave themselves ten years to split up the assets. 

Thus the biggest private equity deal announced this week is, in essence, a return to the industry’s roots. The first leveraged buyout in history – the 1964 deal for Orkin Exterminating Company by conglomerate Rollins – involved an asset whose family owners had no appetite for staying with the business. “The company had glowing fundamentals, and its owners were motivated sellers, looking for ways to get their money out of a business they had no desire to run,” Lewis Cullman, who helped engineer the $62.4 million Orkin deal, wrote in his autobiography.

Forty-three years on, families remain a key source of deal flow for private equity groups worldwide. Family-run businesses facing succession issues are always going to need liquidity, regardless of the price of debt, credit spreads, or market volatility.

Aside from the Hyatt deal, there were at least two other buyouts of family-owned companies in the US this week: ageing fashion designer Betsey Johnson sold her eponymous label and boutiques to Castanea Partners, while Boston Ventures purchased a small Louisiana telecom company that had been family-owned since 1945.

But private equity firms should also be looking at less traditional targets and industries. GI Partners’ recent acquisition of California’s Duckhorn Wine Company, for example, underscores how many top-tier wineries are ripe for private equity suitors.

Dan and Margaret Duckhorn founded their St. Helena winery with the help of investors in 1976. Margaret, the company’s vice president of sales and marketing, and Dan, the chief executive, did not have children and divorced in 2000.

By 2007, Duckhorn had three production facilities, several hundred acres of prime vineyard land in Napa Valley and Alexander Valley, labels including Duckhorn, Paraduxx, Goldeneye, Decoy and Migration – and around 80 investors, many of whom were getting old and looking to cash out. After months of negotiations and a bidding war, GI Partners purchased a controlling stake in the company that Napa Valley sources value at roughly $250 million (€181 million).

Onlookers were duly impressed: at a recent Napa soirée, private equity was painted by one winery owner as a knight in shining armour for those without children, or whose children simply have no interest in running the family business. “You have an extensive number of people who started wineries in the ‘60s, who have turned them into mature brands with widespread distribution networks, and they have absolutely no succession plan,” the person said. “Phelps, Grgich Hills, Caymus, Clos Du Val, Schramsberg – those are all ‘old school’ Napa companies with major succession issues.”

The discussions taking place amid the vines also serve to emphasise that buying out family-owned businesses can be good not only for private equity returns, but also its image. The buyout firms are seen as validating the success and growth potential of a company, and rewarding successful entrepreneurs – as well as saving the company from extinction.

At a time when private equity seems to be the favourite bogeyman of unions, politicians and the media, this is the kind of image that the industry needs to project well beyond wine country.