Yellow Wood banks on ‘fairness’

Yellow Wood Partners is not your typical mid-market private equity firm.

An emerging manager formed in 2009, Yellow Wood has raised a fund that will charge no monitoring or deal fees to its portfolio companies. The firm beat its $200 million target on its debut fund recently, collecting $225 million from a select group of investors. 

“When we tell the management team of a selling company that we’re not going to take a $1 million or $2 million or more fee at the start, their eyes widen with surprise,” said Yellow Wood co-founding partner Peter Mann.

Yellow Wood’s belief that deal and monitoring fees are an unnecessary burden on portfolio companies comes in part from Mann’s experience working as the chief executive officer of Blacksmith Brands, a Johnson & Johnson

Peter Mann and Dana Schmaltz

carve out.

“I can tell you that as a CEO of a number of different companies owned by a number of private equity groups, I really didn’t like authorising that quarterly monitoring fee,” Mann said. “Even though we worked with great private equity groups, it didn’t seem completely fair, in my judgment.”

Mann founded Yellow Wood with co-founding partner Dana Schmaltz, previously the president of Boston-based mid-market firm JW Childs. The partners developed an impressive record prior to launching Yellow Wood by partnering with firms including GTCR and The Shansby Group on individual investments, including Blacksmith. 

Yellow Wood's LP-friendly terms helped it attract the attention of investors, one of whom said fairness is a big part of Yellow Wood’s philosophy.

They understood that the private equity model has been a little bit broken

“They truly are an outlier because they understood that the private equity model has been a little bit broken for the LPs and wanted to be at the forefront of crafting a slightly different model in working with LPs collaboratively to find a structure that works for them as well as the LPs,” the LP said.

“A 2 percent fee on $2 billion allows the GPs to do very well in the fee stream regardless of what happens with the carry, so with this fund size and this targeted structure, it really was a vehicle where interests were truly aligned between the GP and LP.” 

Yellow Wood will invest the capital from its debut fund in consumer packaged goods businesses, a sector in which Mann and Schmaltz have extensive experience as an operator and investor, respectively.

One of the most unique aspects about Yellow Wood is how the co-founders came to raise their own fund. After generating a 2.5x return multiple on Blacksmith Brands alongside Boston-based Charlesbank Capital Partners, Mann and Schmaltz were approached by a small number of limited partners who asked them about creating a fund. The co-founders secured half of their fund from two anchor investors who, after committing, helped attract Yellow Wood’s three other LPs.

“These two big investors stood up and said, ‘We think you should talk to these other investors,’” Schmaltz said. “That alleviated the need for us to go to smaller investors and do a full road show.”

What we’re doing here is more of an operating approach to investing Dana Schmaltz

 Yellow Wood is comprised of an eight-person team: five operating partners, two investment professionals and an associate. 

“[Yellow Wood] had that combination of both investment experience and operational experience that is so important to be differentiated in today’s very competitive private equity marketplace,” the LP said.

If needed, all eight Yellow Wood professionals will relocate and work inside portfolio companies for up to a year at a time.

“Everybody, myself included, has stepped forward and said we are eager to do whatever it takes to get these new investments off the ground,” Mann said. 

Yellow Wood will target equity investments between $10 million and $80 million for control or minority stakes in North American companies, but has yet to make its first investment.

“What we’re doing here is more of an operating approach to investing,” Schmaltz said, “and we think that’s where the majority of the value is going to be created in the consumer space.”