LOS ANGELES

www.dailyjournal.com

MONDAY, MARCH 10, 2014 COVER STORY Creative juices flow at funds upside if there is an event that makes this Last month, -based company worth more than it is today,” private equity firm TSG Consumer Rodda said. Partners LLC announced a $50 million In most cases, that means building investment in Revolveclothing.com, an convertible debt or warrants into deals — online clothing retailer. financial instruments that allow a private And in October, The Carlyle Group LP equity fund the option to take a stake in acquired a minority stake in Santa Moni- a company if equity proves to be more ca-based consumer electronics company valuable than the debt itself, which it Beats Electronics LLC for $500 million. does in many instances. Munger Tolles advised Beats in that deal. Accordingly, Golden Gate retained Adopting these new tactics, attorneys just over 11 million warrants — a 25 say, has been a relatively straightforward percent stake in the company — which transition from a purely legal perspective. the fund could convert to shares at a But in many instances, veering away discount if the company’s bottom line from the traditional leveraged began to buoy, which it did in earnest model has meant taking on a set of starting in 2013. concerns that private equity hasn’t had Last month, Zale announced it would to deal with in the past. sell to rival Signet Jewelers Ltd. for $690 “A lender needs to worry about cove- million in cash. Golden Gate didn’t dis- nants, consent rights and its place in com- Juliane Backmann / Special to the Daily Journal Brett J. Rodda, a partner at Munger, Tolles & Olson LLP, said private equity investors close precisely how much it would make pany’s , and those are have been using new methods to invest capital, including debt and minority-stake off of the deal, but with Signet’s offer of very different things to someone who’s investing. $21 per share, Golden Gate’s return is used to saying, ‘I own this company,’” estimated at about $211 million. Rodda said. “Investing in a company By Dominic Fracassa / Daily Journal Staff Writer Golden Gate, along with other Califor- rather than owning all of it entails many acing persistently constrained and competitive outlets for the kinds nia-based private equity firms including of the same concerns.” of mega-deals that have defined them in the past, private equity and Altamont Capital, Hellman & Friedman But conversely, Winston & Strawn and Silver Lake Partners all declined LLP partner Eva Davis said that because funds have been getting creative when it comes to F interview requests. the tactics themselves are fairly new, at- findingnew ways to put their money to work. Tactics that these firms began to Minority-stake investing has also torneys also have the ability to be creative experiment with during the tumult of the nation’s most recent financial crisis become a fashionable strategy among in the ways they help their private equity are increasingly finding their way into the pages of the private equity playbook. private equity funds, a notable departure clients structure deals. from their reputation as financers inter- “There’s not a wealth of aggregated While many corporate attorneys and there,” Kirkland & Ellis LLP partner ested only in and control. market information on minority invest- financial analysts agree that macroeco- Jeremy M. Veit said. “Private equity In some ways, the approach is similar ment deal terms for private equity,” she nomic conditions have been steadily, funds found entry into the market and to that of venture or funds. said. “It gives you great flexibility to be if slowly, improving year over year, had real expertise that they could bring But where usually looks creative when you’re negotiating deal the pace hasn’t been fast enough for to bear. There’s now more comfort for to make a number of small investments terms because you don’t feel constrained private equity investors eagerly waiting private equity funds investing across a across a range of companies in the hope by market norms.” to deploy as much as $1 trillion in “dry capital structure, where historically they that a handful survive to see a lucrative And as markets have continued to powder,” according to a report released were experts in traditional [leveraged exit, Weil, Gotshal & Manges LLP part- improve, attorneys are also pleased by the earlier this month by Bain & Co. buyouts].” ner Kyle C. Krpata said private equity broader impact of private equity’s will- “The environment for M&A buyouts San Francisco-based private equity funds tend to strategize a bit differently. ingness to explore new financial tactics. is still not anywhere near what it was, so firm Golden Gate Capital reaped the “On the whole, private equity funds In addition to the infusion of new people are looking for places to put their benefits of just such an arrangement in tend to put more dollars to work on a capital for companies, Dentons partner S. money,” said Munger, Tolles & Olson recent weeks. single investment,” he said. Elizabeth Foster said as funds continue LLP partner Brett J. Rodda. In 2010, with revenues floundering, Additionally, Krpata said, private to look beyond leveraged buyouts, the Rodda and other attorneys point to two jewelry retailer Zale Corp. turned to equity investments tend to be in more tension bred from competition between new tactics in particular: debt lending, Golden Gate for a $150 million loan. stable, established companies with many a small pool of funds for the same deals where a private equity fund takes on But a return based solely on the interest of the same business fundamentals they will be a boon as well. the role of a loan financier, and minori- from the loan itself isn’t what typically would have sought out when looking to “It’s good for everyone in the market,” ty-stake investing, an approach private placates private equity investors, who for a leveraged buyout opportunity, such Foster said. equity firms have not typically utilized aggressively seek out bigger returns in as steady cash flow and an experienced “The companies that want to sell will in the past. exchange for taking on more risk. There- management team. see money starting to move, and because By most estimates, private equity fore, funds will also look to ensure that Few private equity firms are willing to private equity investors have become funds began to dabble in debt financing they’ll be able to transform the debt they shed light on the kinds of minority invest- more flexible, maybe they’re willing between 2008 and 2010 — when credit hold into equity if that company increases ments they’re making — particularly in now to consider alternative structures and markets were at their tightest. in value down the line. privately held companies — but a handful alternative deals that they wouldn’t have “Traditional lenders just weren’t “They want … the ability to have of examples have made recent headlines. looked at in the boom times.” Reprinted with permission from the Daily Journal. ©2014 Daily Journal Corporation. All rights reserved. Reprinted by ReprintPros 949-702-5390