Ken Firtel’s private equity firm owns the company famous for selling ant farms. Matt Young’s firm owns a screen-printing business. Robert Loring’s owns the Tampa Tribune.
They have different lines of business, different strategies and different investors. But they do have one big thing in common: Their firms – and at least 10 others – all trace their roots to Beverly Hills’ Platinum Equity.
“Platinum was a great place to learn,” said Loring, who spent eight years at Platinum then briefly worked at another firm before co-founding Revolution Capital Group in 2009. “I really learned the business of mergers and acquisitions, top to bottom.”
And he isn’t the only one who got an education in deal-making at Platinum, the firm founded by billionaire Tom Gores. The firm’s hard-core culture and Gores’ early success in small-dollar deals has made Platinum an incubator in the local private equity scene. Former Platinum executives have founded at least 13 buyout firms or merger-and-acquisition advisory businesses, 10 of them in Los Angeles County.
There are small shops, such as Manhattan Beach’s CriticalPoint Partners, which just made its first acquisition; and bigger ones, like Century City’s OpenGate Capital, which owns more than a dozen companies with combined annual revenue of about $2 billion. A few were founded by longtime Platinum executives, many by people who worked there for just a few years.
But most of them have stayed in Southern California and in one way or another have stuck to Platinum’s strategy of buying underperforming businesses and trying to turn them around by improving operations.
Platinum has produced more spinoffs than Westwood’s Leonard Green & Partners, a larger and older firm, or Gores Group, the Beverly Hills firm – run by brother Alec Gores – where Tom Gores got his start in private equity.
Perhaps no firm in L.A.’s financial scene has spawned so many spinoffs since the infamous high-yield bond desk at Drexel Burnham Lambert. The New York investment bank’s Beverly Hills office, run by billionaire Michael Milken, gave rise to a bevy of financial firms after it was forced into bankruptcy in 1990. Former Drexel bankers went on to found Canyon Capital Advisors, Moelis & Co. and other big-name firms.
Unlike Drexel, Platinum is still in business – and it continues to grow. In September, the firm closed its third fund after raising $3.8 billion from investors. That’s $1 billion more than the firm raised for its previous fund, which closed in 2008.
That growth goes a long way toward explaining why so many have left Platinum to seek their own fortunes. Former Platinum executives interviewed by the Business Journal offered various explanations for why they left and why others did so. Some said compensation for junior executives at Platinum was lower than at other firms; others said Platinum’s top partners are so loyal to Gores and vice versa that junior executives saw little opportunity for advancement. Most of Platinum’s partners have been with the firm for more than 15 years; some have known Gores since he ran a software firm in the 1980s.
But the main reason was simply that, as Platinum grew, it naturally became less interested in smaller deals, leaving a vacuum in the lower middle market where it started.
In the early days, Platinum might buy a company worth just a few million dollars. Now that the firm has raised multibillion-dollar funds, small deals just don’t make sense, said Stephen Rossi, a former Platinum vice president and now a managing partner of CounterPoint Capital Partners in downtown Los Angeles. (See profile, page 22.)
“Little deals take a lot of work and they don’t move the needle on a $3 billion fund,” he said. “When Platinum moved on from smaller deals, it created a pocket. We continued to see a bunch of deals that fit our model, but they were dying on the vine inside the firm.”
As another Platinum alumnus put it, “If you’ve got a $3 billion fund and you make a great return on a $5 million investment, it’s like, who cares?”
‘Eat what you kill’
Neither Gores nor other current Platinum executives would comment on this report. On its website, the firm boasts about the stability of its top-level executive team, saying the median tenure among partners and principals is 11 years. Given that, it’s likely the firm would rather not publicize the number of people who have left or have been asked to leave.
But some who have left the firm and others in the private equity world say Platinum always attracted different, perhaps more entrepreneurial, workers than other firms – “eat-what-you-can-kill types,” as former Platinum principal Matt Young put it. He founded CriticalPoint last year.
Darryl Smith, a former Platinum vice president who spent four years at the firm before striking out on his own in 2005, said people with degrees from top-tier business schools such as Harvard and Wharton were rare at Platinum compared with other firms. Even today, there are more Harvard M.B.A.s among vice presidents and associates at Leonard Green – three – than among Platinum partners – none.
That’s fitting, as Platinum was founded not by an Ivy League-educated investment banker but by a guy who worked his way through Michigan State University.
Especially in its early years, Platinum was described as a kind of blue-collar curiosity in the suit-and-tie world of private equity. A 2001 Forbes article likened Platinum’s business development operation – a half-dozen guys cold-calling corporations and looking for deals – to telemarketers hawking penny stocks and time-shares.
“Most private equity firms are very finance driven and they hire a lot of ex-investment bankers,” said Smith, who ran a private equity firm for a few years before buying Premier LogiTech, a logistics company in Grand Prairie, Texas. “At Platinum, all these guys were entrepreneurs, not investment bankers. They were very young high-energy guys.”
Smith, who worked for global consulting firm Accenture of Dublin before joining Platinum, recalls thinking his Wharton M.B.A. would help him get a job at Platinum. But he said the executive he interviewed with was more interested in his experience as a Marine Corps officer.
“He said to me, ‘We’re less interested in a bunch of guys sitting around looking at spreadsheets all day than about making decisions,’” Smith said.
Others, too, say Platinum’s culture attracted entrepreneurship, even demanded it. One firm alumnus, who like many others spoke on condition of anonymity, said that was clear even on his first day.
“There isn’t a new-hire training,” he said. “You’re just expected to figure it out. The human resources director told me, ‘It’s a sink-or-swim culture – don’t sink.’”
For those who thrived in that environment, Platinum provided a primer on how to do private equity deals.
The firm prides itself on doing almost everything in-house, from sourcing deals to improving operations, instead of relying on outside consulting firms or investment banks.
Potential acquisitions are analyzed by teams that include professionals in finance, operations and deal execution. That gives even junior-level staffers an intimate look at all the various parts of a deal.
“You get more exposure to the functional areas of a deal, and more intimate exposure to the portfolio company and its operations,” one Platinum alumnus said. “That experience has helped us move forward with transactions of our own.”
For those who left Platinum to start their own firms, the attraction was not only the urge to hang out a shingle but also the relatively low barriers to entry to creating a Platinum-like business.
To start a small buyout shop doing lower-middle-market deals, you don’t need to raise a billion-dollar fund or have a huge team. You need to be able to find good opportunities and line up investors, and many Platinum alumni showed they could do both, said Smith, the former Platinum vice president.
“A lot of these guys knew how to find distressed businesses and hook up with money,” he said. “They had these relationships and wanted to go out and monetize them. Why wouldn’t they try?”
What’s more, because of the size of deals many Platinum spinoff firms have done, they didn’t even need much from investors. Andrew Nikou’s OpenGate is a prime example: Its most noteworthy deal was its purchase of TV Guide Magazine in 2008 for a symbolic dollar.
That mirrors some of Gores’ early deals at Platinum. One of his first acquisitions was software company LSI, a company he reportedly bought with $200,000 of his own money and sold for more than $5 million.
Working for Gores, and knowing such small-dollar deals are out there, it was tempting for Platinum alumni to believe they could do likewise.
“What Tom proved is that you don’t need a $2 billion fund to get high returns,” said one former firm executive. “You prove that to people, and they say, ‘Hey, I can do that.’ Once you’ve seen that, why would you sit around at an organization instead of buying a company yourself and rolling the dice?”
To that end, most Platinum spinoffs have not raised their own funds. Of the firms in Los Angeles, only Brentwood’s Transom Capital Group, founded by former Platinum Vice President Ken Firtel, has a committed fund. Others line up financing deal by deal from wealthy private investors and other sources.
Despite their shared roots at Platinum, the firm’s spinoffs are as diverse in size and strategy as Platinum’s vast portfolio itself.
Manhattan Beach firms CriticalPoint and Palm Tree Advisors, as well as Westchester’s Ocean Park Advisors, mostly offer merger-and-acquisition advisory services, though they all dabble in their own private equity deals.
OpenGate, one of the oldest Platinum spinoffs, deals exclusively in corporate divestitures, only buying business units that are being sold off by a larger parent. Even within that niche, OpenGate specializes in multinational divestitures – buying operations in one country being sold off by a parent based somewhere else.
Revolution, co-founded by Loring and Cyrus Nikou, brother of OpenGate’s Andrew Nikou, works on corporate divestures, too, but has also done buyouts from private owners.
CounterPoint has mostly purchased small family-owned companies, a niche where co-founder Chris Iorillo said there’s lots of opportunity for operational improvements.
“You go into a sleepy family-run company and there are lots of easy things to do that just haven’t been done,” he said.
And these firms, unlike those launched in the wake of Drexel’s breakup, weren’t founded en masse but in dribs and drabs over nearly a decade, with a firm started nearly every year since 2004. Alex Soltani founded Century City’s Skyview Capital in 2005. Loring started Revolution in 2009. Brian Wall, one of the few Platinum partners to leave and found his own firm, started Century City’s StoneCalibre last year.
Though they all left at different times, most of these founders worked at Platinum when the firm was doing smaller deals. And that means the number of Platinum spinoffs could soon slow or stop.
A junior executive who came up on $10 million and $20 million deals might think they could break away and start their own firms. But the deals Platinum does now, such as its acquisition this summer of CBS Corp.’s European billboard division for $225 million, can’t be pulled off by a startup, said one former executive.
“I don’t suspect anyone hired at Platinum today will leave and say, ‘I can do this,’” he said. “Now they’re doing more traditional and larger leveraged buy-out deals and they’re investing out of a $3 billion fund. The Platinum 1.0 model is much easier to replicate.”
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