This content is from: Portfolio
An Upstart Start-up Takes on Jim Cramer
The unsolicited offer by New Orleans–based Spear Point Buyout Group for New York media company TheStreet is just a taste of the economic renaissance of the Big Easy.
Nicolas Perkin and Rodney Bienvenu Jr., who run seven-month-old New Orleansbased Spear Point Buyout Group, are big fans of Jim Cramer, host of CNBC's Mad Money and co-founder and chairman of TheStreet. "We agree with him that Wall Street brings in riches for the rich guys while retail investors get locked out," says Bienvenu. He and Perkin have noticed that TheStreet has itself been losing value; they think an institutional holder of preferred shares is driving down the price. So the two upstart investors are taking a page from Carl Icahn and making an unsolicited bid to buy out TheStreet.
"We think this is a great opportunity for Cramer to walk the walk," the 47-year-old Bienvenu says. He and Perkin, 42, approached the company by stealth, buying just under 2 percent in the first half of this year so that they wouldn't have to disclose their holdings to the Securities and Exchange Commission. They say they talked with CEO Elisabeth DeMarse several times and think highly of the company's entire management and fundamentals. But the numbers have been proof that something is not percolating. TheStreet's market capitalization has dropped from more than $560 million in early 2008 to $65.7 million today. Even in October 2008, with the financial crisis raging, the stock was trading at more than $4 a share; today it hovers in the $1.88 to $1.90 range.
|Nicolas Perkin and Rodney Bienvenu Jr. (Photograph by Britney Penouilh)|
In early July the two Spear Point partners increased their stake to more than 2 percent and sent a five-page letter to DeMarse and Cramer explaining their interest in the company and why they think a privatization buyout would be the best route to a turnaround. To date, DeMarse and the board of directors have not responded to their letter. TheStreet has no interest in pursuing the matter and is not for sale, according to people familiar with the company.
The story of how the heads of a little-known private equity firm, based in a city known for jazz and good times but not for high-profile financial deals, inched their way into the boardroom of a company whose founder is on national television five days a week is a turnaround tale in its own right. New Orleans has been undergoing a slow economic renaissance for several years. The rebirth can be traced directly to the aftermath of Hurricane Katrina, which hit the city in August 2005 and was the costliest natural disaster in the history of the U.S. One month later the almost equally devastating Hurricane Rita blasted the Louisiana coast. Locals refer to Katrina as a near-death experience, but the $150 billion in relief funds that followed have enabled New Orleans, whose economy was troubled throughout most of the previous century, to embark on a fresh start. Hurricanes Katrina and Rita, as well as the Deepwater Horizon oil spill in May 2010, made it trendy for volunteers to go to New Orleans to help. Actor Brad Pitt organized the construction of new houses in the impoverished Ninth Ward. Many less famous travelers visited and decided to stay. As a result, New Orleans now has a growing population of start-up entrepreneurs and technology-savvy millennials, who have infused the city with a can-do spirit.
from New Orleans
"If you'd told me even five years ago that I'd be doing this from New Orleans, I'd have laughed," says Bienvenu, who grew up in the southern Louisiana town of St. Martinville, about 140 miles west of the Big Easy. The former Greenwich, Connecticutbased private equity manager returned in January 2012, drawn mainly by the low tax base, and started the Louisiana Buyout Fund. That fund, still in existence, is aimed at buying out small-cap tech companies that Bienvenu believes would be more profitable if they moved some of their operations to Lousiana or other places where labor and other overhead costs are low relative to the rest of the country.
Perkin and Bienvenu are by their own admission a long way from purchasing TheStreet. They call Spear Point a "transaction-oriented activist fund," and by making their intentions public, they are deploying the activist side of what they do.
"Our long-term goal is to fix the problem holding down [TheStreet's] valuation," says Bienvenu. "In this case the problem is the capital structure" specifically, a preferred stock position held by Palo Alto, Californiabased private equity and venture capital firm Technology Crossover Ventures. The liquidation preference of the preferred stock is to be paid upon a change in control. For that reason, Perkin and Bienvenu contend that the preferred stock acts as a poison pill that makes a strategic buyer less likely to acquire the company and further dampens the value.
All of this might sound like chutzpah for a company that came out of nowhere and now owns a little more than 2 percent of the outstanding shares. It might be just that; Perkin and Bienvenu say all shareholders will benefit if they make an unsolicited bid which they haven't done yet and that leads to a bidding battle.
On their home turf of New Orleans, however, Spear Point, launched in December, has become a source of pride.
This is a city that is on red alert for investment and growth, especially for its growing base of small businesses. According to the Greater New Orleans Community Data Center, a nonprofit research organization, entrepreneurship has nearly doubled, from 218 individuals starting businesses out of every 100,000 metro-area adults in 2003'05 to 427 in 2008'10, well above the national average of 333.
"Nic Perkin and Rod Bienvenu both have track records in finance," says Michael Hecht, CEO of Greater New Orleans Inc., an economic development alliance for the city and the surrounding metropolitan area. "As they begin to complete deals, word is going to ripple through the private equity and investment world, and that will help establish New Orleans as a brand to other firms."
Perkin was, like his business partner, a financial professional who thought post-Katrina New Orleans was the place to be. He grew up in New York City but lived in New Orleans as an undergraduate at Tulane University before earning an MBA from London Business School. After that he worked in investment banking and co-founded an advertising software company, Massive Incorporated, which Microsoft Corp. bought in 2006. His career took him to Hong Kong, Prague, San Francisco and Los Angeles, but in 2007 he piled his possessions into a U-Haul and drove from Southern California to New Orleans with his fiance. There he co-founded a company called Receivables Exchange, an online marketplace that allows businesses to sell their accounts receivable to accredited investors by competitive auction. (Institutional Investor named Perkin and Receivables Exchange co-founder Justin Brownhill to its 2011 Tech 50 ranking of the world's leading executives in financial technology.)
While Brownhill worked from an office in New York, Perkin set up shop in a formerly blighted district just below Canal Street. The building at 220 Camp Street became known as Entrepreneurs' Row, and it now houses Spear Point and the Lousiana Buyout Fund.
As entrepreneurs, Perkin and Brownhill were unique among their New Orleans peers in that they had a proven track record in finance and technology, along with contacts in the private equity world. They received in total about $60 million in private equity from the likes of Bain Capital Ventures, Fidelity Ventures, Prism VentureWorks and Redpoint Ventures. In September 2011, NYSE Euronext acquired Receivables Exchange through a minority stake. Though Perkin is still on the advisory board, he resigned his position as CEO in October 2012. It was the standard tale of the founder who feels out of place once a bigger company takes over. "It was my decision to leave, but let's put it this way: The decision was well received," says Perkin.
James Coulter, co-founder of $56.7 billion Fort Worth and San Franciscobased private equity firm TPG Capital, is one of New Orleans's most enthusiastic boosters of new capital. "New Orleans has become a place where young people want to live that is important," he explains. "As the entrepreneurial community grows, it can create jobs, and economic growth becomes a self-perpetuating belief."
Coulter goes there every March to address start-up leaders at New Orleans Entrepreneur Week, an event hosted by an incubation complex for small start-ups, called Idea Village. Some advice he gave this year: Disrespect fundamental roadblocks and offer a way to bypass the obstacles. Coulter also recommended using theatrical-style stunts, as he did when his firm was trying to make changes at Continental Airlines and he mailed an airline meal to the CEO with a message about how bad the food was.
For the past three years, the TPG co-founder has capped the week with a Friday event dubbed the Coulter IDEApitch, an American Idollike competition in which five entrepreneurs each make a short pitch before a panel of judges who know a lot about start-ups. The winner receives several prizes, the most valuable of which is a trip to San Francisco to meet with private equity managers. The prize this year went to Brendan Finke and Joe McMenemon, founders of software company ChapterSpot, whose tools track finances and membership for organizations.
Coulter grew up in Buffalo, New York, but his wife, Penny, is from New Orleans. After Katrina they helped out with the relief effort, and they continue to go back several times a year. Though most of his contributions have come from personal capital to start-up entrepreneurs, Coulter has also done a great deal to fuel the national image of New Orleans as a cool place to be. "Jim Coulter has made a case for New Orleans being one of the best places in the country for start-ups, and national venture capitalists have begun to take an interest," says Hugh Evans, a partner at T. Rowe Price Associates in Baltimore.
Evans went to high school in New Orleans and in the past year has invested in four start-ups there. One is Kickboard, an educational software company and part of an industry that has been growing in New Orleans largely through people who went there after Katrina with nonprofit organization Teach for America. Kickboard founder Jennifer Medbery is a local success story, having received a total of $2.8 million in start-up capital so far. Evans was one of a group of angel funders who participated in a $2 million round of funding for Kickboard in early 2013. His investment was $200,000, and some of the angel investors put in smaller amounts; most of the capital came from New Markets Venture Partners and Two Sigma Ventures. Evans has also committed angel funding to a new gourmet retailer named Jack & Jake's.
Louisiana has become very business-friendly under Republican governor Bobby Jindal. He has proposed eliminating the personal income tax, the corporate income tax and franchise taxes as incentives to attract more private capital a proposal that is under widespread debate within the state. Louisiana already offers fairly strong incentives to those who ask. Take Receivables Exchange: Under a new CEO, Henry Allen, formerly with Marsh & McLennan Cos., the company Perkin started still has 34 people working in a New Orleans office thanks in large part to tax breaks and grants. But the most important reason for staying, Allen says, is an incentive that Perkin and Brownhill were able to negotiate with the Louisiana legislature. The law, written just for the firm, says financial institutions and others that buy a small or medium-size business obligation can get recourse that is, get their money back from the state if the debtor goes into default. Allen keeps a framed copy of the law on the wall of his New York office.
Angel investors get a strong tax incentive too. Louisiana's Angel Investor Tax Credit provides a 35 percent tax credit on investments, phased in over five years and limited to a total of $5 million. Even investors who aren't Louisiana residents can take advantage of the incentive by selling their tax credits.
What has eluded New Orleans so far, however, are multimillion-dollar deals. Coffee bars and yoga studios have proliferated in the city alongside more-traditional jazz clubs and Cajun restaurants, but the new hip ambience hasn't fully materialized into a competitive edge at least, not yet. No one knows that better than GNO's Hecht, a native New Yorker and former assistant commissioner for Mayor Michael Bloomberg. Hecht has family roots in Louisiana and went to New Orleans to lead a small-business recovery program after Katrina.
He is targeting a number of industries as ripe for investment capital. Two of those have been a part of the city for a long time: energy and advanced manufacturing. Others are part of the post-Katrina start-up fervor, including digital technology. Environmental technology is starting to grow as an industry, with several companies from the New Orleans area now working on restoring parts of New York and New Jersey from the ravages of Hurricane Sandy. Biotechnology has received a boost from an incubation facility called the BioInnovation Center, along with a $2 billion medical center that is under construction. The entertainment industry is also on Hecht's list. In 2012, New Orleans hosted 61 film projects that received tax credits for shooting there. But Hecht says that although visiting film crews spend money locally, they don't deliver lasting returns. "Brad Pitt is a bit like the grammar book," he says. "He eats, shoots and leaves. Until we have postproduction facilities and other brick-and-mortar businesses here, we're not adding value."
Hecht also has high hopes for Spear Point bringing new jobs to the region. Partners Perkin and Bienvenu expect to acquire companies that are based in expensive locales such as New York and Silicon Valley and bring some of their operations to lower-cost areas like Louisiana. Median salaries in this city are about 8 percent below the national average, according to U.S. Census data, and the cost of living can be as much as 30 percent lower than that of New York.
If by chance Spear Point is successful in buying TheStreet, Perkin says Louisiana would be a very competitive place to relocate some of its operations. He stresses that he and Bienvenu like the company's management team and are well aware that, as a financial media company, TheStreet needs to be based in the financial nerve center of New York. But this part of the Deep South isn't wholly unfamiliar to TheStreet's founder. As it happens, Jim Cramer contends that his signature battle cry "Boo-yah!" first came from a Louisiana investor who called in to his show.