On a chilly afternoon in February 2005, Stephen Murray entered the Park Avenue headquarters of JPMorgan Chase & Co. and rode the elevator that would take him to the 48th floor and the office of the banks then president, Jamie Dimon. The famously candid Dimon had joined the bank the previous summer, after the institution he ran, Bank One Corp., merged with JPMorgan, and Murray, head of buyout and growth equity investments at J.P. Morgan Partners, the banks private equity group, wanted to get his new bosss take on business.
For months, Murray, Dimon, JPMorgan CIO Ina Drew, the firms famous deal maker James (Jimmy) Lee Jr. and J.P. Morgan Partners longtime CEO, Jeffrey Walker, had been hammering out the details of a deal that would spin out the private equity group after more than two decades within the walls of the bank and its predecessor firms. Murray, then 42, was getting the chance to become a partner in the new enterprise.
It was the opportunity of a lifetime, but Murray, who had struck deals with CEOs twice his age when he was in his 20s, had some concerns. He worried about the surging leveraged-buyout market, which he felt was being fueled by low interest rates and easy access to credit. Although few others in the business appeared to give a second thought to the then-record $300 billion worth of buyout transactions that had taken place in 2004 or to the growing size of private equity funds that were being raised as investors rushed to get a piece of what seemed to be easy profits, Murray saw the numbers as alarming.
A fast-talking workaholic who spurns the spotlight as often as his rivals seek it out, Murray had spent the previous year evangelizing to his staff and other investors that private equitys future would soon lie in operational turnarounds generating profits from revamped companies rather than financial wizardry. It was an approach JPMorgans group had long followed, but Murray felt he was missing critical expertise at the top to add to the tight-knit group of deal makers on whom he relied. Murray planned to hire hands-on operators ideally former CEOs as full partners in the firm. The executives would be paired with a financial partner to help identify investments and turn around businesses in what he confidently believed would be a brave new world, even as competitors were going in the opposite direction.
In their meeting that February afternoon, Dimon thought Murrays strategy of doubling down on operations was a good one. But he sounded a note of caution about the enthusiastic executives ability to get it done. There are few corporate CEOs who are both great operators and great investors, Dimon remembers telling Murray. First, youre looking at the top echelon of CEOs, says Dimon, who became chief executive of JPMorgan in January 2006. But then you need someone who thinks like an investor. Youre shooting at a very small target.
Dimon was right, but he underestimated Murrays patience, discipline and willingness to go against the herd.
In 2006 the bank spun off the buyout and growth equity team of its private equity group into a new firm called CCMP Capital Advisors. But it wasnt until August 2008, after Walker retired, that Murray finally brought in the first of three new operations partners: Greg Brenneman, a sought-after leader who had turned around everything from Continental Airlines to restaurant chains Burger King Corp. and Quiznos. Murray also made the now 49-year-old Brenneman chairman of CCMP.
When asked what differentiates Murray from other private equity kingpins, Dimon fires back that Brennemans hiring illustrates Murrays discipline and leadership abilities. Murray was able to set aside his own ego the same characteristic that kept him out of the fray at the height of the market to bring on board an extremely charismatic leader as a working chairman who would act almost as a co-CEO. Look, he was able to attract someone like Greg Brenneman to come join him, Dimon says. Then he made him chairman. Thats a hard thing for a CEO to do.
After Brenneman joined CCMP, it took Murray a year before he enlisted another CEO, Richard Zannino, former chief executive of Dow Jones & Co. Zannino, now 52, had transformed Dow Jones into a diversified media company through $2.5 billion in acquisitions and restructurings, capturing the attention of Rupert Murdochs News Corp., which bought it in December 2007. In September 2009, Murray recruited energy industry veteran Karl Kurz. Although Kurz was not a former CEO, he had played a key role in the global expansion of Anadarko Petroleum Corp. as that companys chief operating officer.
Murray, who sat on all but $1 billion of the $3.4 billion that CCMP raised in 2006, waiting out the boom, has positioned his team to take advantage of the changing face of private equity. In this world, success will depend on the ability of firms to dig into the business strategies of their portfolio companies and generate gains based on old-fashioned turnarounds rather than financial engineering the process of layering debt on companies and relying on cheap money to free up cash for shareholders.
To survive by just doing financial engineering is not possible, says Joshua Lerner, a Harvard Business School professor who has written a 25-page case study on Yale University CIO David Swensen and that schools so-called endowment model, which includes large allocations to private equity and other alternative investments. The market has gotten more competitive. As a result, old strategies like financial engineering have become a commodity.
CCMP has the benefit of a superior long-term track record; a fund raised by J.P. Morgan Partners in 2002, now part of the new firm, had delivered a 32 percent annualized internal rate of return as of December 31, 2010. The firm also showed unusual discipline during a period when even the most experienced deal makers overpaid for mediocre properties and lost the trust of many big and influential investors.
CCMPs deal makers have a history of investing in troubled or underexploited small and midsize companies. CCMP, whose initials hark back to its onetime owners Chemical Bank, Chase Bank and Manufacturers Hanover Corp. as well as its former incarnation as J.P. Morgan Partners, takes equity stakes of $100 million to $500 million in businesses that have scared away other buyers or in companies in need of capital and new ideas to grow. It focuses on enterprises with $500 million to $3 billion in enterprise value, where it can have the most direct influence on strategy, targeting, among others, corporate spin-outs and companies owned by their founders, with all their quirks.
The companies in which CCMP invests are hardly household names Crosstown Traders, a direct marketer of womens clothing based in Tucson, Arizona, or Tennis Channel in Santa Monica, California. CCMPs partners roll up their sleeves and reorganize, restructure and restrategize to generate big profits from their holdings. Before going independent, CCMP, which oversees $7.4 billion in private equity assets, invested around the globe, including in Asia and Latin America, in mezzanine debt, real estate, venture capital and other areas. It has since narrowed its scope to buyout and growth equity in North America and Europe, where it had the best track record, focusing on only a handful of sectors: consumer/retail and media, energy, health care and industrial. Murray recently hired Robert McGuire, 46, former vice chairman of JPMorgan Cazenove, in London to expand the firms European operation.
CCMP has the right recipe, says André Bourbonnais, who oversees private equity investments for the Canada Pension Plan Investment Board, one of CCMPs biggest investors, with a $368 million investment. Theyre not trying to be everything to everyone. They really focus on four or five core sectors, and they have people with operational expertise in each. If you can deliver operational results, youll really be able to distinguish yourself.
CCMPs own operation is a meritocracy by design. Brenneman and Murray lead a 12-person investment committee that must approve every deal, but most of the firms 69 other employees, including 15 analysts, get involved in the investment process at some stage.
Now, after a period of abstinence, Murray and his team are leveraging their two decades of experience turning around companies. Last year, CCMP did three deals: It bought controlling stakes in Francescas Collections, a family-owned retailer that wanted liquidity, and Infogroup, a troubled information company with significant upside; and it became the single largest shareholder in Chaparral Energy, an independent oil and gas company with too much debt and underexploited assets. These investments came on top of four in its first fund, CCMP Capital Investors II: a $128 million investment in Plano, Texasbased LHP Hospital Group; a $160 million acquisition of Edwards Limited, a U.K. technology company that makes industrial vacuums; a $212 million stake in Aramark Corp., a Philadelphia-based food service and facilities management provider; and a $433 million investment in Generac Power Systems, a Waukesha, Wisconsin, company that manufactures generators.
CCMPs focus on operations isnt unique. Eric Dobkin, the founder of equity capital markets at Goldman, Sachs & Co. who led the underwriting of such titans as Microsoft Corp., says every private equity firm these days will boast that it has the capability to manage these businesses, but few have a track record that can support that claim. There are lots of financiers, but not as many owner-managers, says Dobkin, who retired as a general partner in 1999 but still serves as an advisory director to Goldman Sachs Group and a member of the firms commitments and capital committees. Dobkin, like Dimon, says Murray is different from other leaders in that he is very open to new ideas and will implement advice. It was Dobkin who recently advised CCMP to hire someone in London to gain critical mass overseas.
Murrays firm has done what everybody is now trying to do: a back-to-the-future approach to private equity in a postbubble environment for deal making. With many investors skeptical of private equity since liquidity dried up in 2008 that fall, managers kept calling capital in the face of their own funding problems as the value of portfolio companies cratered private equity firms realize that operations experience is essential.
Its patience and discipline, Murray says. The industry expertise that everybody preaches, weve been doing for 25 years.
Jonathan Lynch, 43, a partner whose easy smile balances the CCMP CEOs rougher edges and who has worked with Murray since the early 1990s, adds that the firms discipline prevents financial catastrophes and offers downside protection for shareholders. The difference between us and competitors is that well wait for a better entry point price for a company, he explains. Were not going to jump at a deal just because its actionable. We know the cycles.
Most of the members of CCMPs leadership team began honing their operations skills and instincts for deal making in the 1980s, as the modern private equity industry was taking shape. In 1983, seven years before Barbarians at the Gate would immortalize Kohlberg Kravis Roberts & Co.s then-record $25 billion leveraged buyout of RJR Nabisco, a young Jeffrey Walker, a few years out of Harvard Business School, made a proposal to Chemical Banks board to set up a venture capital operation. (The term private equity wasnt yet in use.) The board made a $200 million commitment to the group, which would be called Chemical Venture Partners, the first private equity partnership within a bank.
A year later, Manufacturers Hanover hired recent Boston College graduate Murray into its credit training program. He became a vice president in the middle-market lending division in 1989, and although rival banks tried to recruit him, he showed early signs of the patience that would later define his career.
I thought it was too easy to jump from job to job, says Murray, who went on to get his MBA from Columbia University while working at the bank. I recognized I was around smart people who could teach me a lot.
In 1989, Murray, who grew up about 30 miles north of Manhattan in North Tarrytown, New York, joined newly reorganized MH Equity Corp., which combined Manufacturers Hanovers private equity group with its leveraged finance unit. MH Equity began doing midmarket leveraged buyouts of traditional manufacturing and retail companies part of the focus CCMP has today as well as some co-investments with bank clients. Murray, who can accurately recall the details of deals he worked on 20 years ago, was successful, making four times the groups money on Minneapolis supermarket chain Byerlys and seven times its money on an investment in Deltak, a Plymouth, Minnesotabased engineering and manufacturing company. Colleagues say he expects the same cold command of details from staffers.
In 1991, Chemical Bank bought Manny Hanny, as its rival was popularly known. The merger united MH Equitys four investment professionals with a half dozen partners from Chemical Venture Partners, including Lynch, who today heads up investor relations for CCMP and is a deal partner and a member of its investment committee. Walker, who took over the combined group and would be Murrays boss for the next decade and a half, created an entrepreneurial environment where everybody did their own deals and got their hands dirty fixing what wasnt working in their companies an experience crucial to CCMPs current success.
Walker was known as a brilliant investor who didnt think there was anything his group couldnt do, pushing into mezzanine debt, real estate and global investing. In 1996, Chemical Bank merged with Chase Manhattan Corp. and Chemical Venture Partners was renamed Chase Capital Partners. Walker remained at the helm. Chase Capital had a reputation as a venture firm, largely because that was Walkers passion, even though 35 percent of its deals were LBOs. Murray oversaw the best and biggest buyouts and was the groups star deal maker.
In 2000, JPMorgan and Chase merged, bringing the group its first significant outside money. Two years later the group, which had changed its name to J.P. Morgan Partners, raised an institutional fund that CCMP still manages today. The Global Investors Fund was made up mostly of money from the bank, but it also had limited partners such as Canada Pension Plan and the State of Michigan, as well as JPMorgans wealthy private clients.
Outside JPMorgan, private equity was changing fast. Funding was now coming primarily from huge institutions such as pension plans rather than from high-net-worth investors. The nature of the investors would ultimately affect the size of the funds raised and the types of companies that private equity firms pursued. Blackstone Group, KKR, Texas Pacific Group and others were launching megafunds that would invest in larger companies in a broad range of industries anywhere in the world.
In July 2004, JPMorgan bought Bank One, setting the stage for Dimon to run the merged bank and for J.P. Morgan Partners ultimately to be spun off. Dimon wanted to reduce the banks exposure to private equity. He also believed that there could be conflicts in managing the banks money alongside client money.
I wanted to make sure that we didnt get in a position where JPMorgans needs as a bank prevented us from doing something for a client somewhere, Dimon says.
In the mid- to late 2000s, private equity firms relied on balance-sheet maneuvers to eke out value from the companies they were buying. That meant better management of working capital taking out cash, for example, by reducing inventories and layering debt on a company to pay dividends to shareholders. The recipe was simple: Take a company private, clean up its balance sheet, and quickly take it public again. Private equity firms even started selling companies to one another, with the new buyer hoping there would still be value to be squeezed out.
At J.P. Morgan Partners 2005 annual investor meeting, Murray raised concerns about ever-higher deal prices, growing leverage and narrowing credit spreads. Murray doesnt sugarcoat tough news, says Simon Guenzl, partner at $7.3 billion Paul Capital, a pioneer in the business of buying existing private equity interests from institutional investors. Hell give you a straight answer, and he focuses on doing the best thing by his investors rather than on his ego.
To help formulate CCMPs strategy following the spin-off, Murray asked Lynch to analyze the performance of all the groups deals. Lynch, a Chicago native with an MBA from Harvard, found that the group had been most successful in growth equity and buyouts in North America and Europe. Murray, who believed that investors would increasingly allocate money to specialized private equity firms, pushed CCMP to cut back on its less successful specialties. The firm shed its Asia, Latin America, mezzanine finance and real estate teams, among other areas.
As his role within CCMP grew, Murray was the natural successor to Walker, who retired in January 2008 to a full calendar of philanthropic ventures. (He had been intimately involved in the nonprofit world during his long career.) Murray in fact had been playing a major management role well before Walkers retirement. It was his idea to elevate longtime members of the team like Lynch, Christopher Behrens and Timothy Walsh all now part of the investment committee to lead their industry sectors.
Murray also squashed what he calls CCMPs pumpkin-shaped organizational structure. The problem, he says, is that CCMP had too many midlevel managers who didnt have enough experience to truly make a difference but had too much experience to check their egos at the door. Murray who Walsh humorously says has a managed ego is careful to point out that he has picked people whose egos wont get in the way of working closely with companies well outside the financial hubs of Chicago and New York.
I dont believe that the world wants another 31- to 36-year-old with a high opinion of himself and a New York investment worldview, Murray adds. That doesnt play in Albuquerque.
Murray replaced the pumpkin with an hourglass in which very senior operating-level people are supported by scores of junior analysts. Indeed, the firm now has only three titles: associate, principal and partner. Murray kept the Monday morning meetings Walker had instituted, a forum for ideas and for younger members of the firm to interact with the investment committee. At the meetings everybody is included and no one is too junior to offer up an investment thesis. However, he hates when people make general statements, Walker notes. He says, Prove it.
Analysts and partners first identify industry trends, including disruptions in industries, and valuation anomalies among companies. They then discuss specific investments and offer actionable ideas to target them. The operating team uses its extended networks and other contacts to execute those ideas. In the health care sector, for example, current themes include home health care, which should benefit as the U.S. government looks to reduce rising costs in a country with a rapidly aging population and generic pharmaceuticals.
For Murray, one of the keys to CCMPs ultimate success was attracting experienced operators, starting with Brenneman. Murray saw his skills firsthand when CCMP invested in Quiznos for J.P. Morgan Partners Global Investors Fund in 2006. After Brenneman talked to his longtime friend Dimon about investing in Quiznos, Murray persuaded Brenneman to become CEO of the sandwich chain that year; the new chief executive spent the next 18 months recalibrating its strategy. That was enough time to convince Murray he wanted Brenneman permanently on his team.
Murray tapped Brenneman in September 2008 as working chairman and a member of the investment committee, which must unanimously approve all investments. Brenneman, a deeply religious man who grew up Mennonite in Kansas and who with his wife mentors young couples in their church, says that although other private equity firms recognize that CCMPs model is successful, they are unlikely to copy it because of the partnership dilution.
Theyre short-term greedy, says Brenneman, who works out of an office in Houston and has an 11-year-old Wheaten terrier named Texas. He quips, Were long-term greedy.
Brenneman is upbeat and always has a funny story to tell, whether its about negotiations with union pilots when he was president of Continental from 1994 to 2001 or about negotiating with his son Andrew when it came to financing his college education. He also inspires loyalty.
John De Meritt, CEO of Francescas, is an old friend of Brennemans from their days at Continental. By December 2009, De Meritt was unsatisfied with the promises and strategy ideas he was hearing from private equity firms eager to do deals again and from bigger retailers wanting to take a stake in the rapidly growing retail chain. Instead, he made a phone call to Brenneman to arrange a meeting. His old buddy, though, was hopping a plane from Houston to Seattle. I cant wait until he comes back, De Meritt told Brennemans assistant. Let me fly with him.
Brenneman agreed. During the flight, De Meritt told him that he knew CCMP wasnt going to come in with the highest bid but that Francescas wanted the firms operational expertise and financial discipline. CCMP has a long history with idiosyncratic family- and founder-owned companies, of which Francescas was one. It also has a strong track record with retailers, including Cabelas, 1-800-Flowers and Vitamin Shoppe.
We figured out the max youre going to be willing to pay, De Meritt recalls telling Brenneman. And its not the max we could get. But we want to get Francescas into the right hands with people we trust and close it quickly.
In February 2010, CCMP won Francescas without a formal auction process, paying $209 million in an all-equity financed transaction for an 81.5 percent stake in the retailer; this was 8 times estimated earnings before interest, taxes, depreciation and amortization, according to bankers. A Korean family founded Francescas as a discount alternative to the upscale and popular Anthropologie and similar boutiques. What made it attractive to investors was its formula of creating a treasure hunt for consumers in odd read inexpensive real estate. Almost all of its 208 stores open for at least one year are profitable.
Brenneman characterizes the process of working with Francescas as collaborative. In this case, the family didnt need equity to fuel growth the business generated plenty of cash for that but it did want liquidity. CCMP tapped its network to help De Meritt build his team, hiring a chief financial officer, chief information officer and chief marketing officer, and put in place a strategic plan to grow the company. It also helped Francescas take advantage of the weak real estate market and add 50 stores last year. The retailer is on pace to open 300 new stores by the middle of this decade. In 2010, Francescas outperformed its plan, with sales up 71 percent and ebitda up 72 percent from the previous year. In November, Francescas completed a recapitalization and funded a $100 million dividend to shareholders, and its readying the company to go public next year, according to bankers.
Former Dow Jones CEO Zannino joined CCMP as a managing director, member of the investment committee and co-head of the consumer/retail and media team with Kevin OBrien. Its not surprising that Zannino, a quietly confident but warm and fresh-faced executive, was interested in Infogroup, a company well known in database marketing and one of a handful of dominant businesses collecting crucial information on consumers in the Internet age. When Zannino was at Dow Jones, he came face-to-face with the power of database and direct marketing and the precipitous decline in traditional advertising models. After transforming that company from a business that derived 70 percent of its revenue from newspapers into an online juggernaut, Zannino saw the potential of Infogroup. He also knew Infogroups banker, Evercore Partners, from his days at Dow Jones.
Infogroup founder-owned and a unique business with few competitors and a lot of upside potential because its stock price was so beaten down was a perfect fit for CCMP. That was, of course, if Infogroup survived shareholder litigation and an ongoing investigation by the Securities and Exchange Commission into potential securities fraud by former executives.
Zannino and OBrien, who has been with CCMP and its predecessor companies since 2000, studied Infogroup to identify any possible surprises. They quickly determined that the $500 million-in-revenue, Omaha-based company with $90 million in ebitda was essentially a loose confederation of 25 separate $20 million businesses that had been acquired over the years.
They had 25 different businesses with 25 different sets of competitors and customer bases, and a management team we wouldnt be able to rely on, says Zannino. It scared quite a few buyers away. There were just too many moving parts, and they didnt have the stamina.
CCMP had its work cut out for it. Infogroups founder had never done compensation or long-term strategic planning. There were huge disparities in what executives were earning, despite their track records. Zannino, OBrien and their team determined that the separate businesses could be consolidated into four or five groups that would have leverage with customers and could cross-sell products. CCMP also concluded that the SEC investigation and shareholder lawsuits wouldnt create residual liability. In the end, only a handful of firms came in with final bids. The take-private transaction closed in July 2010 with a $338 million investment by CCMP at $8 a share.
On day one, CCMP installed a new management team, including Clare Hart as CEO. Hart, a colleague of Zanninos at Dow Jones, had been president of Dow Jones Enterprise Media Group, a $700 million entity made up of Factiva and Dow Jones indexes, newswires and licensing and financial information services units. CCMP also hired a new CFO, new heads of human resources and the research group, and a general counsel. It created a new board with many outsiders, including Michael Iaccarino, former CEO of Epsilon Data Management, an Infogroup competitor. Hart is now putting in place new incentive plans and has evaluated the rest of the management team.
Zannino says the idea is to transform Infogroup into an end-to-end marketer of data, from campaign development to strategic and financial planning. We want to become an indispensable partner, not just a clearinghouse of data, he adds.
For CCMPs energy team, the firms April 2010 investment in Chaparral, an independent, Oklahoma Citybased oil and gas production and exploration company, was all about rolling up their sleeves and getting dirty. Kurz, 49, who had lived through the Texas oil crisis of the 1980s, and others at CCMP had heard that Chaparral co-founder Mark Fischer was interested in some kind of deal after running into problems when his company was caught in the downdraft of falling commodity prices during the financial crisis. Fischer had built a successful company since 1988 by increasing reserves and production through acquisitions and by enhancing properties in Oklahoma, North Texas and the Permian Basin of West Texas piling on debt in the process. By the beginning of last year, he needed money to strengthen Chaparrals balance sheet and continue to grow.
Behrens, who focuses on making investments in the energy, distribution and industrial sectors, and Kurz, a petroleum engineer from Texas A&M University with a thick Texas accent, got to work. Behrens handled the financial aspect, leveraging his experience at Chase working out loans for steel, aluminum and basic manufacturing companies in the late 1980s, when those industries were flat on their backs. Kurz, who was responsible for $36 billion worth of oil and gas deals during his nine years at Anadarko, provided technical expertise.
Kurz and Behrens came up with a plan that involved developing core assets, including drilling or participating in 300 wells last year. Kurz wanted to use a technique involving the injection of carbon dioxide to force additional oil out of older, depleted reservoirs. The process would more than double Chaparrals existing reserves. Behrens and Kurz also laid out plans to add a chief operating officer and a new head of the carbon initiative, and to push decision making down to the field level. Mark had a lot of inventory of assets to go after, but he had to add human capital to the organization, Behrens says.
Behrens emphasizes that Fischer started with just $5,000 and a secretary. Hes an entrepreneur, so he made decisions himself, he says. Most of those were the right ones, but you can only do that for so long.
Adds Kurz, Mark had looked at initiatives like these over the years, but hiring people from the outside allows him to take the company to the next level.
Not all of CCMPs investments have been so well timed, of course. The firm invested in Generac, a North American manufacturer of standby power generators for residential and commercial use, in November 2006, not far from the peak of the private equity market. Murray, whose style, personality and approach to deal making have not changed since he began his career, according to peers, liked the sector and that Generac was owned by an entrepreneur, Robert Kern. Murray says CCMP reasoned that the U.S. had not made the necessary investments in energy infrastructure and that power outages would continue to increase, growing the overall market for generators. Kern had managed Generac well but had not made full use of opportunities such as third-party distribution arrangements. We like taking an entrepreneurial environment and making it more professional, says Murray, who led the deal with Walsh.
Generac performed well its first year. But then came the recession, and sales of consumer durables such as generators, which can cost upward of $20,000, were hit hard. Murray and Walsh spent 2008 and part of 2009 deleveraging the company by buying back some of its debt at steep discounts. By the end of 2009, the company had recovered, and CCMP had helped it enter new markets such as portable standby generators. CCMP decided to take Generac public when the IPO window opened up early last year. On February 11, Generac began trading at $13 a share. (After falling last spring, it has since risen to more than $16 a share.) Were very proud, Murray says. A lot of deals of that genre didnt do well.
Private equity is at a turning point. Although some froth has returned to the market credit is more widely available than some would have thought in the depths of 2008 the brash deal making of the last decade will not return any time soon. In this environment, Murray is confident that his firms discipline and operations experience will give CCMP an edge. A little humility helps too. Steve is never defensive, Dimon says. Hes the first to say youre right about something. In the new world of private equity, that kind of attitude is going to be sorely needed.