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Savvy shoppers

TSG Consumer Partners' twenty years as a private equity firm speaks to the cumulative value of maintaining an industry focus for the long term.

Many thoughts enter the mind of a shopper trying to decide, say, which brand of cookie to purchase. But most people likely don't ponder whether or not to buy the whole company. The investment professionals at San Francisco-based TSG Consumer Partners do.

TSG professionals are constantly on alert when in the vicinity of consumer goods, using their keen sense of observation to pinpoint potential worthy investments. ?When we're out shopping, we're also working,? says Jamie O'Hara, a managing director at TSG, of time spent away from work. ?We walk the appropriate stores,? he says, referring to the grocery and specialty stores that carry the types of products his firm targets for its investments.

TSG has had a distinct focus since its inception in 1987: consumer brands. ?Branded consumer products are in our blood,? says O'Hara, who joined the firm in 1998 from the consultant firm Bain & Company.

A look at its portfolio companies from past and present reveals a list of names from the food, personal care or household industry that will surely be familiar to all. Among those companies are Glacéau, maker of ?vitaminwater,? ?smartwater? and ?fruitwater,? cosmetics company Smashbox, nail care product manufacturer Cutex, medicated dandruff manufacturer Denorex, kitchen and bathroom surface cleaner Comet, sore throat pain reliever Chloraseptic, chocolate chip cookie maker Famous Amos, potato and vegetable chip producer Terra Chips, and macadamia nut processor Mauna Loa Macadamias.

Consumer products investing has been a winning strategy for TSG, allowing it to grow markedly. The firm closed TSG2 on $67 million in 1994 and TSG3 on $510 million in 1998. It closed TSG4 on $500 million in 2002. Last month, TSG5 closed on $875 million (€658 million). With the growth of each subsequent fund, the firm has targeted larger opportunities without leaving its sweet spot. ?They're still middle-market companies, but just ones with larger sales and earnings,? O'Hara says.

Earlier in the firm's history, it made investments in companies with approximately $15 million to $30 million in revenues per year, but now it targets those with between $30 million and $300 million in revenues, O'Hara says. And with TSG5, the firm plans to continue making its mark within the consumer brand space.

Chairman J. Gary Shansby and chief executive officer Charles Esserman founded the firm in 1987. Shansby left his position as chief executive officer of Chaklee Corporation, a Fortune 500 direct marketer of products in the nutrition, personal care and household sectors to found the firm while Esserman came from Bain & Company, where he was a management consultant.

TSG has approximately 30 limited partners, including the New York State Teachers and State of Colorado Public Employees. ?We are very relationship oriented,? O'Hara says about the firm's commitment to keep the investors abreast of the firm's performance and plans. In communicating with the limited partners, TSG not only issues quarterly financial reports but also makes an effort to meet personally with each of them once every year. According to O'Hara, the five managing partners often kill two birds with one stone by combining LP visits with other business travel.

New name, same game
Originally known as The Shansby Group, the firm changed its name in May of 2005. ?The name change will more clearly identify our firm's mission, which is to be great partners with great consumer companies,? Shansby and Esserman said in a statement issued at the time of the change. ?It will also serve to highlight the strength and expertise of the team we developed.?

There are several factors making the consumer brand sector an attractive one for private equity investing, O'Hara says. First, such brands tend not be susceptible to volatile economic cycles and to changes in technology. In addition, O'Hara says, ?Once we can help accelerate growth, we have a universe of strategic buyers.? Criteria for investment selection include a product's competitive advantages over others within its category, he says.

For example, O'Hara notes that vitaminwater differs from teas and fruit juices, sports drinks, carbonated soft drinks and regular bottled water because it has lower sugar, is non-carbonated and has a ?functional level? of vitamins and minerals.

Another attribute TSG looks for is strong gross margins, which can put a brand in a position in which the firm can successfully invest in advertising and promotions for it. ?Real consumer acceptance,? O'Hara says, is the final key, meaning that ?consumers recognize the attributes of a brand and are satisfied with the performance of a brand against their wants and needs.?

TSG has had some notable recent exits. The firm bought Mauna Loa Macadamias from C. Brewer and Co., a Hawaii-based scientific molding company, for an undisclosed amount in 2000. While it owned Mauna Loa, TSG launched a line of Pure Gold Macadamia Nut Oil, a cooking oil, among other initiatives. The firm sold the company four years later to Hershey Foods, the Hershey, Pennsylvania-based chocolate and non-chocolate confectionary producer, for $112.4 million. The high quality of Mauna Loa was what appealed to Hershey, said Richard Lenny, the chairman, president and chief executive officer of Hershey Foods in a statement regarding Hershey's acquisition of the company.

Another notable exit involved the sale of Medtech Holdings to GTCR Golder Rauner, a private equity investment firm based in Chicago, Illinois, for an undisclosed amount in 2004. Medtech, which GTCR still owns, is an Irvington, New York-based company that markets and distributes health and beauty care products like the wart remover Compound W Freeze Off, the medicated dandruff shampoo Denorex, the nail polish remover Cutex and the liquid bandage New-Skin. TSG had launched Medtech in 1996 after it acquired 11 over-the-counter topical ointments and internal analgesic brands from American Home Products. Subsequent acquisitions of similar product lines also became a part of Medtech.

TSG appointed Peter Mann, a veteran of the pharmaceuticals industry, to be Medtech's chairman and chief executive officer in 2001. GTCR combined Medtech with Prestige Brands and took the company public. It currently trades on the New York Stock Exchange under the ticker symbol ?PBH?, and Mann remains Prestige's chairman and chief executive officer.

TSG credits such successes as Mauna Loa and Medtech to their investment professionals' previous experience as management consultants. That consulting acumen enables the firm to quickly identify not only attractive assets, but those most viable for the value TSG can bring to their operation.

O'Hara says TSG was the first firm to invest in the natural and organic foods space with its investments in Arrowhead Mills, a maker of organic and gluten-free baking mixes, grains, cereals and nut butters, and in vegetable and gourmet potato chip maker Terra Chips. It was also the first to invest in the ?functional food and beverage categories,? with its investments in meal replacement manufacturer MET-Rx, natural vegetable oil blender Smart Balance, as well as Glacéau. TSG also adds to its list of accomplishments being the first to invest in ethnic foods via its acquisition of salsa, taco sauce and Mexican cooking sauce producer La Victoria, and the refrigerated entrées sector with the investment in Harry's Fresh Foods, a maker of allnatural soups, chilis, gravies, entrées and desserts. Finally, TSG was the first to invest in orphan brands in the personal care and household sectors when it acquired wart remover Compound W and cleaning product maker Spic and Span as part of the Medtech investment.

Earlier this year, the firm sold its 30 percent stake in electrolyte-enhanced vitaminwater maker Glacéau to Mumbai, India-based Tata Group for $677 million. In that transaction, TSG made 14 times the original investment it made in Glaceau, then known as Energy Brands, in April of 2003. Though the firm declined to comment on the original transaction, a source close to the deal told sister publication Private Equity Online that TSG's original investment was less than $50 million.

TSG Consumer Partners

Founded: 1987 Types of investments:
Capital under management: $1.5 billion Internal growth and acquisitions, full or partial liquidity for
Offices: San Francisco (headquarters) and New York entrepreneurs, family members or passive investors, man-Total employees: 20 agement buyouts, corporate divestitures of subsidiaries, di- visions and product lines.
Key operations personnel:
Charles Esserman, CEO and managing partner Sectors:
James O'Hara, Managing partner Beverage, beauty and personal care, household and car
Alex Panos, Managing partner care, over-the-counter pharmaceutical, ethnic food, func-Yasser Toor, Managing partner tional food, natural and organic food, snack food.
Hadley Mullin, Managing partner Selected investors:
Funds: Approximately 30 investors, including the State of Michigan,
TSG2 ($67 million; 1994) New York State Teachers and State of Colorado Public Em-TSG3 ($155 million; 1998) ployees
TSG4 ($510 million; 2002)
TSG5 ($875 million; 2006) Strategic relationships:
Ropes & Gray, Jones Day, PricewaterhouseCoopers, Ernst &
Young