David Moross expects people to run, hike, canoe and climb their way to retirement, and his buyout firm, Falconhead Capital, hopes to get big returns from their active lifestyles.
As founder, chairman and chief executive officer of New York-based buyout firm Falconhead Capital LLC, originally called Sports Capital Partners LLC, he has broadened its sports focus through its continuing relationship with sports-marketing firm International Management Group, and now targets leisure-activity businesses that play to baby boomers' active lifestyles. Falconhead's ownership has also evolved over its seven-year history. Originally, Mr. Moross and IMG's founder, the late Mark McCormack, jointly owned the firm. JPMorgan Chase & Co., New York, was the firm's first large investor. In 2001, the $197.5 billion California Public Employees' Retirement System, Sacramento, bought an interest in the firm's revenue and became the largest investor in Falconhead's $215 million first fund, now 85% invested. Last December, Mr. Moross bought out IMG's and CalPERS' interests and is now sole owner. Citing Securities and Exchange Commission regulations, Mr. Moross shied from speaking about whether the firm is preparing to raise a new fund, but he spoke about everything else: the firm's direction and advantages of finding a niche.
What is your current relationship with IMG? Prior to this deal (in December), there were certain economics that IMG received in the general partnership which have now been replaced by incentives for sourcing deals, for helping us with pre- and post-acquisition diligence. But the carry economics (the general partner's share of the profits) which we depend on, are now 100% within the general partnership.
Why did you make these changes? We had matured to a point where we looked at ourselves and said, "You know, most of the deals we are now doing have little IMG involvement. Those where IMG is involved are clearly important. But when one looks at the whole portfolio and weighs IMG's relative contribution against that of our own internal, high-grade and high-cost deal people, and the infrastructure we've built to support them, the economics of our relationship with IMG clearly need to change."
Have you changed your focus? We are now focused principally on leisure-, lifestyle- and recreation-related businesses. Our investment focus has broadened over the years because the investment opportunities have broadened. We are essentially operators with deal skills, seeking businesses in the midst of positive megatrends, businesses we can acquire and build. The megatrend itself takes out an awful lot of the risk for us. And then, of course, so does finding assets that fit the profile we're looking for within the sports, leisure, lifestyle and recreational arena.
So you are still in sports? Yes, depending on how you define it, absolutely.
How do you define it? Most people define it as team ownership. We don't. What we're interested in is anything to do with sporting activity, from the perspective of either personal participation or viewership. As I've often said, it's really not the teams that make an awful lot of money for a private equity fund, but the companies that support and supply the teams — which are often pretty interesting little entrepreneurially run businesses. But we see sports as a very important component part of leisure. And for as long as people play sports, get fit, look for new ways to exercise, have an insatiable appetite for watching competitive sports, on television or live, there will be great opportunities to invest.
How much of the fund needs to be invested before you can begin raising a new fund? 80%.
Does CalPERS own a stake in the firm? They not only don't, but never did. What they did have was an interest in our carry, in the economics of the business, but that is no longer the case.
Were they a main investor in your first fund? Yes, they were a large investor in our fund — in fact, the largest investor when they came into it in 2001.
Do you expect CalPERS will continue to be a main investor? I expect them to be a continuing investor in anything we do.
Can you elaborate on the firm's current investment focus? Consumer spending is about two-thirds of GDP. We've carved our little niche to be around $700 billion of that, in the U.S. alone. Within that $700 billion, we have six verticals: outdoor; sports equipment and apparel; recreational vehicles; leisure media; cruise and travel; and health spa and fitness.…
But, most importantly, what we have found is that because there's a huge megatrend that is being fueled heavily by certain demographic groups — namely the baby boomers — you have 78 million people who are buying products and services in each of those verticals at a rate we've never seen before.
For example, among those 78 million baby boomers are many people looking for new ways to exercise. For them, it's no longer just about golf and tennis. For example, in outdoor, it's about hiking, mountain biking, mountain climbing, rock climbing, ice climbing. So when we see trends like that, we look to buy equipment companies serving that group, meeting those needs. Similarly, we think about canoeing companies, tenting companies, hiking apparel and equipment companies.
Is it important to have an investment niche these days? I think it's very important. Today there's an awful lot of money going into private equity again, as you well know, and there have been some interesting paradigm shifts. For instance, the megafunds are getting bigger and are basically so oversubscribed that it's very hard for a lot of investors to get into them.
At the same time, there are now so many midsize, midmarket, midcap funds that it's very hard to differentiate between who's good and who's bad. What I'm finding is that people are interested in Falconhead because we're a focused fund, a differentiated fund, that has a really compelling story in a niche that everybody understands, that everybody gets, because they are part of it in their daily life.
What percentage of your deals have a co-investment part to it? Four of them, about 60%, have co-investors.
Are these co-investors mainly institutional investors that wanted to invest more with you? Yes. And because we're a smaller fund, in addition to putting up fund capital, we also often rely on being able to bring in co-investment capital.
Do you expect to continue that strategy in the future? We definitely expect that to continue.… we believe that the quantum returns from investing in these businesses don't involve going out and spending half a billion dollars to buy a company, but rather on acquiring smaller businesses, sometimes with co-investors, sometimes not.
Do you expect that whatever funds you happen to raise in the future will be similar size or larger? I'm sure there are a lot of people who would want to invest with us given our track record and we might want to increase the size from where we were. But we don't have to go to a billion-dollar fund.
Are you interested in buying a sports team? I don't think the risk-reward ratio aligns itself very appropriately for a private equity firm. We've studied 72 sports teams. We've looked at just about all of them that have become available and we've learned a lot from that. It seems that the same issues rear themselves every time in every scenario, involving player salaries, wage inflationary issues. Sports team ownership is really designed for wealthy individuals. For the right person or people, they may be a great source of enjoyment. But for an investment firm, for a professional investment manager or fund, to buy into sports franchises is in my view highly risky, and it's highly unlikely that Falconhead will invest in sports teams.