William Barnum likes to say that Brentwood Associates, the middle-market private equity firm he now heads, invests in the best companies nobody has ever heard of, those at the top of the heap in the small niches they occupy. The same description might fit the private equity firm that has been earning double-digit returns while sticking to a single strategy.
Unlike many of the firms that started out nearly 30 years ago, Brentwood raises a fund fairly infrequently, with each investing in only a handful of companies. The firm raises a new fund about every six years, compared to every three or four years for other private equity firms. Rather than expanding into other alternative investment asset classes, Brentwood is focused on private equity investments in consumer brands.
Mr. Barnum, a Missouri native and son of an engineer, applied to Stanford University on a whim. He stayed eight years, leaving with a law degree and an MBA in addition to his bachelor's degree. After working for Morgan Stanley in New York, he moved back to California in 1984 and joined Brentwood, one of three private equity firms in Los Angeles at the time. Like most firms then, Brentwood Associates, which was founded in 1972 by Frederick Warren, Timothy M. Pennington III and B. Kipling Hagopian, invested in both private equity and venture capital, with 80% in venture capital, Mr. Barnum recalled.
Shortly after he joined the firm, Mr. Warren and Mr. Barnum opted to concentrate on private equity and the venture capital group formed a separate firm now called Redpoint Ventures. Messrs. Warren and Barnum eventually decided to hone the firm's investment strategy to its current consumer focus.
(Mr. Warren is mostly retired but still pops in for occasional meetings and calls on some of his contacts for the firm.)
For Mr. Barnum, investment management is a family affair. His wife, Donnalisa Parks Barnum, is a senior vice president and portfolio manager at Capital World Investors in Los Angeles. They sometimes end up meeting in airport stopovers on their way to different parts of the world.
How long has Brentwood focused on investing in the consumer sector? We've been investing in consumer (brands) for 25 or 30 years, since I got here. But we refined the strategy to invest in specific businesses that have high consumer satisfaction and customer loyalty. It's something we learned along the way, to focus on that. We had companies that anecdotally had higher customer satisfaction and consumer loyalty and those had higher growth rates and, equally important, they had lower downsides.
Why? If they have a loyal customer base, (the customers) keep their consumption pattern when they give up other things due to an economic downturn.
How did you end up working in private equity? At Stanford, I was in a joint program of the law school and the business school. Unlike most of my classmates, I did not go into law. I went straight into business. I was at Morgan Stanley for three years in New York. I did not want to be an intermediary; I preferred to be a principal. I wanted to be the one actually owning the companies. So I left New York and moved back to the West Coast. ...
I joined Brentwood in 1984 when it was an institutional investment firm on its fourth fund. It had just raised $160 million, which was considered a sizable fund then. Brentwood's first funds had been part venture capital and part private equity, a common mix in those days. Brentwood's first funds had been part venture capital and part private equity, a common mix in those days. It was really between 1984 and 1989 when private equity and venture capital branched into two distinct asset classes. By the time we raised our next fund in 1989, our limited partners wanted us to raise two distinct funds, one private equity and one venture capital, and they would determine how the assets were allocated.
What attracted you to private equity? I liked the model that we have with our limited partners, which is one that allows a lot of independence and creativity on the part of the general partner. I wanted to be an investor, and one of the most interesting and flexible formats at the time was private equity. This was pre-hedge funds. I liked the ability to make your own investment decisions on things and decide what to buy and how long to hold it.
How has the investment strategy evolved? We have a significant history in branded consumer businesses dating ... to when I first joined the firm. Over the years, we've further refined our criteria for brands. We look for businesses that have specific characteristics, including high consumer satisfaction and perhaps most importantly, significant customer loyalty. Companies that historically had higher customer satisfaction and consumer loyalty had higher growth rates and, equally important, lower downside.
Why focus exclusively on consumer brands? Our best deals had been branded consumer product companies. We looked for those companies that were building enormous good will with their customers through one-to-one marketing and great products. In the old days, companies just used catalogs but e-commerce changed everything.
Why not add other investment silos? We are focused and disciplined. ... We are very ROI (return-on-investment) investors and very much growth investors. ... We are a low risk, higher return investor. ... The way you get high returns without taking a lot of risk is to be a growth equity investor so you don't need the leverage. Growth investors have longer hold periods and so we are not raising funds as often. We end up on a slower fundraising cycle than many of our peers, which suits our style.
When you're returning investors two times their money every two years, investors say, “Gee, you're good. How would you like to do more?” Then investors say, “You've done so well, how about investing in another asset class?”
With our strategy, we return five times their money in five years, which is much slower. But the model has worked for us.
How do you find companies for your portfolio? It's a needle-in-a-haystack strategy. It takes discipline and it takes looking at a lot of businesses until we find ones that fit our expertise. It's very hard to find. We do one or two deals per year.
Zoes Kitchen, for example, was a very small business that had 15 (restaurants) based in Birmingham, Ala. The food is Mediterranean with a Southern twist. We visited the restaurants. We liked the food, liked the environment, liked the feel of it — but that was not enough. We did the (market) research and it got an MPS (motivating potential score, which measures customer satisfaction) in the 90s. (We thought:) “Oh my gosh, that is really high, it must be wrong.” We did it again and it came back again in the 90s. The market research company said they saw that kind of score two other times: at Starbucks and In-N-Out Burger, but no other restaurant concept. Customers love it. It was (a smaller company) than what we like. We have now opened our 62nd store.