A Test of Blackstreet's Strategy
Monday, October 6, 2008
Executives of Blackstreet Capital Management, a Bethesda private-equity firm, are constantly tossing around pithy investment philosophies. One saying is, "If we can't fix it in 12 to 24 months, we probably can't fix it."
Another is, "Management, management, management." And then there is this one: "If we don't lose money for investors, all the other outcomes are good."
That last investing notion has faced quite a test recently, as the relatively small, fly-under-the-radar firm found itself entangled in a public relations nightmare after two infant deaths in August were linked to bassinets sold by Simplicity, which was bought by a Blackstreet affiliate in a complicated deal earlier this year.
Blackstreet's predicament has turned the spotlight on its founder, Murry Gunty, and his business of buying extremely troubled companies near collapse. Blackstreet is a buyer of last resort. If nobody else wants it, call Murry, those in the industry like to say. While more prominent firms like Carlyle Group try to turn around noteworthy companies like Dunkin' Donuts, Blackstreet mostly operates on the periphery of corporate America, targeting small firms that make bassinets, popcorn tins and pumpkin-carving kits.
"People call us to help us solve their problems," Gunty said in his first public comments following the government's recall of the bassinets. "But if we can't explain in one sentence or less what they do, we won't buy it. These companies are not considered to be hot. But they have a lot of value and a lot of heritage."
Gunty declined to speak in detail about the bassinet issue, saying only: "With respect to Simplicity, I'm the father of three young kids, and I cannot imagine the loss these families have suffered. It's very tough, and we want to do the right thing here." Blackstreet's lawyers have argued that it bought only Simplicity's assets, not its liabilities, even though government officials are seeking "all legal remedies" against the company. Asked several times what the "right thing" was, Gunty would say only, "It's a very tough situation, and we want to do the right thing."
Gunty was far more expansive in speaking about his company's history and philosophy, and he authorized several members of Blackstreet's board of advisers, as well as investors in the firm, to answer questions.
Blackstreet was founded five years ago as Milestone Capital Partners in a joint venture with Milestone Merchant Partners in the District. The merchant bank had relationships with Robert Pincus, the vice chairman of Eagle Bank, and Thomas Hale Boggs Jr., the Washington superlawyer and lobbyist. Both Pincus and Boggs became key members of Gunty's board of advisers, providing a sort of seal of approval for wealthy investors.
A graduate of Harvard College and Harvard Business School, Gunty was relatively new to the District business scene when he founded what became Blackstreet. He had been a general partner of Jacobson Partners, which focused on buying companies that had up to $150 million in revenue. He also worked in real estate investment for Lazard Freres, a New York investment bank.
Local investors such as Ray Rice, who owns a Virginia executive recruiting company called Capital Search Group, didn't know Gunty. That made him uneasy about writing a check. But he did know and respect Pincus. "We didn't know anyone there except that Bob Pincus was a part of it," Rice said. "You never know who you are getting involved with. If you don't know the people, it's hard to get over that threshold." The Pincus connection pushed Rice over.
For his initial fund, which is winding down now, Gunty raised about $88 million, putting Blackstreet on the smaller side of private-equity funds.
That keeps Gunty's focus limited to companies with $25 million to $150 million in annual revenue. He has purchased 13 companies and sold five, and Blackstreet executives report that their average return is 5.5 times on invested capital.