A Test of Blackstreet's Strategy
Firm Faces a Hard Pitfall of Buying Troubled Companies

By Michael S. Rosenwald
Washington Post Staff Writer
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.

Gunty said he finds his opportunities through a network of brokers, bankers, accountants and bankruptcy lawyers. "What's amazing is that nobody brings him a deal unless they expect to get very little for the deal," Rice said. By most accounts, according to his investors and board members, Gunty is scrappy, intense and a round-the-clock worker.

At times, he is almost too intense, Pincus said: "It's my job to soften him up a bit."

Two years ago, Gunty sparked a dust-up online when he tried to censor a blogger from writing about an embarrassing episode from Gunty's college days: He had resigned from the Harvard Business School's Finance Club after manipulating an election for officers. As punishment, he also wrote an ethics paper. He felt some Internet accounts of the incident were inaccurate.

These days, Blackstreet's investors appreciate Gunty's ability to find companies they haven't heard of, turn them around and make a profit. "He's a very intelligent guy, but I know a lot of intelligent guys," said Ken Malm, the chief executive of local builder Craftmark Homes. Malm also invested in Blackstreet because of its connection to Pincus. "Murry also has common sense. He boils things down to the meat of the matter very quickly. He doesn't waste your time."

Gunty is particularly interested in divisions of larger firms that are moving in different directions and neglecting parts of their business. He also targets companies that have lost their way through poor management. Florida Tile is a case in point, mingling both approaches.

The tile maker, founded by the Sikes family 54 years ago, was purchased in 1990 by Premark International. Nine years later Illinois Tool Works bought the business. A few years after that, Illinois Tool Works fingered Florida Tile as a noncore business and put it up for sale.

Gunty says that while consumers wanted to buy basic large-format floor tile, Florida Tile was trying to sell expensive, trendy products that won lots of design awards but did not have a wide following in flooring showrooms. "Often what we do in fixing companies is get back to basics," Gunty said. "We are not financial engineers. We try to simplify things. What does the customer want and how do we get it to them?"

After purchasing the company, Gunty immediately fired the senior management team and brought in his own people to focus on more mainstream tiles. He also closed production plants that weren't meaningfully contributing to Florida Tile's core products. Two years ago, Gunty sold Florida Tile to Italy's Panariagroup for 14 times the initial investment. Representatives from the new owners could not be reached for comment.

"This is old-line business," Rice said. "A lot of what Murry does is in old-line manufacturing America. He does a better job running them and then hands the opportunity to the next company down the line."

Pincus has been happy with the fund's performance: "We've had singles, doubles and home runs. We haven't struck out, yet." It remains to be seen whether Blackstreet's deal in April to buy the assets of Simplicity will be a winning investment.

On Aug. 27, the Consumer Product Safety Commission warned consumers to stop using certain Simplicity bassinets after a second child died when her head got caught in the bassinet's metal bars. The CPSC said it was forced to issue a warning because Blackstreet affiliate SFCA, which owns Simplicity's assets, would not recall the bassinets. SFCA said it didn't take on legal responsibility for assets purchased from Simplicity, which included the bassinets.

It is not clear whether SFCA can escape liability. In one case, Maryland's highest court ruled that a company that bought the assets of another is not liable for the defunct company's products. In another case, the California Supreme Court ruled the opposite. On Sept. 17, retailers recalled 600,000 Simplicity cribs that were made before SFCA bought Simplicity, and the CPSC said that, this time, SFCA was cooperating by working with retailers on the recall.

Rice, for one, is not overly concerned about Blackstreet's potential liability. While he said it is a "terrible, terrible, terrible tragedy when somebody loses a baby" -- he has grandchildren -- Rice also stressed that he didn't think Blackstreet had any liability. "I don't think I'm exposed to a darn thing," Rice said. "I don't think the fund is exposed." But even if the Simplicity deal does turn bad -- if people stop buying the products altogether -- Rice said, "If Simplicity gets wiped out and the equity gets wiped out, it's just a loss."

Staff writer Annys Shin contributed to this report.

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