Why would private-equity managers want to get into business with public investors?
Normally, they do not. Private equity is famously known as a clubby world where nimble investors and wealthy institutional clients get even richer together. But a few private-equity managers are giving the public investing world a second thought thanks to something commonly known as the blank-check company.
The basic idea: Professional investors raise big money with an initial public stock offering for a kind of shell company created to find and buy a real operating business to be identified later. Public shareholders count on the skill and connections of the pros to put their money to work profitably. Blank-check companies have dominated the sparse IPO field so far this year.
Several alternative investment firms, including private-equity shops and hedge funds, have pushed new blank-check offerings. One of the latest: A $200 million IPO proposed by the Boston private-equity firm J.W. Childs Associates.
But why do those investment firms want to take an unusually public path to new money? There's more than one answer, and I suspect one is a declining ability to raise money in private equity's more conventional ways.
J.W. Childs has raised three public-equity funds since John Childs and the firm's other founders left an even bigger Boston firm, Thomas H. Lee Partners, in 1995. Getting a fourth fund off the ground turned out to be a problem.
The firm began "premarketing" its fourth fund as far back as 2006, looking to raise $2.5 billion. Dan Primack, editor of the industry website peHub.com, wrote last summer that J.W. Childs decided to postpone the fund because its limited-partner clients were lukewarm to the plan. Performance at two of the firm's previous funds was less than stellar, and key managers began to leave.
"There was a lot of turnover and mediocre performance," says one J.W. Childs limited partner. "The institutional investors didn't see the future."
The plan for a fourth private-equity fund has remained on the shelf ever since, while the investing environment for private-equity firms became difficult and then almost impossible.
J.W. Childs partner Adam Suttin, who is chief executive of the blank-check company called J.W. Childs Acquisition I Corp., took my call yesterday but declined to discuss its planned IPO. He referred me to disclosure paperwork the company filed this month.
That document emphasizes the firm's experience investing in consumer product and retail businesses and tells investors the blank-check company would look for opportunities in those industries. Among current J.W. Childs private-equity investments are Brookstone Inc., Sunny Delight Beverages Co., NutraSweet Co., and a company that owns the Joseph Abboud clothing brand.
Could the new blank-check company end up buying one of those private portfolio companies? It's possible.
The IPO documents filed by J.W. Childs say the company doesn't see that happening, but spell out the procedures to be followed in that instance. They involve third parties guaranteeing a transaction is fair to shareholders of the blank-check company.
The inside nature of private-equity firms running blank-check companies seems like a swamp of potential conflicts of interests. But some securities lawyers and others that follow the blank-check trend think otherwise.
"Not if it's done right," says attorney Joseph Bartlett at Sonnenschein Nath & Rosenthal LLP in New York. "All the negotiations are done with lawyers, advisers, and directors who are outsiders."
Bartlett says many blank-check investors, a group often dominated by hedge funds, see a competitive advantage in some investment companies run by private-equity managers. "If you have an institution with its ear to the ground, that would encourage me as a investor," he says.
That may turn out to be true. But most private-equity managers view public shareholders as their investment clients of last resort. Stories like that tend to come to a bad ending.
Steven Syre is a Globe columnist. He can be reached at firstname.lastname@example.org.