Gores reassures LPs as it works through challenges

Gores Group last year postponed its annual meeting to October from April, a move described by a person close to the firm as a way to complete pending transactions before getting in front of limited partners.

Several LPs interviewed by Buyouts saw the postponement as a red flag, and as one of several signs the firm is going through a challenging period that will make fundraising a tough slog.

“We’ll be hands off on them for a while; it’s definitely a wait-and-see approach,” said a fund of funds LP about Gores. “They may have gotten too big too fast.”

Gores is premarketing its fourth flagship fund and was meeting LPs at the Institutional Limited Partners Association summit in November, sources said. The firm’s message seemed to be, “bear with us, we’re working though our issues,” two LPs with knowledge of the situation said. The firm’s target for Fund IV is as yet unclear.

The issues Gores is facing include past mediocre performance and executive departures over the past two years, sources said.

Performance across the firm’s funds is not terrible but also not extraordinary, according to a family office LP with knowledge of Gores’ funds. “It’s not a train wreck, but why would you invest with these guys [based on the track record]?” the family office LP said.

However, the situation appears to be improving as Gores has gone on a run of exits, some particularly lucrative, since last year. Whether that translates into fundraising success will play out over the next few months.

Track record

The firm closed its third fund on more than $2 billion in 2011. It took about 18 months to raise the fund, beating its initial target. The firm launched fundraising in 2009 when many LPs were reluctant to commit to private equity at all.

Gores raised $1.3 billion for Fund II in 2007 and $400 million for its debut fund in 2003, according to a press release on the firm’s website. Gores also raised $300 million for a small-cap fund in 2012.

The first fund was generating an 8.4 percent net internal rate of return and 1.3x multiple as of June 30, according to performance data from alternative assets data provider Bison.

According to Oregon Public Employees Retirement Fund, Fund II was generating a 7.4 percent net IRR and Fund III was producing a 7.9 percent IRR and a 1.23x multiple, both as of September.

Gores Small Capitalization Fund has been the best performer for the firm, generating a 10.04 percent IRR and a 1.15x multiple as of June 30, 2015, according to Bison.

Departures

Alec Gores, who was listed as the 327^th richest person by Forbes with a net worth of $2.1 billion, started Gores in 1987. His younger brother Tom Gores, listed by Forbes as the 194^th richest person with a net worth of $3.3 billion, runs distressed investment firm Platinum Equity.

Gores has lost at least 15 people, ranging from high-level executives to lower-level employees, over the past two years. Two of the most significant departures, Timothy Meyer and Jordan Katz, co-led the industrials focus at Gores. They left in 2014 to form Angeles Equity.

Other departed executives include:

• Ray Leclercq, managing director, left in 2014;
• Ryan Wald, a managing director who led the telecommunications, media and technology group, left in 2014;
• Jeff Schwartz, managing director, left in 2013;
• David Fredston, former head of business development, left last year;
• Michael Nold, former managing director and part of the leadership group on the small-cap fund, left in late 2012.

Narrowing focus

Part of what held back performance in Gores’ past funds were investments in apparel retail, according to the person close to the firm. The firm’s push into that sector was led by Jeff Schwartz, a managing director who left in 2013.

“It didn’t perform as they had hoped,” said a person with knowledge of the firm. Investments in apparel included J. Mendel, Big Strike and Mexx.

The firm has eliminated focus on that sector, sticking with tech, telecom, industrial and healthcare, the person said.

Performance-wise, things are looking up for Gores. The firm has exited a string of companies since last year, which will likely affect the performance of its past funds.

The firm sold immunotherapy company Therakos Inc. to Mallinckrodt, a drug maker, in a $1.3 billion deal in September. The sale generated a 10.5x cash-on-cash return for Gores.

Gores also sold software company Unify to Atos SE in January. It’s unclear what kind of return Gores got on that exit.

Action Item: For more information about Gores, reach out to Jennifer Kwon Chou at 310-209-3010.

Photo of Alec Gores courtesy of Gores Group