Opinion

Felix Salmon

Annals of private equity, Tamara Mellon edition

By Felix Salmon
February 13, 2012

When Tony Hsieh sold Zappos to Amazon, there were lots of glowing stories about his monster success. Only later did it emerge that he never wanted to sell at all, but felt forced to do so by his VC backers.

It now seems that a similar narrative is likely to emerge from Jimmy Choo president Tamara Mellon. The woman who famously said that “at the end of the day, the person who has the money has the control” is now changing her tune somewhat:

In the New Year – I will give interviews and talk about the MONSTER Private Equity has become and the VULTURES that operate in it.
Dec 15 11 via Twitter for BlackBerry® Favorite Retweet Reply

Remember – Its entrepreneurs that create jobs, not Private Equity or Investment bankers.
Jan 17 via Twitter for BlackBerry® Favorite Retweet Reply

It’s always love and kisses when a private-equity company takes control of your firm: they promise investment, and growth, and riches beyond your wildest dreams. All of which came true for Mellon (who acquired her surname by marrying a man with 14 trust funds, but that’s another story). But then the clock strikes midnight, and your eager backers are forced — they have LPs to answer to, after all — to sell your company out from under you.

Mellon’s blaming the GPs here, and I don’t blame her — they’re the people who make all the promises and the decisions. But she’s a financial sophisticate who knows full well how private equity works: it always needs an exit. And when it exits, it will always sell to the highest bidder, rather than to some potential buyer who might be more likely to preserve value over the long term.

It’s going to be fascinating to hear what Mellon has to say about the way that private-equity professionals behave. Most of the time, the beef with such firms is that they do well by themselves and by senior management, but can fatally damage the company while doing so, and don’t care at all about rank-and-file employees. Mellon is rare in that she’s a member of senior management and she’s upset.

But once you have Mellon’s money, a few extra millions tend not to have the mollifying effect that they might have on a less affluent founder. Mellon made a fortune when she (or her backers) sold Jimmy Choo — but she had a fortune already, at that point. What she really valued, it seems, was her company, and her career. And it’s easy to see how her backers might have stripped her of both those things, in their big and profitable exit.

Comments
6 comments so far | RSS Comments RSS

Cheeky.

If Ms Mellon was so concerned for the long-term direction of her company, perhaps she should have asked hubby to provide capital, or found passive minority investors, instead of taking a *control* investment by private equity.

For the avoidance of doubt, ladies and gentlemen, know this: when you sell voting control of your company to private equity in exchange for their money, you *have sold control*. They make the decisions, and they can outvote you–and even fire you–if you disagree. That’s why they’re willing to give you so much cash up front. It is no longer “your” company. You sold it. Deal with it.

Posted by EpicureanDeal | Report as abusive
 

Um, Ms Mellon’s gripe looks much more like sour grapes than legitimate complaint. Let’s not forget that Jimmy Choo ceased to be “hers” when she sold a majority interest back in 2001.

Looks like she’s pissed b/c she thought she won the power when she forced out the founder. Now, with the sale, she is realizing that she never had it in the first place.

You play with the big boys sometimes things don’t work out the way you planned.

Posted by wmaustin5 | Report as abusive
 
 

Tamara is totally correct. Private equity is a cartel that has a stranglehold on the flow of capital to entrepreneurs. Banks don’t make loans to companies any more — they either do debt deals or lend money to Private Equity — and the PE guys don’t do minority investments, period. That’s the only option she had. The IRR for PE over the last decade is ~7%, roughly the going rate on the PIK coupon/vig on their Convertible Preferred, so PE has the cushion of wiping out all the founders’ junior equity in the process. They do not create value; they extract it. Just like oil, gas and locusts.

Posted by boson | Report as abusive
 

Private equity does have a function in the economy. Whether their fees are justified and their indefensible tax break are other questions, however.

Still, you know what private equity is going to do. She clearly didn’t need to exit for wealth reasons and she wanted to retain control. Why sell to PE, then? She, or her advisors, should have known better.

Posted by LiamAuer | Report as abusive
 

She thought she was clever and connected. So did most of the people with Madoff.

Posted by ARJTurgot2 | Report as abusive
 

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