Rebuilding the Parthenon

Parthenon Capital was having a near-death experience. It was August 2005, and fundraising had come to a standstill. Existing limited partners were so down on Parthenon’s Boston office (which included the firm’s two co-founders), that many of them had offered to fund Parthenon’s San Francisco team as an independent spinout. Prospective limited partners were even more unresponsive – some scared off by the Atkins Nutritionals debacle, and others believing that the San Francisco team would walk. The flatline was deafening.

Two years later, Parthenon is alive and kicking hard. It’s more a story of rebirth than survival, with some LPs referring to the current effort as “New Parthenon.” It’s also a story that should be told in this space, given past in-depth discussions of Atkins.
 
The Beginning
Parthenon Capital was founded in March 1998 by Ernest Jacquet, previously a partner with Summit Partners, and John Rutherford, a former Bain & Co. consultant who had gone on to found a strategic advisory called The Parthenon Group. Rutherford’s private equity firm and consultancy were independent of one another, but still shared an informal symbiosis – much like Bain Capital originally did with Bain & Company. Parthenon Capital also shared some carry with Parthenon Group, in exchange for deal-flow and access to research.

The investment strategy was industry-agnostic, with a focus on recaps of mid-market companies. Parthenon’s entire team was based in Boston, and closed its oversubscribed debut fund in 1999 with $350 million. LPs include General Motors, General Mills, the State of Oregon, Duke University and the University of Chicago.

Parthenon stuck to its knitting for a while, but eventually began to stray. Buyouts Magazine even noted some style drift in a February 2001 article about how the firm had held a $500 million first close on what would become its $750 million second fund. Buyouts reported on the atypical nature of a deal in which Parthenon had teamed with Berkshire Hathaway and Cort Furniture to launch Relocation Central, an information database company that would cater to corporations that needed to relocate personnel. There also were a series of particularly small transactions, which probably wasn’t surprising given that Jacquet’s average deal size at Summit was just $10 million. Nothing too problematic yet, but something worth keeping an eye on.

Later that year, Parthenon hired former GTCR partner Will Kessinger to help launch a San Francisco office. Kessinger had an existing relationship with John Rutherford, and liked the idea of reapplying GTCR’s rollup strategy – except that Parthenon would help managers grow existing businesses, rather than forming new companies around managers plucked from outside organizations. Among his first San Francisco hires would be a local tech executive named Brian Golson.
 
The Middle

In October 2003, Parthenon seemed to have stepped into the batter’s box for its first grand slam. It led a $533 million leveraged buyout of low-carb company Atkins Nutritionals, with Goldman Sachs participating as a minority co-investor. The deal was so hot that Summit Partners accused Parthenon of violating a deal-sharing agreement that had been negotiated as part of Ernest Jacquet’s departure. Parthenon quietly paid Summit $20 million to go away, and everything seemed to be chugging along.

Just as Parthenon began raising its $1 billion-targeted third fund the following fall, Atkins was began raising eyebrows. For example, the New York Times piece used the company as its test case for a piece titled: “Is the low-carb boom over?” Parthenon assured investors that the situation could be worked out, and received its $1 billion in soft circles. But Parthenon was very, very wrong. It was forced to mark down Atkins’ value by 50% at the end of December, installed a new CEO in February and wrote off the entire investment by the end of March 2005. In the meantime, LPs had recalled their Fund III commitments.

Not only was Atkins a failure, but it had been exacerbated by the fact that Parthenon had invested around 25% of its Fund II capital into the deal. No violation of the LPA, but certainly violations of common sense and original investment strategy.

Atkins had been sourced and transacted by the Boston team, as had some other black holes like Pharmedica Communications and Wolverine Proctor & Schwartz. Parthenon’s strongest returns, on the other hand, were coming out of San Francisco. LPs had noticed the discrepancy, and some had vocally lost faith in Jacquet and Rutherford (although many still had close personal ties to the two men).

Parthenon took a gamble at restructuring the partnership, at around the same time it legally extricated itself from Atkins. Will Kessinger became chief investment officer, with the investment committee being broadened to include Brian Golson in San Francisco and Dave Ament in Boston. Most of the remaining Boston team was replaced, save for co-founders Jacquet and Rutherford (who filled out the investment committee). Parthenon also refocused its investment strategy on majority recaps, around a trio of industry verticals: healthcare services, financial/insurance services and business services.

All of this brings us back to the lead. LPs appreciated the remodeling effort, but weren’t sold. Wasn’t the succession plan still a work in progress so long as Jacquet and Rutherford were still around? Didn’t it make more sense for San Francisco to spin out on its own? And what assurances did anyone have that something like Atkins wouldn’t happen again?

(Not) The End
Kessinger just kept pointing at the numbers. Even after having to write off around a quarter of Fund II due to Atkins, Parthenon was still projecting a 17% net IRR and at least a 2x net return multiple. And the data looked even better if the San Francisco-led deals were looked at in isolation – and those were the guys now in charge. For example, Golson sat on the board of Rackable Systems, which went public and today is projected to net Parthenon a 12x return.

As for the two co-founders, Parthenon argued strenuously that the management shift would allow them to spend more time on where they provided the most value. Rutherford had never really been a deal guy, but instead was a consummate consultant whose operational knowledge had led him to sit on more Parthenon portfolio boards than any other partner. Jacquet would have more flexibility to do the smaller deals he specialized in at Summit, albeit as add-ons to existing Parthenon portfolio companies.

Kessinger and company also emphasized the value of their reconstituted Boston deal team, including Dave Ament.

Many existing LPs finally began to bite earlier this year, and the firm announced a $700 million final close in June. It’s not the $1 billion targeted back in 2004, but is still plenty of runway for Parthenon to reestablish itself as a responsible fiduciary.

Most firms on the brink either give up or stubbornly cling to thorny structures. Parthenon, on the other hand, willed itself to adapt. It knows how close it came to extinction, and has evolved into an 11-year-old newborn. The firm will certainly face future pitfalls, but at least has given itself a chance at jumping over them.