Eliot Spitzer and a few others think that Cerberus Capital Management’s decision to sell Freedom Group is a good sign— that if you pair an enraged public with a tuned-in LP, you can force private equity firms to define their ethical duty beyond the most narrow sense of returning the most dollars possible to investors.  It may be a sign, but not of that.

Firms like Cerberus won’t now begin to divest every company in their portfolio presenting complicated ethical issues.  They know that, as Patrick Radden Keefe says at The New Yorker, “Our collective indignation has a half-life—and it isn’t long.”  Just wait it out.  In any case, why give up access to such a lucrative sector, especially with an easy retort so close at hand: it’s impossible to satisfy every shareholder’s or LP’s peculiar ethical standards.  Vanguard said precisely that just now to justify its decision to maintain investments in Smith & Wesson.

So why didn’t Cerberus respond like Vanguard?  Contrary to what Spitzer says, the real surprise is that Cerberus instead chose to sell Freedom Group, which through its brands sells the most guns and ammo in the US, including the gun used in Newtown.  (The other surprise in all this is that Martin Feinberg, the father of Stephen Feinberg, co-founder of Cerberus, lives barely 6 miles from Sandy Hook elementary.)

Clearly, Cerberus forecast a worse-than-usual threat to business — in the form of suddenly vocal LPs, hearings and bills, new laws and regulations — and if so, the shootings merited a strong, preemptive response.  But Cerberus isn’t Dick’s Sporting Goods, an in-the-headlines player in the gun market.  Dick’s interacts daily with thousands of consumers, all of whom know that it sells guns, Bushmaster included.  Cerberus stands apart, owning gun makers, but without any lasting public cognizance of the fact.

Free from the constant, penetrating glare of the pubic eye, and free from having to interact directly with consumers like Cabela’s, another prominent gun retailer, Cerberus is like any other private equity investor, focusing myopically on the IRR.  The rare times a firm actually considers the ethical or moral questions posed by a disaster made possible in part by its activities, it does so by adroitly framing its role as, ahem, owner, as being a mere caretaker of its LPs’ interests.

Cerberus did this, of course, but using the most blandly formal language I think I’ve ever seen in such a press release: “We believe that this decision allows us to meet our obligations to the investors whose interests we are entrusted to protect without being drawn into the national debate that is more properly pursued by those with the formal charter and public responsibility to do so.”  ”Formal charter” has got to be a first.  And notice the sly way that Cerberus distances itself from Freedom Group?  Suddenly, Cerberus is just working on behalf of investors “whose interests we are entrusted to protect,” not a savy investor who saw dollar signs in a gun maker and who as owner was instrumental in transforming it into a dominant player.

So Cerberus intends to sell Freedom Group.  Okay, but don’t expect a habit to develop.  If you know private equity, you know how little influence LPs choose to exert on GPs in this sense.  All the retired teachers and firefighters, to take just one significant bloc, to whom pension funds must ultimately answer, would have to finally inform themselves of how their money is being used.  Until that happens, pressure on private equity firms will only be sporadic, and last only until the next big story takes over the headlines.

In its statement, Cerberus said;

“…

It is apparent that the Sandy Hook tragedy was a watershed event that has raised the national debate on gun control to an unprecedented level.  The debate essentially focuses on the balance between public safety and the scope of the Constitutional rights under the Second Amendment.  As a Firm, we are investors, not statesmen or policy makers.  Our role is to make investments on behalf of our clients who are comprised of the pension plans of firemen, teachers, policemen and other municipal workers and unions, endowments, and other institutions and individuals. It is not our role to take positions, or attempt to shape or influence the gun control policy debate.  That is the job of our federal and state legislators.

There are, however, actions that we as a firm can take.  Accordingly, we have determined to immediately engage in a formal process to sell our investment in Freedom Group.  We will retain a financial advisor to design and execute a process to sell our interests in Freedom Group, and we will then return that capital to our investors.  We believe that this decision allows us to meet our obligations to the investors whose interests we are entrusted to protect without being drawn into the national debate that is more properly pursued by those with the formal charter and public responsibility to do so.

…”

See the full list of schools below.  You shouldn’t be surprised by this post’s title.  In private equity, after all, hiring alumni from top universities is a simple way to handle two issues that every firm faces:  (1) making investors (prospective or not) confident in its capacity to produce returns; (2) actually producing those returns.  Is it a blunt way to hire the best people?  Perhaps: in-class performance, prior employment, and anything that reveals how an applicant interacts with people and analyzes problems might be more useful and relevant to what they’ll do at the firm.  But on the whole, whether you went to Harvard or UCONN has proven to be a decent proxy for the particular skills that private equity firms seek.

That settled, what do these numbers reveal?  That firms prefer Harvard alumni to an unjustifiable degree.  Unjustifiable because the network effect (where people hire people with similar backgrounds), coupled with Harvard’s being a top university, appears to have made firms over-confident in accomplishing their goal in hiring: securing the best talent.  In other words, if Harvard alumni do, in fact, make better private equity professionals — and research suggests this is doubtful (PDF) — I don’t think they are as superior as the disproportionate preference that they receive in hiring implies.  A similar, but much less pronounced (and therefore more defensible) effect appears to reward alumni at UPenn, Stanford, Columbia, Chicago, and Dartmouth with quicker entry into the club.

As you scan down the long tail of our selective list of schools, a couple things pop out.  Incredibly, unassuming Middlebury College, 2,500 students and all, and Tufts University, 9.500 students, are both better represented in private equity than behemoths like Ohio State, Minnesota, Purdue, Georgia, and Florida, all schools with absurdly extensive networks of alumni, in every field.  When you’re small, it seems, you stick together.

And compare this list with the one that CB Insights recently published of the universities with the alumni obtaining the most venture capital funding.  In private equity, it’s UPENN, Harvard, and everyone else.  In venture capital, it’s Stanford and everyone else, with NYU and UC-Berkeley significantly more appealing to the adventurous VC class than in private equity, relatively speaking.

School		Graduates in Private Equity
	Harvard	1,945
	UPenn	1,041
	Stanford	687
	Columbia	649
	Chicago	478
	Northwestern	477
	Dartmouth	342
	NYU	334
	Michigan	328
	Virginia	323
	Yale	319
	Texas A&M	290
	Princeton	289
	Duke	284
	Cornell	277
	Georgetown	245
	UC-Berkeley	229
	UT-Austin	228
	Illinois	195
	Notre Dame	192
	Boston College	162
	UNC	154
	Vanderbilt	136
	Brown	133
	USC	121
	Boston University	112
	UCLA	110
	Emory	93
	Tufts	84
	BYU	76
	George Washington	67
	Fordham	66
	Wake Forest	62
	Middlebury	61
	Minnesota	61
	Purdue	54
	Florida	51
	Tulane	48
	William & Mary	46
	Rice	45
	Northeastern	45
	West Point	41
	Ohio State	40
	Iowa	35
	Georgia	35
	Washington	34
	Virginia Tech	31
	Pepperdine	30

Note: MIT likely occupies the same rarefied air as the top three, but we’ve decided not to include it in the graph because, in our database of over 18,000 private equity professionals, MIT alumni don’t list MIT in a consistent format, making an accurate number complicated —  i.e., too time-consuming for a mere blog post — to calculate.

You’d be right to guess that New York City is the epicenter of private equity.  But that, it turns out, is like saying that the cradle of golf is the UK, not Scotland, or that Giants territory is California, not San Francisco.  See the map below?

Not a single firm has its central office outside Manhattan, not even in trendy Brooklyn.  And in Manhattan, a single neighborhood — Midtown (mostly Midtown East) — is home to the lion’s share of firms.  That means that nearly all of the 286 firms in New York City — roughly 14% of all the private equity firms in the PrivateEquityFirms.com database — are within a single square mile.  A scattering of firms, Goldman Sachs Merchant, unsurprisingly, and Seaport Capital, are in the Financial District, downtown, and two small ones are even in Greenwich Village.  All alone on the Upper West Side resides DeMarseCo, on W End Avenue and 86th, a small firm focusing on information and media investments.  

Within Midtown, larger firms appear to congregate a bit closer to Central Park, where the prestige and rent increases block by block, whereas smaller firms appear to spread themselves south toward Murray Mill.

This map makes us wonder how disperse hedge funds and venture capital firms are across New York City.  Presumably, the hedge funds would have a greater presence in the Financial District, though with less exclusivity than Midtown has with private equity.  Venture capital firms, however, might be much more dispersed across Manhattan and the boroughs — well, perhaps not the Bronx or Queens or Staten Island, so much, but certainly Brooklyn, where the start-up scene is pretty active.

Each firm is color-coded according to its size.  Zoom in and out for a closer look.

Bottom line – Midtown reigns supreme while Downtown is relatively empty.

Most popular street – Park Avenue

Most concentrated area – Between 49th and 57th and Lexington and 5th.

Biggest surprise – No firms outside of Manhattan.

Key: Mega, Large, Middle-market, Small

Culling Forbes’ annual list of America’s largest privately owned companies, it’s about time we revisited the largest of which are private equity-backed. End of the year and all that. Anyway, the list isn’t all that surprising, and it’s remarkably similar to what it would’ve been in 2011.

Pilot Flying J traded places with US Foods at the top. BI-LO is new to the top-10, and it owes its spot at number 7 to its 2011 merger with Winn-Dixie, after emerging from bankruptcy protection in 2010. It’s spot in 2011 was way down at 203.  HD Supply is the other newbie, at spot number 10.

Readily apparent from Forbes’ list: these companies may be the largest by revenue, but certainly not the most profitable or valuable.

Of the 10 entries below, KKR leads the way with investments in 3.

One big question we have: why did Forbes include Platinum Equity on the list (at number 22)? What makes it unlike every other closely-held private equity firm?

1. Pilot Flying J (6) – FJ Management, CVC Capital Partners
2. US Foods (11) – Clayton, Dubilier & Rice Inc., KKR
3. Toys “R” Us (18) – Bain Capital, KKR, Vornado Realty Trust
4. Performance Food Group (22) – Wellspring Capital Management, The Blackstone Group
5. First Data (27) – KKR
6. CDW (31) – Madison Dearborn Partners
7. BI-LO (33) – Lone Star Funds
8. Hilton Worldwide (38) – The Blackstone Group
9. Momentive Performance Materials Holdings (42) – Apollo Management LP
10. HD Supply (44) – The Carlyle Group, Bain Capital, Clayton, Dubilier & Rice

Image Courtesy of greeblie.

To help showcase data found in the PrivateEquityFirms.com database, we’re going to begin breaking down info on a state, sector, and country level.

There are a number of ways to slice, dice, and filter info in the db and no better way to demonstrate that than doing some simple searches surrounding a central theme.

First up is the state of Minnesota (important to give your home state attention whenever possible). While Minnesota is slightly off the grid when it comes to private equity (and most things), it’s still a surprisingly strong place of economic activity. It’s home to 19 Fortune 500 companies and if Best Buy gets taken private, Minnesota can boast one of the larger buyouts in recent years.

Here’s a rundown based on what we have in the database.

Some Minnesota Private Equity Stats

Image courtesy of Doug Wallick

Yes, we’ve gone through a re-design. However that’s only part of the story as we’ve also gone ahead and rebuilt the entire backend of the site as well. It’s been a significant project, but we felt a re-build was the best way to take our increasingly popular platform to the next level.

Don’t fret too much if you’ve grown comfortable using the previous version. The data and much of the previous site’s functionality has been carried over to the new platform. We feel we’ve been able to keep the simplicity while making subtle but significant improvements that you’ll quickly notice.

What’s new?

Speed

Nothing more annoying than a site that contains info you want but makes you wait for it.  We’ve done our best to ensure that speed isn’t an issue you’ll think about.

More Ways to Search

New Ways to Search Firms

• City – Looking for firms in a specific metro?  Just enter a city and get a targeted list.
• Portfolio Count – Limit your set of results to firms based on portfolio count totals.
• Has Co-Invested – Isolate firms that have co-invested on at least one transaction.
• Level of Investment Activity – Now you can search the most active firms (those that have bought or sold) over the past 18 months.

New Ways to Search Portfolio Companies

• City – Quickly isolate portfolio companies within a metro.
• w/ Multiple Investors – Find companies that have been held by more than one investor in the database.
• w/ Multiple Transactions – Locate companies that have been bought or sold more than once.

New Ways to Search Professionals

• Seniority – Isolate professionals based on general importance within a firm.  We have tagged every professional with a rank (Senior, Midlevel, or Junior).  Now you can filter professionals based on this element.
• City – Enter a city and lookup all professionals based within a given metro.

More Ways to Sort

It’s a small detail, but being able to sort your search results is one of the more important factors that make up an efficient search experience. We’ve added more options for sorting – not just after general searches, but also within firm profiles.

View Connections Between Firms

This is probably the one change we’re most excited about.

If a firm has bought from, sold to, or invested with another firm in the database, we now list these connections (and the portfolio companies involved) as part of each firm profile.

Nearly half of the firms in the database have a connection with another firm in the database.

What’s the same?

Price.

We’re still an unbeatable $39 per month. While we can’t promise this price forever, offering extreme value is something that we’ll do our best to always provide.

If you haven’t already checked out the PrivateEquityFirms.com db, we certainly hope you’ll consider trying it. We offer a 30 day trial.  Click here for more info on that or here if you’d like a tour.

SEOMoz, the Saas startup focused on helping businesses get the most out of their online web presences announced last week that it had raised an $18 million Series B from existing investor Ignition Partners, as well as new investor, Foundry Group.

Funding announcements aren’t terribly interesting as most most press releases don’t provide any insight into the underlying health or traction of the business. You might see user numbers, but rarely active users or revenue figures.

For example, Path, the mobile social network also just raised a Series B, a whopping $40 million. However, there wasn’t even an official announcement on the story – just confirmation. No word on how user count is growing. Path is maintaining a low profile.

That’s what makes SEOMoz’s story so unique and interesting. While we’re still guessing Path’s number of active users, here’s what we know about SEOMoz – directly from SEOMoz.

Financials

Revenue – $11,467,510 for 2011 (projected $18 to $20 million this year)

Net Income – $121k (clear focus on growth)

Pre-money valuation – $75 million (negotiated up from $70 million)

Cash balance prior to funding – $2,172,232.78 (to the penny!)

Marketing

85% of new customer via inbound marketing

Paid Users/New Trial Users

14,619/4,075 (as of March 2012)

Conversion Rate

56% (Trial to Paid User)

Traffic

6.9 million visits in 2012 through April 21.

You can even read emails between SEOMoz CEO Rand Fishkin and Foundry VC Brad Feld and the official pitchbook. And the list goes on – use of proceeds, personnel moves, etc.

If you know SEOMoz, the fact that they are so open about their business is nothing new. Transparency is one of their core values and something they take seriously. Despite the positive news with the recent raise, SEOMoz had a rather frustrating experience going through the same process in 2011. You can read all about that failed exercise on Rand’s personal blog.

The interesting thing is that even with SEOMoz’s continued growth and success, business transparency is most certainly not catching on. Wireframe software provider Balsamiq might be another notable example, but these companies are rare. Afterall, disclosing internal performance metrics as a means to success, is something they don’t teach in business school. Who knows, perhaps they should.

A few weeks ago, we achieved a small milestone here at PrivateEquityFirms.com – crossing the ‘magical’ (at least for us) 2,000 firm barrier.  2,000 certainly doesn’t make us ‘complete’, however it’s important to note that we’re constantly adding new firms and aren’t looking to let up anytime soon.

As for coverage, an often asked question is what’s our global breakdown? or do we even have international firms?  The answer is ‘Yes’.  The PE industry is certainly US-heavy and our database reflects this.  Of the 2,044 currently listed, 1,366 are US-based (67%).  However this percentage has been steadily falling.

If you notice any missing entries, don’t hesitate to let us know.

SecondMarket and SharesPost serve to facilitate the purchase and sale of illiquid assets and are the largest such exchanges in the rapidly emerging secondary marketplace field (other exchanges include DebtMarket, a specialist in loans and Liquidnet, a recent entrant into the trading of private company shares).  While both SecondMarket and SharesPost deal with the private sale of illiquid assets, there are important differences between the two marketplaces.

Time in Operation/Assets Covered

When private equity firms hunt for acquisitions, they look for business characteristics that minimize risk as they build value and position for a potential exit.  All investment firms break down the key traits that interest them the most.  The challenge of course is finding what they want at a reasonable multiple.   So what business characteristics do private equity firms covet the most?

10. Simple

Private equity firms like to invest in businesses that are easy to understand. They need to be able to make a decision about whether or not their investment is going to be profitable, and overcomplication (whether high regulation, advanced technology, etc.) means that they have to spend more of their time and money on due diligence before they can come to a conclusion. All other things being equal, simpler is better.

9. Significant Barriers to Entry

A business that can be easily set up by anyone is a difficult business to be in, as there is nothing to stop other entrepreneurs or investors replicating the successful plan and taking away market share. Barriers to entry, be they capital, technology, staff or even networks make a business more desirable for investors.

8. Low Capital Expenditures

A requirement to constantly reinvest profits in the acquisition of new equipment and similar capital expenditures is a big turn-off for investors.

7. Market Leadership

There are few businesses that do not have any competitors at all, so private equity firms look for the market leaders. Pioneers in a field will be first on the ground with new and improved products and services, meaning that they reap the benefits of offering these developments to customers at an early stage.

6. Strong Management In Place

When purchasing or investing in a business, private equity firms prefer situations where there is already competent business management in place willing to stay. Good management in place can more easily deal with any changes that are instituted by the investors as well as steering staff and processes through the acquisition. Layering in performance based incentives then creates a situation where everyones’ interests are aligned.

5. Growth Potential

The intent of an investment or purchase of a company is always to increase profits over time. It is a better strategy to spend money on a company that has room for growth than one which has reached its peak. After all, this can result in a small initial investment growing to much larger profits and so a better cost-benefit ratio for the investor than spending more money on an equivalent stake in a stagnant company.

4. Established/Diversified Customers

An established customer base provides a means for the company to make money, and loyal customers allow a greater degree of confidence in the future of the business. The more diverse the customer base the better the opportunities for growth and introduction of new products and services.

3. High Margins

Private equity firms like businesses where there is ample room to streamline operations and increase profits.  Businesses with high margin products offer the most flexibility in terms of finding ways to cut costs and boost the bottom-line and ultimate return on their investment.

2. Unique Products/Services

When private equity firms are deciding on which businesses to invest in, those which are providing something unique will always be highly attractive. A unique selling point generally means limited competition and opens up the possibility of cornering the market and making the business a leader in their field.

1. Recurring Revenue

Private equity firms hate surprises and a business with a locked-in, repeat customer base allows for steadier profits and a greater ability to grow revenues. Businesses with recurring revenue generally command high multiples and are easy to sell.

Missing something?