If you've ever wondered what happens to the beaten-down companies that major corporations spin off or divest, let me introduce Platinum Equity, the United States' 24th largest private company and the source of a $3.3 billion fortune for Tim Gores, the owner of the Detroit Pistons.
Platinum Equity was founded in 1995 as a private-equity firm specializing in leveraged buyouts of corporate divestitures. Similar to other private-equity firms, the company raises money from private investors through investment funds. Currently, the company manages three private funds, with the most recent raising $3.75 billion in late 2013. However, unlike other private-equity firms that carry the reaper-like reputation of buying out companies and stripping them for parts, Gores' mission has always been to acquire underperforming or underappreciated businesses, manage them back to health, and then eventually sell them off, with hopes of a substantial profit.
As a private company, Platinum Equity doesn't make its books available to the public. However, with more than 170 completed acquisitions, four corporate offices spreading from Los Angeles to London, and revenue of $12 billion in 2014, according to Forbes, Platinum Equity has had a large amount of success. And I'm going to dig into a three of the reasons this company has been successful.
3. Why corporate divestitures?
The theory behind buying up corporate divestitures is that, much like a large tree growing in the forest, major corporations grow so big that a portion of the operations don't get the sunlight and attention they need to prosper. This normally leads to a press release and financial buzzwords like "shedding non-core assets."
For instance, in the midst of the financial crisis in 2009, Alcoa announced that it was going to "focus on businesses where Alcoa brings strong technical and parental advantage," and that did not include the company's struggling wire-harness division -- which was a major supplier of cables for automobiles. Platinum Equity acquired the division in 2009.
Most important, because companies often sell assets and business segments out of necessity, it puts Platinum Equity in a good position to find bargains.
2. How opportunistic are we talking?
The second piece of the puzzle is capturing opportunity, and the following chart shows the number of Platinum Equity's acquisitions by year.
Platinum Equity's portfolio will normally have 20 to 30 companies. So it's constantly buying and selling businesses. However, in certain years the number of acquisitions shoots up. For instance, the tech bubble reached its ceiling in the beginning of 2001, and Platinum Equity feasted on tech companies following the crash. Then, fast-forward to 2009, and the financial crisis hit U.S. manufacturing particularly hard. In the years following the recession, Platinum Equity targeted these beaten-down businesses along with industrials, distribution companies, and the most famous investment: the Detroit Pistons.
The moral of the story is best summed up with a quote from Warren Buffett: "Be fearful when others are greedy, and greedy when others are fearful." Ultimately, betting against the consensus and buying at opportunistic times has been one of the keys to Platinum Equity's success.
1. How does it turn around companies?
Lastly, Platinum Equity refers to its strategy as M&A&O -- mergers, acquisitions, and operations. And while finding and capturing opportunity is important, it's Platinum Equity's operational expertise that makes this company unique.
For example, to turn around operations of the wire-harness business Platinum Equity acquired from Alcoa, the firm rebranded the division as AEES, replaced existing management, and restructured operations -- a vague term that can include buying other companies and merging operations, or shutting down weaker parts of the business to improve the focus on more profitable business lines.
It's hard to see the good in downsizing, but when Platinum Equity acquires a new company its operations are normally in shambles, and it's Gores' and his team's job to stabilize that business and put it in a better position to grow. AEES is a good example: The business was restructured, and then it found a new home with PKC Group in October 2011. It still resides there today.
Lessons to be learned
As a private company, Platinum Equity can't be invested in -- unless you have a pretty massive wallet -- but you can invest like Platinum Equity. That doesn't mean you should go out and invest in bankrupted companies, but going against the tide and buying when the market is down, investing in industries investors are shying away from, or looking for management teams, like Platinum Equity's, that have an eye for opportunity are all a part of what has made Platinum Equity successful. It's certainly something we can all learn from.
Dave Koppenheffer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.