Before Ares Management LLC moved to the major leagues of private-equity with the $6 billion takeover of luxury retail chain Neiman Marcus Inc., it counted the $1.65 billion buyout of GNC Holdings Inc. among its biggest deals.
The firm, whose founders worked at Apollo Global Management LLC (APO) and Drexel Burnham Lambert Inc. before starting out on their own 16 years ago, had bought GNC from Apollo in 2007 after Leon Black’s firm twice abandoned plans to take the operator of wellness stores public. Los Angeles-based Ares, which invested in GNC alongside the Ontario Teachers’ Pension Plan Board, succeeded in 2011 and made more than four times its investment. GNC’s stock more than tripled.
Now, Ares co-founders Tony Ressler and John Kissick are betting they can unlock value again from a company that its previous owners considered ripe for sale, and once more they’re teaming up with a Candian partner, the Canada Pension Plan Investment Board. TPG Capital and Warburg Pincus LLC, which are disposing of Neiman Marcus amid a challenging market for luxury goods, made more than 2.5 times their money in the eight years they owned the company.
Ressler “tends to see trends where others don’t,” Rich Lawson, chief executive officer of HGGC LLC, a Palo Alto, California-based buyout firm, said in a telephone interview. “He takes a view of things from a credit standpoint, always managing downside risk.”
The Neiman Marcus deal is the largest for the firm since starting a private-equity group in 2003 and the fourth-biggest leveraged buyout announced this year, according to data compiled by Bloomberg.
Ares and the pension fund will hold an equal economic interest in Neiman, and the chain’s management will retain a minority stake. The deal probably ends prospects for a Neiman initial public offering.
Ares executives declined to comment on the deal beyond the statement yesterday announcing the buyout, said Bill Mendel, a spokesman for the firm at Mendel Communications LLC.
Begun as a capital markets outfit that issued and managed debt for corporations, Ares has since expanded into private equity and private debt. The property team invests in assets worth $15 million to $100 million, according to Ares’s website, and its debt group consists of a team focusing on U.S. private debt and one focusing on Europe. The firm overall manages $66 billion in committed capital, with 700 employees in the U.S., Europe and Asia.
Its current private-equity investments include 99 Cents Only Stores, Simmons Bedding Co. and Smart & Final Stores LLC, according to the firm’s website. In 2007, Ares, along with Bain Capital LLC, sold luggage maker Samsonite Corp. to CVC Capital Partners Ltd. in a $1.7 billion deal. That investment also was done with the Ontario Teachers’ Pension Plan Board.
The firm’s private-equity group manages $9 billion of committed capital, raised through four buyout funds and an Asia-dedicated fund. Ares, which closed its fourth pool last year at $4.7 billion, exceeding its $4 billion target, has two funds in the top 25 percent of buyout pools, according to a report this year from Preqin Ltd., the London-based research firm. The report didn’t identify the two funds.
The third fund, which held its close in 2008, had a 24 percent net internal rate of return as of March 31, according to data from the California Public Employees’ Retirement System, which committed $400 million to the pool. The previous fund and Ares’s first fund both had 14 percent net IRRs, according to the Calpers data.
“Tony is one of the best in the business,” said Lawson, who has known Ressler since he started Ares. “He’s done a lot in the retail sector, like Samsonite.”
Ressler and Kissick led the capital markets business at New York-based Apollo and in 1997 formed Ares with a team of partners. Before Apollo, the duo were bond traders at Drexel Burnham Lambert, the pioneering junk bond firm. Ressler is a co-owner of Major League Baseball’s Milwaukee Brewers and brother-in-law of Black, who founded Apollo in 1990 after working at Drexel Burnham.
The Neiman Marcus buyout is expected to close by the end of the year, Ares said. The company was founded in Dallas by Herbert Marcus, his sister and her husband, A.L. Neiman, in 1907. Marcus bought out the Neimans in 1928 and his son Stanley ran the stores from 1952 to 1979. Stanley’s son Richard then became chief executive until 1988, when he resigned, ending 81 years of family management of the chain.
While Neiman has recovered some of its luster in the past year, sales remain below their 2008 peak. Many Americans are wary amid a weak economy and, rather than spending on apparel, are upgrading their cars and buying home-related merchandise as the U.S. housing recovery gathers momentum.
Luxury spending in the Americas grew 5 percent on a constant-currency basis in 2012, less than half the 13 percent gain of the previous year, according to Bain & Co. estimates.
CEO Karen Katz, who will remain at Neiman’s helm, has been working to spur sales growth by introducing the chain’s Cusp contemporary fashion concept into its namesake stores to attract younger customers, opening an e-commerce site in China, and rolling out more Last Call outlets. The chain is known for its Christmas catalog, which offers such gifts as limited-edition McLaren cars for $354,000.
“We plan on investing meaningful capital into the business to ensure Neiman’s long-term position as the unparalleled leader in luxury retail,” David Kaplan, co-head of Ares’s private-equity group, said in the statement. “We believe we have achieved superior growth with many consumer-facing businesses.”
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