Levine Leichtman Capital Partners (LLCP) is ranked among the premier private equity firms in Los Angeles. The firm operates additional offices in Dallas, Chicago, and New York. Its private equity investment operations are conducted through three funds — Levine Leichtman Capital Partners III, L.P. (Structured Equity Fund), Levine Leichtman Capital Partners Deep Value, L.P. (Distressed Debt Fund), and Levine Leichtman Capital Partners California Growth Fund (California focused Small Cap Fund) — and after a recent $1.2 billion raise, the firm has over $5 billion in institutional capital. The Levine Leichtman Capital Partners strategy is based on domestic middle market companies that meet strict criterions for investment:
- Strong Management Team
- Clear Market Leadership
- Proven Historical Performance
- Sustainable Capital Structure
- Proficient Operating Systems
- Identified Exit Strategy
The firm recently made noise with its bid for Rubio’s Restaurants at $8 per share; a 33% premium to the stock price.
I had the distinct pleasure of interviewing co-founder and chief executive, Ms. Lauren Leichtman, by phone after a few months of schedule negotiations with her assistant. PE folks are awfully busy, so be ready to work with the Executive Assistant and be willing to wait. Luckily, Ms. Leichtman made time to humor an inquisitive grad student looking to pepper her with questions about the inscrutable world of private equity.
To give you some background, Ms. Leichtman practiced law for ten years, including a three year stint with the SEC, after graduating from Southwestern University School of Law in Los Angeles. She later earned her LLM from Columbia University School of Law. In 1984, she founded Levine Leichtman Capital Partners with husband Arthur Levine and has been at the helm ever since. Her extensive task list includes strategic plan development for the firm, deal origination, investment due diligence, transaction negotiations, as well as leading the Investment Committee. Now, you understand why it took so long to get on her calendar!
Invest with Management
In detailing what separates LLCP from its counterparts, she explains that it is mostly in the firm’s strategy. “Levine Leichtman does not want to buy companies. It invests with management.” Contrary to the general thought on buyout firms, LLCP looks to partner with management teams that want to increase equity value; teams that understand their market, know their customers, vendors, and have a strategic plan. The operation of the company is a shared responsibility — Management runs the P&L; LLCP runs the balance sheet.
In addition to the relationship with management, LLCP is much disciplined in its deal structuring. The firm invests with a senior floating rate debt instrument that yields a current return (typically equal to LIBOR or fed funds rate) plus 20-25% of equity. Deals are leveraged less than 4X Debt to EBITDA (EBITDA is a good measure of a company’s cash flow; Debt/EBITDA is used to assess default probability). To put that in perspective, the 10 biggest private equity firms worldwide borrowed 9.54 times their targets’ EBITDA from 2005 to 2009, according to Bloomberg. Putting less debt on a target’s balance sheet at the onset of the deal, gives LLCP the flexibility to increase to a 5X or 6X Debt/EBITDA level if the need arises. No doubt this strategy has served the firm well in this current downturn, allowing it to continue its superior performance.
Ms. Leichtman shared her thoughts on where the opportunities lie in private equity today. Perhaps you’ve read the reports that the sun is setting on the age of corporate buyouts; that credits markets have contracted and will never return to their previous liberality. Leichtman sees the contraction not as a prophetic sign of finality, but as financial Darwinism. It weeds out deals that are not based on the fundamental principles of PE and exposes the true value of target companies. She believes that there are plenty of good companies that need to refurbish plants or buy new equipment and cannot get access to capital. These companies are trading at low multiples (a phenomenon that has not been seen in a long time) and would benefit from the recapitalization and operational efficiencies resulting from a PE firm’s influence.
Advice for Business Students
Next, I asked Ms. Leichtman for her suggestions on what an ambitious business student should do to secure a position at a PE firm post-graduation. She suggests aiming low-well, at least initially. Try to get a job as an Analyst, perhaps even a Junior Analyst.
The job market is full of qualified, experienced candidates; so you may have to take a step back to take a major step forward. It may also involve moving, as there are many more firms and opportunities on the East Coast than in Los Angeles; so be open to relocating. Generally, it takes 15 years to develop the complete PE investor skill set- identifying opportunities, understanding critical factors, and most of all raising funds. You have to be willing to learn continuously and “not come in with the idea that you know it all”. Business school and the real world are not exactly synonymous, you know.
I then asked Ms. Leichtman to give me a feel for the market’s perspective on students that are not graduating from Ivy League universities; what is their value in the financial sector job market?
“The notion that an Ivy League student is more capable than a Pepperdine student is completely bunk,” she explains. “Students from your school are just as productive because they have something to prove and want to be a part of the team.”
This contention is perhaps the result of Ms. Leichtman’s personal plight as a graduate from Southwestern University. She encountered great difficulty in going for jobs at a big law firms (she counts 50 rejections!) not for lack of skill, commitment, or work ethic; but lack of worthy academic credentials. She brings that experience to her hiring decisions now- she appreciates that candidates from small schools can do big things. I hope this is great encouragement for my peers. Know that your Pepperdine education will serve you well and that you absolutely can compete- even in this tough market.
Finally, because I believe in the importance of getting to know a person’s story, I inquired about Ms. Leichtman’s personal success philosophy- something that has been with her through both her academic and professional careers.
Her answer was simple and yet so powerful.
“I never take no for an answer,” she says. “It’s about how much you want it.” Her final word sums it up beautifully – “Perseverance!”