Vampire capitalism or unlocking value?
Friday, Sep 12, 2014 - Posted by Rich Miller
* From avowed Bruce Rauner foe Doug Ibendahl…
Cherrydale Farms is a Pennsylvania-based company which survived the Great Depression and two World Wars. But it couldn’t survive Bruce Rauner.
Less than five years after Rauner and his investment group took control of Cherrydale Farms, the century old family business was in bankruptcy.
Cherrydale Farms was founded in 1907 by Esther Cherry who began selling hand-made candies and other items to her neighbors. In the 1930’s the company discovered a new distribution channel for its candies and related products when it began working directly with schools and charity groups and offered its services as a fundraising vehicle. The family’s decision helped the company weather the Depression and the fundraising specialty soon became the core of Cherrydale’s business model.
By 1986 the company had annual sales of $15 million and a new candy making plant was opened in Pennsburg, Pennsylvania. Annual sales would eventually approach $100 million.
Then in 1994 the Cherry family sold a majority stake in their company to Rauner’s private equity firm, then known as Golder, Thoma, Cressey, Rauner, Inc. – now simply GTCR, LLC.
As part of the take-over, Rauner put himself on the Board of Directors of Cherrydale Farms.
Catastrophe followed.
* From the Lehigh Valley Morning Call…
Cherrydale was a successful business, with sales growing from $4 million to $100 million, until 1994. That’s when it sold a majority stake in the business to an investment group made up of Golder, Thoma, Cressey, Rauner Inc. of Chicago and Jackson National Life Insurance Co.
Then in March of this year — just five years later — Cherrydale filed for bankruptcy protection. […]
Cherry, who grew up working in the Cherrydale plant but cut ties to the company in 1997, declined to say specifically what went wrong.
“It’s something that never, ever, should have happened,” said Cherry, who called rescuing Cherrydale the “biggest emotional issue of my life.”
“It was just disastrous,” he said. “There will be no mistake again of that nature; I can guarantee that.”
Despite continuing strong sales, Cherrydale was $50 million to $100 million in debt, according to bankruptcy filings on March 15. “Different people operate companies in different ways,” Cherry said. “This company was very close to liquidation.”
Asked about the previous managers at the company, he said, “They will not be with the company, clearly. There’s no question about it. The old management team is back.”
* I asked a friend of mine who’s in the finance biz for his opinion. Here’s his e-mail…
At first blush, it looks like GTCR acquired the majority stake through a leveraged buyout: a little private equity and a lot of debt structured in such a way that Cherrydale’s cash flow and assets collateralized the debt. Pretty common in private equity. That’s how Zell got the Trib: put up a little money, have the target assume most of the risk (in the Trib’s case, the employees ESOP).
Some LBOs are also straight bustouts. Targets are usually in some trouble. Say GTCR got control of the company putting up a little cash and borrowing more based on the company’s assets: They run up lines of credit, stiff vendors, sell assets, all the while paying themselves sweet salaries and consulting fees and the investors — also themselves — dividends.
When it all falls apart, they file bankruptcy and walk away.
It’s what Mitt called “unlocking value” in a company, lol, and what Newt and Rick Perry called “vampire capitalism.”
Discuss.
- ZC - Friday, Sep 12, 14 @ 10:26 am:
It occurred to me the other day, whether Rauner’s current “investor team” truly see Illinois as a turnaround option, or just as a promising has-been they can strip for its last remaining considerable fiscal resources, before they walk away and hand the key to somebody else.
- archimedes - Friday, Sep 12, 14 @ 10:31 am:
“unlocking value” or tapping underused capital resources can grow a company if the value is plowed back into business growth. It destroys a company if the value is siphoned off.
It’s easy to see how Rauner makes the promises and statements he does. In the short term - he might even believe them. But it isn’t leadership - its selling.
Too bad. For Illinois to thrive and business in Illinois to flourish, we need leadership that is visionary and consistent. When the rules and goals change, business has no confidence to grow and create.
Maybe the hope of R’s and business organizations (such as the Chamber) is that Rauner is just selling right now. Once elected, he’ll stick to the script much better.
- PoolGuy - Friday, Sep 12, 14 @ 10:31 am:
IMHO this story sounds familiar to Paulie taking control of The Bamboo Lounge, runs up the credit, sells stuff out the back at a discount but pure profit, gives away free food and drinks to the high rollers and wiseguys. and when the banks finally come calling, Henry and Tommy light a match, and Paulie walks away clean with the insurance money.
- 47th Ward - Friday, Sep 12, 14 @ 10:31 am:
===When it all falls apart, they file bankruptcy and walk away.===
Sounds like Goodfellas.
“Also, Paulie could do anything. Especially run up bills on the joint’s credit. And why not? Nobody’s gonna pay for it anyway. And as soon as the deliveries are made in the front door, you move the stuff out the back and sell it at a discount. You take a two hundred dollar case of booze and you sell it for a hundred. It doesn’t matter. It’s all profit. And then finally, when there’s nothing left, when you can’t borrow another buck from the bank or buy another case of booze, you bust the joint out. You light a match.”
- Mighty M. Mouse - Friday, Sep 12, 14 @ 10:32 am:
How do you - how does anyone - think Rauner made his money anyway? This is news???
- Anonymous - Friday, Sep 12, 14 @ 10:36 am:
You have to wonder if Rauner’s budget numbers add up for Illinois if he can unlock the value of the state’s retiree benefits…what a nightmare.
- PoolGuy - Friday, Sep 12, 14 @ 10:37 am:
47th Ward - yikes we posted at same time, same thoughts
- Oswego Willy - Friday, Sep 12, 14 @ 10:38 am:
lol , - 47th Ward -,
“It’s a shame!”, while wearing a yellow sweater.
- justthefacts - Friday, Sep 12, 14 @ 10:38 am:
No question, vampire capitalism. “Unlocking value” what a hokey euphemism.
- Tim Snopes - Friday, Sep 12, 14 @ 10:39 am:
Bruce is successful at everything he does. He sets goals and works toward them. In this case, he set a goal of taking a family owned and operated company and milking it dry.
Now he wants to milk Illinois.
- JS Mill - Friday, Sep 12, 14 @ 10:39 am:
@47th Ward- Great catch, same thing occurred to me.
I don’t think this makes GTCR different than any business in that industry. The rise in influence of the financial sector is forcing businesses to move away from traditional operational models and focus solely on short term stock values. Not good for building business, it certainly does not create an incentive for long term capital investment by a business.
- Bogey Golfer - Friday, Sep 12, 14 @ 10:40 am:
Was Cherrydale Farms forced to sell to GTCR? Were they a publicly traded company that need to appease stockholders?
Sounds more like they wanted to get bigger and richer as well.
- anon - Friday, Sep 12, 14 @ 10:40 am:
Its the Scatino bustout from the Sopranos. Rauner is a mobster in Carhartt.
- A guy... - Friday, Sep 12, 14 @ 10:41 am:
This one deserves at least one more opinion. When a company is on life support, already drowning in debt, their chances of success are tough to begin with. I don’t know any of the details of this one, but Ibendahl is always worth rechecking on. Not defending here. Just more info would be helpful.
- VanillaMan - Friday, Sep 12, 14 @ 10:41 am:
I don’t believe what avowed foes say about the people they stalk. They are untrustworthy.
- Jechislo - Friday, Sep 12, 14 @ 10:41 am:
There’ll never be a story like this about Quinn since he’s never done anything in the private sector - he’s just a career politician.
- Truthteller - Friday, Sep 12, 14 @ 10:43 am:
With no direct governmental experience Rauner’s calling card is his business experience. Now we see what that is. The fact that he made a lot of money doesn’t mean he knows how to operate a business, only that he knows how to operate for himself. We shouldn’t be buying what he is selling.
- Concerned - Friday, Sep 12, 14 @ 10:45 am:
When Rauner says he is successful at everything he has ever done, you have to understand how he defines success. Here, as in many other investments, his firm and the fund investors he attracted made money through fees charged to the acquired entity, made money on the laons to the entity, and maybe even made money selling the entity (becuase without all the fees and debt service, the business may well have still been very profitable). So Rauner’s crew made money and the entity suffered (no doubt the employees, too). That, Rauner claims, is a great success (for him and his crew). Next!
- Anonymous - Friday, Sep 12, 14 @ 10:51 am:
there is a dairy in northern illinois that needs it`s value unlocked
- Been There - Friday, Sep 12, 14 @ 10:51 am:
Remember when there use to be some stigma to having a bankruptcy on your record? No way you could even run for dog catcher. Now Bruce has had multiple companies he was involved with go bk and he is the front runner to be our governor. Times change.
- Tim Snopes - Friday, Sep 12, 14 @ 10:54 am:
Patronage vs milking businesses in a way that hurts people.
Hmmmm…
- Nonplussed - Friday, Sep 12, 14 @ 10:59 am:
Further proof Rauner has never built anything, just destroyed and gotten rich off of it.
Whether it is the Caymens, Bermuda, LBO’s like this, or outsourcing America’s jobs overseas, he took advantage of US tax and bankruptcy law to become rich. Good for him. I’m voting for Quinn.
- Langhorne - Friday, Sep 12, 14 @ 10:59 am:
they last for almost nine decades, thru the depression and wars. but rauner gets involved and they are going down the tubes in five years.
so where is the hands on, know everything about whats going on, management by rauner? or will rauner tell us sugar prices went up, and someone made a couple bad decisions, sometimes stuff happens, but he didnt know anything about it?
- wordslinger - Friday, Sep 12, 14 @ 11:15 am:
Saying you don’t trust Ibendahl is a cop-out. Read the article and educate yourself on the world of private equity LBOs .
Ask yourself how a company like that has to take on that much debt and go bankrupt with those sales numbers.
I don’t see anything here that indicates Cherrydale sought out GTCR. Many LBOS are hostile takeovers, where you take over a publicly traded company for the sole purpose of milking it dry. “Unlocking value,’ as they say.
- Ubecha - Friday, Sep 12, 14 @ 11:18 am:
Pool Guy and 47th Ward nailed it, my first thought after reading about Cherrydale (and others by the way) was to GoodFella’s. These practices are in Rauner’s DNA and you can’t run State Gov’t like that.
- walker - Friday, Sep 12, 14 @ 11:21 am:
Archimedes has it. “Unlocking value” is nonsense speak for converting assets into cash or equivalents. Nothing magic there. If this generated “value” is siphoned off by investors, the business suffers; if leveraged for or invested into the business, it can grow.
It is unclear whether Rauner’s business skills were applied more to bleeding or growing businesses. Unlike Romney, whose record was balanced, Rauner and his fellows appear to have been more takers than growers over time. Could be wrong.
It is certain his skills were applied to creating wealth for himself and his private investors. It is also certain he was a master at avoiding accountability and liability when thing went very badly. Does any of that imply he has the skills for governance? Which ones?
- Pelonski - Friday, Sep 12, 14 @ 11:21 am:
Does anyone know of any companies that were rescued by GTCR and are now doing well? People criticized Romney for Bain Capital, but he at least could point to Staples as an example of a company he helped build into something which provided quite a few jobs around the country. I have to imagine that there are some similar GTCR examples, but I’ve yet to hear of one. Is the Rauner crew dropping the ball on this, or are there really no true success stories for the company?
- The Captain - Friday, Sep 12, 14 @ 11:35 am:
As others have pointed out already this is the business model from Goodfellas. Did they burn it down at least?
- Anonymous - Friday, Sep 12, 14 @ 11:36 am:
yea romney and rauner were bain employees
- Oswego Willy - Friday, Sep 12, 14 @ 11:36 am:
===I don’t know any of the details of this one, but Ibendahl is always worth rechecking on. Not defending here. Just more info would be helpful.===
“I don’t know any of the details of this one, but if I can try to make the person reporting this, Ibendahl, look bad, that is tatic always worth relying on. Not defending here. Just more hammer and shaking the info would be helpful to protect Bruce.”
Better
- Willie Stark - Friday, Sep 12, 14 @ 11:53 am:
D’oh! “That’s Marge vs. the Monorail.”
- Chris - Friday, Sep 12, 14 @ 11:58 am:
Also, reports of the “death” of Cherrydale are greatly exaggerated:
https://www.cherrydale.com/index.php
Seems like the losers on that one were mainly the lenders to GTCR-owned Cherrydale–the family got a payout, then bought back control for pennies on the dollar.
- Willie Stark - Friday, Sep 12, 14 @ 12:04 pm:
Great find, Chris! Even though the reporting above and linked indicates that Cherrydale is still a going concern, under new management. I guess that makes the financial arson cool, since the business was rebuilt after the arsonist left. No harm, no foul, right?
- Formerly Known As... - Friday, Sep 12, 14 @ 12:07 pm:
== For Illinois to thrive and business in Illinois to flourish, we need leadership that is visionary and consistent. ==
Unfortunately, that’s not going to happen any time during the next 4 years if Quinn wins either.
Buy stock in Gubernatorial undervotes
- Sue - Friday, Sep 12, 14 @ 12:38 pm:
By that definition Madigan Quinn and Cullerton are running illinois as if they were PE investors- loads of debt and little equity
- Demoralized - Friday, Sep 12, 14 @ 12:41 pm:
@Sue:
That is one of the dumbest comparison I’ve ever seen.
- Oswego Willy - Friday, Sep 12, 14 @ 12:46 pm:
- Sue -,
Government isn’t a business. Can’t be any plainer.
- A guy... - Friday, Sep 12, 14 @ 1:00 pm:
When you guys start quoting Ibendahl to support your other issues du jour, I’ll take this one seriously. Everyone (at least everyone who’s been around here for a little while) knows who he is and what he does. He’s not credible for you 99% of the time, but today he fed the Harpies, so he’s up there with Ben Franklin. Yikes.
- Rich Miller - Friday, Sep 12, 14 @ 1:03 pm:
A guy… his facts aren’t wrong here. You can whack his character all you want, but his facts are good.
- Oswego Willy - Friday, Sep 12, 14 @ 1:05 pm:
===When you guys start quoting Ibendahl to support your other issues du jour, I’ll take this one seriously.===
Hmm.
“* From the Lehigh Valley Morning Call…”
And…
“* I asked a friend of mine who’s in the finance biz for his opinion. Here’s his e-mail…”
Wanna take a shot at these two - A Guy… -, and call out Ruch for adding Doug to the mix?
“I don’t know any of the details of this one, but if I can try to make the person reporting this, Ibendahl, look bad, that is tatic always worth relying on. Not defending here. Just more hammer and shaking the info would be helpful to protect Bruce.”
Dope.
- Chris - Friday, Sep 12, 14 @ 1:06 pm:
W. Stark: “Even though the reporting above and linked indicates that Cherrydale is still a going concern”
Yes, but the comments discuss it like it went away, like the *family* lost out, etc. Which isn’t true.
“guess that makes the financial arson cool”
Never said it. The losers were the lenders, and the investors in GTCR. Everyone already has no sympathy for the latter, and the former aren’t favorites around here, either.
- Anyone Remember - Friday, Sep 12, 14 @ 1:06 pm:
=Some LBOs are also straight bustouts.=
=When it all falls apart, they file bankruptcy and walk away.=
Paging Gordon Gecko, paging Gordon Gecko!
- Sir Reel - Friday, Sep 12, 14 @ 1:32 pm:
This is typical 1% behavior. I love the way they tout the “free enterprise system” and view any format of regulation as anti American. Predictable when the system’s rigged in their favor.
- Ducky LaMoore - Friday, Sep 12, 14 @ 1:35 pm:
Here’s a question for a reporter to pose to Rauner… “Exactly how many businesses have you been involved in that have entered bankruptcy?”
- MrJM - Friday, Sep 12, 14 @ 1:35 pm:
I guess the era of the sexy vampire is officially over…
– MrJM
- A guy... - Friday, Sep 12, 14 @ 1:51 pm:
===O Willie“I don’t know any of the details of this one, but if I can try to make the person reporting this, Ibendahl, look bad, that is tatic always worth relying on. Not defending here. Just more hammer and shaking the info would be helpful to protect Bruce.”===
O Willie, this is Dope. I don’t need to make Ibendahl look bad. He does that all on his own. I hardly called out Rich. Ibendahl sent over his facts, Rich got some corroboration from a guy he knows and trusts. Good. That represents a side of this story, facts included are stipulated to.
This business of Venture Capital goes on every day. It’s a high risk business at it’s baseline. The rewards are high because the risks are high. If I asked Rauner or any other VC person to provide a list of losses, you’d see how topsy turvy this entire industry is. Rich’s pal provided a scenario based on what he’s seen happen in a lot of cases. Very believable, because it does happen just like that. Illinois especially loves their LLCs. Did it happen here? I’m still not sure. I saw and opened another link on the thread that pointed to this family doing just swell. Notice, the I, the Dope, did not use that to refute what was intellectually speculated on before that. I suggested we needed a second opinion. No more than that. During the bust, over 4-5 years, there were several stories just like this. Intentions start in one direction, money gets spent….
Then it’s fish or cut bait. None of this is done without contracts. The link would lead you to believe these were not unsuspecting dupes.
Here are the facts: Ibendahl used facts in his story purposely meant to defame a candidate. Confirmed by a reliable source
Fact 2: Ibendahl is an incredible jerk. Confirmed by anyone whose ever met or come close to meeting him.
Love,
The Dope.
- too obvious - Friday, Sep 12, 14 @ 1:56 pm:
Are there any businesses GTCR acquired that Rauner DIDN’T plunder? It’s become a fair question.
“And then finally . . . when there’s nothing left . . . when you can’t borrow another buck from the bank or buy another case of booze . . . you bust the joint out . . . you light a match.”
- Oswego Willy - Friday, Sep 12, 14 @ 2:02 pm:
===I hardly called out Rich.===
Really?
===When you guys start quoting Ibendahl to support your other issues du jour, I’ll take this one seriously.===
Rich…was the one quoting him. Hmm.
===This business of Venture Capital goes on every day.===
Lots of things go on every day, not all of them good, but according to you, “Meh, it goes on everyday.”
So Vulture Capitalism is fine? Busting out places like in “Goodfellas” is A-Ok?
Got it.
Honesty, integrity, ethics, morals.
Nope…
“I don’t know any of the details of this one, but if I can try to make the person reporting this, Ibendahl, look bad, that is tatic always worth relying on. Not defending here. Just more hammer and shaking the info would be helpful to protect Bruce.”
That’s right. Exactly right.
- A guy... - Friday, Sep 12, 14 @ 2:12 pm:
===Oswego Willy - Friday, Sep 12, 14 @ 2:02 pm:
===I hardly called out Rich.===
Really?
===When you guys start quoting Ibendahl to support your other issues du jour, I’ll take this one seriously.===
Rich…was the one quoting him. Hmm.====
Really calling out you and yours more than Rich. He was skeptical enough to get corroboration. I’d love to see the list of stuff from this hateful quack that he doesn’t publish. lol.
It’s not awful to ask for details and more info Willie. I’m a dope, remember.
- Oswego Willy - Friday, Sep 12, 14 @ 2:46 pm:
===Really calling out you and yours more than Rich.===
“…more than…”
So ya were calling out(?) Thought it was a “no”
Yikes.
- wordslinger - Friday, Sep 12, 14 @ 3:15 pm:
There’s not necessarily any risk in private equity, much less high-risk.
When you land pension or other investors for your funds, you take juice right off the top. If the fund gains, you keep the juice plus a percentage of the profits. If the fund loses, you keep the juice. No risk at all, unless you have your own dough in the fund.
Don’t confuse venture capital with LBOs.
Venture capital is generally seed money for startups or for small companies to expand.
LBOs are takeovers, often hostile, of existing companies, often distressed, by means of a relatively small amount of equity and a lot of debt saddled onto the company.
Even among investors with the best of intentions to make a go of it, their liability is relatively limited if things go south, while the upside is large because their small amount of equity gains majority or at least controlling interest. If they score, they score big.
Look at Zell. He put up $90 million in cash and assumed $225 million in debt for 40%$ of Tribune Co. valued then at $8.2 billion.
But the company’s ESOP borrowed $8.4 billion to complete the purchase for a 52% stake. Yet the way the deal was structured, Zell controlled the board and called all the shots.
To keep the company going, the ESOP eventually borrowed a total of $13 billion before filing bankruptcy, less than a year after the deal closed.
So who’s taking the risk? Mr. Private Equity, with $315 million in the game for 40% and control of the board, or the ESOP, with $13 billion in debt for 52%, yet no say?
- Left Leaner - Friday, Sep 12, 14 @ 3:22 pm:
Is this the “good CEO business practices” that Rauner would bring with him?
- A guy... - Friday, Sep 12, 14 @ 3:39 pm:
O Willie, he’s fine. Go back to guarding Pat. lol.
Sling, those examples carefully and well explained are not risk laden for those specific deals, at least not for the Capitalist. There’s a whole nother conversation that would lead to. Venture Capitalists lose a lot of money. It’s the nature of the business. Fortune 100 companies don’t need them. That’s not the pond they fish in. Former Fortune 100s have them on speed dial though. lol
- wordslinger - Friday, Sep 12, 14 @ 3:53 pm:
You keep throwing around the term venture capitalist. I’m not sure what you’re talking about in this context.
Private equity firms like GTCR create investment funds for high net-worth individuals and institutions. They make the investments (usually mergers and acquisitions) and manage the portfolio of companies for a fee and a share of any profits.
The risk is all on those who invest in the funds, not the managers of the funds.
- Oswego Willy - Friday, Sep 12, 14 @ 3:55 pm:
I’m not guarding Pat, I’m keeping you honest, big difference.
Plus, when you make up what you think you say to make a point, you should be called on it, without “the sugar”