Sun Capital Partners, which just a couple of years ago was among the hottest private-equity groups in the country, has fallen upon hard times of late — a victim of the recession, bad management decisions and — according to critics — outright greed.
For example, the once-high-flying founders of the 14-year-old distressed-buyout firm, Rodger Krouse and Marc Leder:
* In 2007, raised an astounding $6 billion for their latest fund, four times as much as their previous investment fund and, to many, a leap for a firm focused on mid-market acquisitions.
In fact, much of the fund, about 74 percent, remains uninvested at a time when there should be plenty of distressed companies to buy. In addition, the duo in 2008 pledged the $120 million in annual management fees back to the fund to defer taxes and in hopes of increasing profits — which would be mostly returned to them and not employees.
But the move appears to have backfired as the separate-fee revenue they expected from completing deals and managing their own businesses decreased, leaving the firm cash-strapped and unable to pay bonuses or even meet its payroll, sources said.
About 25 percent of the staff have been laid off this year;
* Who each own 50 percent of the firm, also retain almost complete ownership of each fund. That keeps staff from sharing in any profits;
* Have not been generous with pumping their own money back into the hobbled firm, and have skimped on salaries. In a move that rankled associates, Leder sent a note to all employees earlier this year after taking a ski vacation on the company jet, according to a Sun investor.
Leder bragged in the note that he was able to keep up with his private ski instructor. The note arrived just after the two announced that expected bonuses would not be paid.
The money crunch and the attitudes of the owners have depressed morale, said both a former Sun employee and the investor. More importantly, they have drained the firm of key talent.
A source said the firm cut staff because there are fewer opportunities now with sellers looking for high prices and uncertain revenues streams during the economic downturn.
It was a rosier scene at Sun back in 2007.
That spring, Sun Capital was on a roll, having raised the $6 billion buyout fund in just 47 days. The New York State Teachers Fund, along with the Kentucky and New Mexico pensions, were among its investors. At the time, Leder and Krouse had boasted that the firm had averaged an annual return of 70 percent, before fees.
Then the recession hit.
In 2008, Sun’s investment pace slowed as financing for buyouts largely evaporated.
Worse, six businesses, representing a significant amount of invested money, including retailers Mervyn’s and Lillian Vernon, went bankrupt, reducing fee income.
In the first three months of this year, as the cash crunch hit, Sun reduced costs by cutting 50 of the 200 people on payroll, including nearly gutting their 100 Park Avenue office — which was cut to eight or nine people from 26.
Among those let go were Gary Talarico, who had run the New York branch, and Brian Meyer, who has since formed his own fund, Pelham Street Capital, to help companies find other businesses to buy.
The layoffs cut into muscle, the Sun investor said, adding that “there was no rhyme or reason for this except the economic model was broken by the greed of the founders and supreme arrogance that the high-volume, high-fee environment could last forever.”
Bad management decisions didn’t help.
In early 2008, Sun made an unwelcome offer for publicly traded Kellwood, the maker of the Vince and Phat Farm clothing labels. Kellwood said it would agree to be purchased only if Sun bought the business without any due diligence, said a source with direct knowledge of the situation.
Shockingly, Sun agreed, and plunked down $882 million.
It might be the firm’s biggest embarrassment. This week Kellwood skirted bankruptcy when it amended debt terms with its lenders. Not so fortunate this year were four Sun companies, like E-Z Pass maker Mark IV and retailer Big 10 Tires, that did collapse, bringing more clouds over the once-hot firm.
The company, through a spokesman, declined comment.