Michael Eisenson SOM/Law '81 doesn't invest in "glamour businesses." Eisenson, the co-founder and CEO of Charlesbank Capital Partners, has held stakes in a shower curtain rod company, a technical institute that trains mechanics, a grain storage business, and a "take and bake" pizza operation. Eisenson, who spoke to SOM students as part of a conversation with Dean Sharon Oster on October 4, is the first to admit that many of the companies Charlesbank gets involved in look pretty boring to most people. But that’s the point. "What we’re looking for are businesses that are undervalued by other people," he said. "Our hope is to find the $20 bill that looks like $5 to other people."
Eisenson co-founded Charlesbank in 1998 after 12 years at the Harvard Management Company, which oversees the university’s endowment investments. Until 1999, Harvard was the firm’s sole client (Charlesbank was known as Harvard Private Capital Group from 1991 until 1998). In 1999, Charlesbank raised its first private equity fund from outside institutional investors, focusing on buying positions in "middle market" companies, those with between $50 million and $750 million in revenue. Since 1991, the Charlesbank team has invested more than $2 billion in 60 companies.
Although the firm is no longer tied solely to Harvard, Eisenson said that the way it did business with the university continues to shape Charlesbank’s approach to private equity. For instance, Charlesbank won't invest in tobacco companies. The firm also steers clear of businesses such as pay day loan operators and collections agencies, which are hot among private equity firms at the moment. "Making money off misery and poor people is something we won’t do," he said.
Another important difference from many private equity firms, Eisenson said, is Charlesbank’s long-term approach. He called Charlesbank "fundamental investors," meaning that the firm is more interested in improving the long-term operation of companies than in a quick sale, often involving high amounts of leverage, or breaking up a company and selling off the parts. "I can’t tell you the interest rate on the debt of any company we’re invested in," he said. "But I can tell you the cash flow of all 16 of them."
This approach requires a different way of doing business than many other private equity firms. Eisenson said Charlesbank generally stays away from well-run auctions, positing that if a number of investors are interested in a company the price would be too high for his firm’s strategy to work. Instead, Charlesbank searches for businesses other private equity firms mistakenly overlook. Sometimes, he said, a company will present a "false toxic," where something appears wrong but really isn’t, such as the technical institute, which was out of compliance with federal regulation, but was eligible to get crucial Title IV funding if it made certain changes to its capital structure. Or there might be a misleading accounting anomaly, such as the pipeline company that actually understated its own earnings. And there’s the orphan division within a larger corporation that when spun-out on its own quickly becomes profitable. "Other firms will overlook these companies because they’re in the business of turning things around quickly," he said. "We don’t have the same pressures. Our disposition is not to sell until we’ve at least doubled our capital."
When Eisenson graduated from Yale, he said, there were about 300 people total in private equity. Now there are more than that many firms raising funds in any single year. The last decade has seen an explosion in private equity. But the economic downturn has wreaked havoc in the asset class. Charlesbank didn’t make a single investment from the middle of 2006 to the middle of 2007, betting that the high times on Wall Street were about to end. But many funds continued to buy and had grown too big when the financial crisis hit. Pressed for cash, they’re looking to make quick sales on companies they acquired, reducing profits. "The outlook in private equity is cloudier than the economy as a whole," he said. "The downturn has uncovered flaws in the model."
While he might be bearish on private equity generally, Eisenson does not think the economy as a whole will continue to perform as poorly. “We’re not operating our business as if there’s significant risk of another downturn,” he said. "There's eight and a half trillion dollars in U.S. households earning 40 basis points or less. Eventually that will flow into the capital markets."