Lynn Tilton, Patriarch Partners CEO, Saving U.S. Manufacturing
March 11 2011 by JP Donlon
Don’t let the Versace belt, Gucci boots, Prada jacket, Cavalli blouse and impossibly long platinum blonde hair fool you. Since 2000 Lynn Tilton, 51, has quietly built a private equity firm with $8 billion in equity and secured loans, assets specializing in repairing midsize manufacturing firms in the U.S. (Investors include Bank of America, TIAA-Cref and S&P 500 companies.) Behind the bling and glam façade is a woman whose firm owns or controls some 74 portfolio companies with combined revenues of $7 billion, employing 120,000 people. Hers is the largest woman-owned enterprise in the U.S. and probably in the world. The LA Times called her a combination of Dolly Parton and Warren Buffett. Many on the other side of a transaction who assumed they were dealing with the former were taken aback when they realized it was more like the latter.
The Bronx, N.Y.-born CEO of Patriarch Partners, the private equity firm she started a decade ago with $10 million accumulated from working 20 years on Wall Street, specializes in mid-size distressed manufacturing cast-offs. In many, Tilton is intimately involved in product or process innovations. Typical is Old Town Fuel & Fiber, a former Georgia-Pacific paper mill in Maine, that opened in 1860 as a sawmill and under Tilton’s ownership now recycles pulp byproducts into the biofuel butonol. She acquired MD Helicopter, a company founded by Howard Hughes, in bankruptcy in 2005, endured several painful years and eventually revamped its sourcing and customer service to emerge with a healthier order book for the first time in almost a decade. Stila Cosmetics, a Glendale, Calif., firm Patriarch acquired three years ago, offers a cosmetics case Tilton devised that guides women on how best to apply make-up. For 180s, a Baltimore performance apparel maker that lists itself as a “Lynn Tilton company,” she devised the TechTouch glove, which allows you to work an iPad, mobile phone and small keyboard devices with warm hands. Finding old iconic brands on hard times is a specialty. She pushed mapmaker Rand McNally into a navigation finder for truckers and a value destination services for tourists.
Not all dogs become stars. Fire truck maker American LaFrance continues to hemorrhage revenue in the effort to turn it around. Patriarch typically reconstitutes management and sells a business within five years, freeing capital for new acquisitions.
In the process, the self-made billionaire has become a champion of saving U.S. manufacturing, one company at a time. Pointing to the 250,000 jobs her firm has salvaged, Tilton sees saving this damaged sector of the economy as her personal mission. “I hope that the mid-term elections taught a lesson about the need to create jobs in America,” she says. “Obama keeps calling the big company CEOs to discuss it as if he’s going to convince them to create jobs, but I don’t think people understand the truth about the destruction of small and midsized companies. There’s a disconnect between the stock market and the real economy.”
Her current ambition differs a bit from the one she had at 24:”Marry the right man and have six kids.” But when her father (the inspiration for her firm’s ironic name) died in her junior year at college, everything changed. A Yale grad who put herself through Columbia Business School as a single mother while working long hours as an investment analyst with Morgan Stanley, Tilton developed a patented Rescue Loan Investment Partnership (RLIP) financial tool to help credit-starved middle-market companies. She even had two meetings with the U.S. Treasury, trying to persuade them to use $30 billion of TARP money in RLIP to help rescue companies at risk. Treasury said they could never get Congress to go along.
She continues to press Washington to enforce antidumping rules and for policies that support manufacturing. Oddly, given her experience with Treasury and her avoidance of government- directed ethanol programs, she displays a touching faith in industrial policy, despite the fact that such protection hasn’t done much for the auto, steel, or tire industries. “We have to decide in this country that there are certain industries where if you want to sell in America, you have to make in America.” This from someone who is eager to sell helicopters in Brazil.
Headquartered in the former AT&T building in New York’s Tribeca, Tilton oversees the Patriarch empire in an office festooned with deal-making artifacts. She admits to having posed for the large painting of her—draped over the hood of a Mercedes, blonde locks flowing, that hangs prominently over a far wall. What about the life-size cut-out image of her in fishnet stockings and corset, holding a tray of beverages that greets visitors to Patriarch’s lobby? “It was a birthday gift from some of my people commenting on my so-called ‘circus act”’ she laughs. “Women often tell me that they think it’s great that I am not afraid to be a woman in a man’s world.”
What prompted you to change from running a portfolio of distressed companies to actually managing their turnaround? It’s not like you had operational experience at GE or anything similar in your background.
No, I didn’t. But like everything else I’ve ever done in life, I try to understand it variable by variable.
It started with our acquisition of MD Helicopters in August 2005. By March or April of 2006—three management teams later—people told me that there was no way this company could be restored, and I was $150 million in!
I was told that there was no chance of getting the supply chain moving. Meanwhile, they were constantly chewing through my money. This was my epiphany. I decided then that I would fly out to [Mesa] Arizona every Thursday, spend three or four days on the ground through the weekend and try to do it myself.
The first thing I did was walk the line, ask how many parts were in a helicopter, and no one could answer me. I knew I had a problem. I drove through the process trying to understand every bit about a helicopter, how it’s put together, what the parts are, what the supply chain is, how they’re manufactured, what were the issues. I’d call the customers, I traveled around the world, got the suppliers to work with us, and then had the guts to bid on an Army contract right there and then.
You didn’t exactly choose the easiest thing to manufacture.
No, and I’m back out there every weekend because we have some huge contracts in our hands right now and I need to make sure that we don’t mess up this moment of divine opportunity for the company.
It’s five years later. What do you have to show for your investment?
In 2008, we went from having zero revenues to more than $250 million, and from having 365 aircraft grounded to being No. 1 in customer support. 2009 brought a great downturn to the entire aerospace industry. We had a bad year in 2009 and not great one in 2010. Going into 2011, we have contracts representing up to 225 aircraft that will keep our manufacturing lines busy for five years. One of them is for the Middle East for our twin-engine aircraft, which is new technology. There are only 100 of these in the market. This one will almost double that. We have never faced this moment of divine opportunity, which is why I want to make sure that we can actually deliver.
How do you go about choosing which distressed firms are worth trying to turnaround?
At the beginning I was the Statute of Liberty—bring me your broken, your homeless, your huddled masses. When you get larger it becomes unbearable. Now we look for three things: an iconic brand name, one that people remember even if the company is down and out; a credible product, or at least the prospect of a credible product; and finally, talent or the prospect that we can hire a talented team. Talent is the key.
A major stock-exchange company has a lot more funds to hire great talent. Down-and-out midsized firms don’t have the same dollars to spend. This means you have to build a team of people who are willing to work for the end game. We always give away at least 15 percent of the equity to the management team. So you need people who have the passion, the perseverance and the courage to really walk in the darkness every day, one foot in front of the other, until they see the light.
How do you determine whether people stay?
If something is deeply distressed, chances are there is some fault with the people on the ground. Sometimes it’s the culture, further crippled by an exogenous force. You never want to eradicate all history and prior knowledge. I usually give people a chance. But if they are not capable of self-reflection, if they can’t take any responsibility for where they are, they will never be the team to succeed. The one thing about my world is that truth is cold and hard, but it’s the first point on the path to hope and salvation: If you don’t want to hear the truth, then you do not want to work with me.
Remember BCG’s matrix of stars and dogs? Which has been your star turnaround and which has been your dog?
MD Helicopter is the one that taught me how to be an operator, and since I’ve been the CEO of that company, it demands the most of me because it’s a complex organization. We own a company called Denali, which is the largest reinforced fiberglass maker in the country, making everything from winding machines to scrubbers for coal and nuclear industries, as well as underground storage tanks. Now it’s making wave buoys and windmills. When we bought it in 2003, it had $35 million of revenues and was losing $3 million. Now it has revenues of $235 million and $32 million of cash flow.
American LaFrance, a 175-year-old fire and rescue company, is one that’s been a continuing struggle. It suffered losses for three years when we bought it as a spin-off from Mercedes subsidiary Freightliner. I didn’t get the right management teams in until probably the last four months. Because I lived through September 11 and have huge respect for firefighters, I believed I could turn it. Often when you buy a spin-off from a larger company it is the kiss of death because the people have that big-company mentality. We didn’t see this clearly and it took a while to get the right people in place. Will we turn it? Yeah. It’s already starting to improve, but we went a long way back before we could go forward.
Since chemical engineering is not on your CV, how did you know that the output of Old Town Fuel and Fiber, a pulp and paper mill, could be converted into jet fuel, of all things?
I’m an extrapolator. I learn about things. Before I bought the company, which had been shuttered, they had been working on a Department of Energy grant to make cellulosic ethanol. I did not want to get caught in the ethanol market because I didn’t want to be in something that was so subject to government control. My experience in the helicopter industry made me aware how important jet fuel is. I figured out that if we if we could get to ethanol as a biofuel, we could get to butanol. So I just studied it. Did I go in there and mix the chemicals and pull out the sugars? No. But I did some research on the extrapolation of the bases, and then I went back to those who were working on it and I said, “I don’t want to do ethanol; you’ve got to get me to butanol.” I told the Department of Energy that I did not want their money for ethanol.
Your belief that the key to America’s future is manufacturing seems quaint in the age of Google, Facebook and Twitter. How does someone with a background in analytical finance become enamored with a sector that has been called our past, not our future?
Google and Facebook are great technology game-changers, but in the end, we have 150 million Americans that have to work each day, and we can’t rely on a service economy without an industrial base. Every great empire is built on a manufacturing economy, and the fall of every great empire is the failure to remember this one fundamental fact.
We must be a value-added economy where services support industry. We have people who don’t love school, going to junior colleges to get an education where they hate what they do. When did we put a taint on making things with your hands? When did we decide that being a blue-collar worker was lesser than being a service worker, saying you’re too good for that?
It’s become a rationalization for moving everything overseas because we’re addicted to the cheapest American goods. But if you look at the rising economies of the world—China, Brazil, India—even Vietnam—it’s built on an industrial base. That is how countries move from undeveloped to developed, where people have the ability to make life better for their families and make a living with dignity.
Most multinational CEOs are not in touch with Main Street America. I listened to some of those multinational CEOs at the Yale CEO Institute’s Summit conference and found it fascinating. They believe this is the greatest moment to be alive, because they actually have the resources to set up production in Malaysia, Vietnam, China and India, but they’re not creating American jobs.
You realize that group had few industrial company CEOs.
Perhaps, but the truth is, I walk Main Street. I speak with those who are unemployed or worried about being unemployed. Recently I tried to buy Schutt, a company in Litchfield, Illinois, that makes football helmets and faceguards. They are a competitor of Riddell. People are working for $10 to $12 an hour. Their manufacturing equipment looks like it was made in 1950. We didn’t buy them, because the deal got too expensive. But when I bid for it, I guaranteed all the jobs for at least a year because success depends on a lot more than mere labor costs alone.
Four years ago I was a novice to the aviation industry, but I told an HAI conference that it made no sense to me to have 500 suppliers around the world to make 50 to 100 helicopters a year. It just adds complexity that absolutely can’t equal a reduction in costs. A reporter said to me, “Boeing has just outsourced the entire 787, so what makes you so smart?” I said, “Look, I’m humble. We’ll see. But to me as a business woman, it makes no sense.” Need I say more?
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