The Minnetonka company Shock Doctor has just passed into the hands of its third private equity owner in the past 11 years, and the managing partner of the new owner couldn’t be more excited about the growth opportunity he intends to nurture.
And in talking about it, he sounded a lot like the partners of the last two private equity owners of this company, who bought the business with a similar plan for growth — and achieved their goals.
Building growth companies isn’t the kind of thing the private equity industry usually gets much credit for doing, but it should. The story of Shock Doctor shows there are other ways for the smart guys to make money in private equity besides leveraging an investment with a ton of debt or squeezing costs out of a company.
Private equity managers have done enough heavy-handed restructuring over the last 30 years to get a reputation for not just trying to outsmart the market like a stock investor might but for thinking they are smarter than the managers of the companies they buy.
That clearly wasn’t the case with Shock Doctor. Part of the appeal for each of the three private equity firms that bought the company was the ability and enthusiasm of the people running it.
Hillcrest Capital Partners of Minneapolis was the first. It was founded by Managing Partner Jeff Turner and his dad, John, a former insurance executive. Jeff Turner said Shock Doctor was introduced to him by a local business broker and he took an immediate liking to CEO Steve Washburn.
Shock Doctor was then still mostly a single-product company doing less than $10 million in sales. It had been founded as E-Z Gard Industries Inc. to introduce what it called the first “engineered” mouthguard for competitive athletics. Washburn knew he could grow the company with new products under the Shock Doctor brand.
Turner agreed, and Hillcrest bought a controlling interest in the summer of 2003.
“It was a good brand when we made our investment,” Turner said. “We then invested in continuing to build the brand,” with improved advertising, a new website and new packaging — all around a marketing message of the best in performance and protection gear.
As awareness of Shock Doctor grew in its industry, along with annual revenue approaching $20 million, companies began nosing around to see if it might be for sale.
Turner called a friend at Minneapolis-based Norwest Equity Partners for a recommendation for a good investment banking team to manage the process of finding the best deal. That investment banker got hired and then turned around and pitched Shock Doctor to NEP.
Its deal to buy Shock Doctor from Hillcrest closed in the spring of 2008. “What the Turners did well when they owned the business was they really invested in the brand,” said NEP partner Tim Kuehl. “What we tried to do under our watch was turn it into a company.”
NEP operates more or less as a conventional private equity firm but with just one investor partner, and that’s Wells Fargo. Kuehl said his firm’s structure helps partners think longer-term than most private equity managers, and as he put it: “We built the infrastructure because we thought this company could be hundred-million plus business.”
They also decided to fund the 2008 buyout with all equity rather than use any debt, which allowed for a hiccup in profitability without the stress of still having to make loan payments. And, Kuehl said, “we needed that.”
As the company grew in complexity, the CEO’s job got more complex, too. NEP decided in 2010 to hire a CEO with bigger-company experience. It recruited Tony Armand from a California company called Bravo Sports. Shock Doctor also appointed a new chief financial officer that year.
In the last year, NEP’s partners decided they had done what they had planned to do. The annual sales had nearly tripled, $100 million was in sight and the employee count had doubled. It was time to turn the company over to another owner.
“As we exited [by selling], we had a full executive team,” Kuehl said. “We had a full and deep product line. We had found new channels to sell the products. We had expanded the international business. And there was a lot more opportunity.”
NEP was not sure if a new buyer would come from the sporting goods industry or be another private equity group. One of the firms solicited was a New York private equity firm called Bregal Partners. It turned out to already know all about Shock Doctor.
When NEP was doing its final reference checks before hiring Armand as CEO, one call was made to private equity veteran Bob Bergmann, whose firm had invested in Bravo Sports. Bergmann was now a managing partner of Bregal Partners, with a $500 million capital commitment from a European family foundation. And here was a company for sale that he knew, run by a CEO he knew and respected.
Shock Doctor also fit well into one of the investment “themes” that guides decisions at Bregal: the idea of making good returns by investing in businesses at the intersection of consumer choices and health care.
There was a time when almost all sports equipment was picked by the team or the league or by a school athletic director, but it’s increasingly left now to the parents and participants. And with sports injury and health concerns increasing, so, too, are the dollars spent by parents and athletes.
The markets that Shock Doctor currently targets are “growing at 8 or 9 percent per year,” Bergmann said. With continued new product introductions, expanded distribution outside the United States and acquisitions, he would expect the top-line growth to handily exceed the market’s growth rate.
His optimistic view is shared by each of the previous owners, too, for even though Jeff Turner has been on the sidelines for six years, he continues to follow the fortunes of Shock Doctor.
“It’s been interesting to watch Under Armour over the past decade,” Turner said, as the sports apparel company’s top line has increased more than tenfold to more than $2.3 billion. “Shock Doctor has the potential to be that kind of a story.”