Private equity fund follows Ayn Rand's teachings and finds opportunity

The next time you take a bite of a Carvel ice-cream cake, you'd better make sure you earned it. The company that owns it, Roark Capital Group, is an Atlanta-based private equity fund named for the virtuously selfish architect concocted by writer and philosopher -- and master of neither writing nor philosophy -- Ayn Rand, the founder of Objectivism.

A tribute to the author in more than just name, Roark has spent most of the financial crisis on the sidelines. Now it has $750 million to put into the private equity market – nearly half of the $1.55 billion it has under management.

Roark kicked off 2008 by raising $1 billion -- and then did nothing. Rather than rush out to acquire what it could find at likely inflated prices, managing partner Neal Aronson saw that credit spreads were tight and decided the market had reached unsustainable levels. When that year's colossal meltdown in the credit markets debilitated the private-equity community, Roark watched from the sidelines.

Now, thanks to the easing of private equity markets, Roark is ready to make its largest investment in its eight-year history. In September Roark put $180 million into the market, spending $80 million on pet retailer Pet Valu and $100 million on Waste Pro USA, a Florida waste-management company. That's in contrast to the previous 20 months, when Roark only sent $65 million into the marketplace.

Roark's portfolio consists of 25 companies; most of its investments are majority stakes. Fifteen of its holdings are franchise companies; five are in restaurant chains, including Cinnabon and Schlotzsky's, and the company plans to pick up more. Roark's debt load is less than 2.5 times earnings before interest, taxes, depreciation and amortization -- making its approach look conservative compared with the leveraged thrills pursued through 2006 and 2007, when private-equity fundraising routinely set records. This is probably how the fund was able to attract investors like Goldman Sachs (GS).

The thawing of the credit markets and acceleration of private-equity activity that's likely to occur in the second quarter of 2010 will be accompanied by a departure from the past, Aronson believes, as the "financial engineers" won't be as active in the private equity marketplace. Instead, companies are looking for "partners who can actually help them grow their businesses and can do so without putting their businesses in jeopardy," he tells Bloomberg News.

Roark seems to be choosing the right time to strike: It can pursue the deals it wants, without the pressure of having to compensate for a recent lackluster performance.. Pitchbook Data, a hedge-fund research company, counts 654 private-equity deals completed in the first nine months this year, off 60 percent from the 1,532 deals a year earlier. Those funds that have put money into play over the past year and a half have suffered; Preqin puts private-equity returns for the 12 months ending March 31 at -30 percent.

In an age of stimulus packages, bailouts, and other forms of loathsome government interaction, Ayn Rand -- and her character Howard Roark -- would be proud to see how Aronson has used the Roark name. His company bucked the trend when private-equity money was pouring into acquisitions, and now Aronson can position his fund for a strong 2010, without the considerable financial baggage of its peers. Who would've thought a bite of ice-cream cake could mean so much?

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