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December 18, 2007


Former Bain exec launches distressed-focused firm

A former Bain & Company executive has launched a private equity firm that will make distressed plays in the lower middle market. The Dallas-based firm, Prophet Equity, will invest in companies with annual revenues of less than $500 million (€347 million), and seeks to generate an internal rate of return on its investments of around 30 percent.

“Given the current state of the economy, there are a lot more distressed assets out there now than there were a year ago,” Gatlin told PEO. “Valuations have come down.”

Gatlin worked at Bain for five years and then founded The Carlyle Management Group, a middle market turnaround private equity group that later spun out as Ewing Management Group, as well as Insight Equity, a private equity firm that targets underperforming middle market companies.

After Gatlin left Insight in July, he began visualizing the prospect of starting his own firm.

Prophet will go out to market for its first institutional fund, which has a $200 million target and a $250 million hard cap, in early 2008. Potential investors are already enthusiastic, Gatlin said, which he attributed to his and his team's extensive track record.

At the same time, the firm has a pool of capital from its partners and co-investors that it will be able to draw down for deals immediately.

Gatlin and team decided to focus on distressed and turnaround plays partly because of their backgrounds, but also because of the current market conditions.

Prophet will use a highly collaborative, operational approach to managing its portfolio companies, one that draws heavily on the data-driven, analytical Bain managerial approach. Prophet will “go through every nook and cranny”, Gatlin said, examining companies to find every possible opportunity for improvement. Also part of Prophet’s strategy are uncapped compensation increases for executives at portfolio companies, tied to two metrics: improvement in cash flows and reduction in debt.

Alumni of Bain & Company, as well as its private equity spinout Bain Capital, are common in the private equity industry. Advantage Partners in Tokyo was founded by Bain alums, as was Pacific Equity Partners in Australia and US firms Audax Group and Golden Gate Capital Partners.

Featured in Private Equity Online December 18, 2007.

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