John P. Rompon, managing partner at McNally Capital, which advises very wealthy families on private equity, said the group was right to take its time and gather as much information as possible before investing.
“Whether it’s a family or a couple of guys pooling their capital, that kind of entrepreneur starts out at a disadvantage because they lack the resources of a big firm,” he said. “This isn’t inherently a bad thing. It just complicates things.”
The mistake that smaller investors make, he said, is to rush into a deal or to lack awareness of their limitations.
Michael Tiedemann, chief investment officer of Tiedemann Wealth Management, said he tried to dissuade clients from small-time private equity with two questions: Who brought you the deal, and why are they bringing it to you?
“You don’t want to offend the client’s judgment,” he said. “But those two questions reveal so much. You can minimize a lot of the risk in that exercise.”
MANAGING THE COMPANY Once an investment is made, the hard part starts: running the company. Mr. Fisher and Mr. Groberg said they did not know much about the cosmetics industry, so their plan was always to focus on the financial side.
This was more about Michele and Pamela and an industry they have a lot of experience in,” Mr. Fisher said of his team. “In putting together a portfolio of small businesses, it was never that we’d learn the industry. It was that we’d find people that we could back.”
Some advisers think this approach is fine. Alan M. Harter, managing director of Pactolus Private Wealth Management, said his firm was putting together private equity deals in many industries, with one or two families leading each.
He recently put two real estate families together to lead a $140 million deal that has 12 other silent investors.
An advantage to doing this is eliminating that extra layer of the traditional private equity fund. “The cons are you have to be very aware of the people you’re doing it with,” he said. “One bad egg could cause you a lot of problems.”
Other advisers say that not focusing on one industry limits the quality of deals that will come your way and means you will never acquire any independent expertise.
“The worst-kept secret in private equity is it’s a game of execution, not strategy,” Mr. Rompon said. “There has to be a subsector you focus on so you can develop some expertise and understanding.”
Either way, the group has realized that managing Menaji is a serious time commitment with no immediate payoff. While Ms. Probst receives a salary and commission on sales, the investors have not paid themselves any distributions or received any compensation for the time they have put in.
MAKING MONEY All private equity investments are done for a return. The questions are always how big and when.
The three main investors in Menaji and Ms. Probst say they are focused on an eventual sale. Mr. Groberg said they would like to increase the company’s sales 10 to 20 times before finding a buyer. He would not say what sales are now.
This could take some time. Menaji sells its products in a few stores, but most of its sales come from online outlets.
Mr. Tiedemann said the most important thing for investors in a small private equity deal is a plan to get their money out. “As you’re trying to do the competitive market analysis, you really need to ask yourself, ‘Who’s the exit to?’ ” he said. “Is this a cash flow business or can you sell it to someone? If so, who?”
Most private equity funds have a set time horizon. That is what Mr. Harter has built into the deals he is putting together. But on the smaller scale, the Menaji group has more freedom: they are the majority owners, so they alone will determine when and if they want to sell Menaji.
For now, they are showing no regrets. “As former bankers, we understand there can be risks beyond our control,” Mr. Groberg said. “Two years into it, we remain very confident that our initial investment thesis will prevail.”