LOHAS Journal's Factbook Edition - September, 2004

By Nancy Nachman Hunt

One of the most difficult choices entrepreneurs have to make in their business lives is how to take the company they have nurtured and cared for to the next level of business success.

Mark Egide and his wife Stacey, the co-founders of Avalon Natural Products, made that choice. The Egides decided in 2001 that if they wanted to grow the natural personal care products company they had successfully built for more than a decade to even greater strength in the marketplace they would have to get help. Help would come, they believed, in the form of selling a controlling interest in the company. So they hired an investment-banking firm to shop Avalon.

"We went through the usual process," Egide says. "And one of the interested parties that our investment bankers identified was a private equity firm called North Castle Partners. We really hit it off with them. We liked their personalities, we liked the space they were in."

The space Egide refers to is the healthy living and aging space, a significant part of the Lifestyles of Health and Sustainability (LOHAS) marketplace.

North Castle liked Avalon, too. Indeed, six months after their mutual introduction, Avalon became another company in North Castle's thoroughbred stable of businesses focused on healthy living and aging. The rest, as they say, is history. Avalon's compounded annual growth rate for the last five years has been more than 60 percent. Today, through its Avalon Organics and Alba Botanica brands, it is one of the largest marketers of natural and organic personal care products in the United States.

All this is not surprising. North Castle Partners, based in Greenwich, Conn., has made a name for itself by taking companies in the LOHAS space and building them into category leaders. The private equity firm counts among its companies such success stories as the active lifestyle nutrition giant EAS; Elizabeth Arden Salons, the world's leading salon and day spa company; Equinox fitness clubs; Enzymatic Therapy, a leader in the field of branded proprietary natural medicines and supplements; and Naked Juice, the second-largest and fastest-growing producer and marketer of refrigerated juices and fruit smoothies in the U.S., to name a few.

Picking Winners
North Castle attributes its success in picking winners in the healthy living and aging space to its singular focus. "Many private equity firms invest everywhere. One day they're looking at telecom, the next day steel, the next healthy living and aging. We only invest in healthy living and aging," Ellen Marram, a managing director at North Castle, explains. "When we do due diligence, we don't have to start from scratch."

As a result, North Castle understands the healthy living and aging market perhaps better than any other private equity or venture capital firm, Marram says. That understanding, and the fact that many North Castle companies have similar challenges as well as common customers and suppliers, can be helpful as North Castle works with the management team to take the company to the next level. "For example, if one company wants to break into a new account, normally someone in one of our other companies or in our network can make an initial introduction," she says.

Brent Knudsen, another North Castle managing director, says that the firm's level of understanding is crucial in a fragmented market like LOHAS and the healthy living and aging industry. "This is a $300 billion market. It includes about 50,000 companies and has experienced growth rates in double digits north of 10 percentÑsometimes 20 and 30 percent," Knudsen says. "This allows investors like us to come in and develop leadership positions for these companies."

Knudsen points to EAS. "We've owned it for more than four years. When we initially invested, it was narrow in its distribution and focus. We've helped it successfully expand both its product lines and its distribution. It's a good example of taking a young company and expanding its offerings to a broader group of consumers."

Making Market Leaders
To develop market leadership positions, North Castle looks for companies where the opportunity exists to partner with CEOs and management teams in building the business for the long term, says founder and managing director Charles Baird.

Baird explains: "The way we build value for our investors is not by overburdening the company with debt. We generate our returns by helping to grow both the top and the bottom line of the business. We are not flippers, we don't care about the quick buck."

Healthy living industry veteran Peter Roy, former president of Whole Foods Market and current advisor to North Castle, says the firm is uniquely qualified to work with companies in the LOHAS space for reasons beyond its exclusive focus. Yes, focus is important, he says, but the people at North Castle also tend to "live LOHAS. They are into the products and the lifestyle themselves," he says. "You don't have to explain the value of the products you make or the services you provide."

Because the North Castle people "live it," Marram says they also understand the importance the values variable plays in the vast majority of businesses that operate in the LOHAS space. "Entrepreneurs in the LOHAS space have started their businesses based on their commitment to their consumers and to providing a better quality of life," she says. "When we talk to them, we're part of the family. We understand a little more about the DNA of their brands and how to grow them without losing the company's values."

North Castle sometimes finds its investment targets like it found Avalon. The firm itself is essentially a brand in the LOHAS space and, Marram says, "When companies hire institutions to help them find investors, those institutions know us." But, she adds, since North Castle is so familiar with the LOHAS space and the companies within it, the majority of North Castle's investments have resulted from direct contact between North Castle and the companies themselves.

But direct contact doesn't necessarily mean an investment will follow. Since its inception in 1997, North Castle has considered investing in almost 1,000 companies, but has chosen only 43.

The Short List
To make the short list, Roy says, very simply, companies need to have two things: a good product and good people. "You need a high-quality product. We don't care if it's hot, if it's not high quality, we're not interested. The same thing goes for the people. If they don't feel good to partner with, we'd just as soon take a pass."

Ultimately, for North Castle, it really is all about partnerships. "The smartest founders," Knudsen says, "are those who get to the point where they say, 'I've taken this as far as I can alone, now I need some partners.'"

Nancy Nachman Hunt is a freelance writer and the founding editor of LOHAS Journal.

Reprinted from the September, 2004 issue of LOHAS Journal's Factbook Edition