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Boston Capital

Making the most of a bad economy

By Steven Syre
Globe Columnist / July 9, 2010

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Private equity managers and venture capitalists make a very comfortable living on big investments in companies they believe are poised to grow and prosper.

Good times improve the odds, but some of these alternative asset money managers will put their cash into businesses built for a bad economy and customers struggling to make ends meet. Consider a few recent business stories straight from the pages of the Globe.

Savers Stores, a for-profit thrift store, opened a new Framingham location just down the road from the swish Natick Collection mall yesterday as part of a big expansion across Massachusetts and other states. A Savers that opened recently in North Attleboro goes head to head with a Goodwill store a quarter-mile away.

How will Savings finance its business expansion? A $500 million investment by Freeman Spogli & Co., a Los Angeles private equity firm, is covering much of the expense.

Then there is Cash4Gold, the company that really does pay people cash for the gold they drop in the mail. Those late-night TV commercials don’t lie, though customers get anywhere from 20 cents to 80 cents on the dollar for their metal.

Founder Jeff Aronson calls his company the nation’s largest mail-in gold business — and that may be true, though he doesn’t disclose any financial numbers. Aronson says he got the attention of about 18 venture capital firms when he needed money to help Cash4Gold grow and eventually struck a deal with three of them.

Highland Capital Partners and General Catalyst, two Massachusetts venture capital firms best known for sophisticated technology investments, were part of the team.

Finally, don’t forget private equity giant Cerberus Capital Management and its plan to acquire Caritas Christi Health Care, the group of six Massachusetts hospitals that was struggling with serious financial problems. Caritas hospitals have a long, charitable history of treating many poor patients, but the entire hospital network is gearing up to become a for-profit organization.

Cerberus has been cagey about its long-term goals in the health care business, but it appears to be assembling a lower-cost medical network that could compete better against Boston’s famous teaching hospitals based on price.

These samples don’t represent an investing tidal wave, and many of the individual cases profit from a combination of circumstances. Cash4Gold does best when the economy is bad and the price of gold climbs sky-high. The Cerberus purchase of Caritas is driven by tougher times and the prospects for health care reform.

And the marriage of sophisticated money and businesses that cater to poorer customers is nothing new, notes Gary Rivlin, author of “Broke, USA: From Pawnshops to Poverty, Inc. How the Working Poor Became Big Business.’’

“Private equity, big-name banks, the big investment banks on Wall Street, they’ve all been involved for a long time in the poverty industry.’’ says Rivlin. His book and online writing spell out those connections, especially when it comes to financial services offered to poorer customers.

Companies built for hard times don’t necessarily take advantage of their customers. Some offer products and services that wouldn’t otherwise be available to many people who walk through the door. By extension, you can say the same about investors who put their money in those businesses.

Here’s a simple test that will tell you a lot about that company and its investors: Do they count on customers who can’t afford to walk out the door?

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.