| Jessica Alba, the Honest Co. (Bloomberg) |
Say this for hedge funds and other savvy Wall Streeters: They have a knack for making heads-I-win, tails-I-don’t-lose deals.
Case in point: Glade Brook Capital Partners. On its face, the news that consumer products giant Unilever is in talks to acquire personal care brand the Honest Co. for more than $1 billion looks like a big windfall for actress Jessica Alba — who co-founded the company in 2011 to produce a wide variety of allegedly “non-toxic” consumer and baby products — and bad news for Tiger Management descendant Paul Hudson, whose Glade Brook Capital Partners has a big investment in the Honest Co.
That’s because the Honest Co.’s most recent financing round, which took place about a year ago, valued the company at closer to $1.7 billion. If a deal is done, it would preclude an initial public offering, which many people were expecting sometime next year. But thanks to some clever structuring, Glade Brook, a hedge fund and private equity firm, does not stand to lose money if a deal is completed below the valuation established when it completed last year’s filing, according to an investor familiar with the Honest Co. deal.
Hudson founded Greenwich, Connecticut–based Glade Brook in 2011. Hudson is a so-called Tiger Grandcub because he previously worked for Tiger Cub Chris Shumway, who in turn previously worked for Julian Robertson Jr.’s Tiger Management.
Glade Brook was founded as a hedge fund firm, but in the past few years, it has morphed more into a venture capital and private equity firm. As of August 1, it managed a total of $1.12 billion. Of that sum, $842 million was invested in private equity vehicles, while $276 million was invested in the public equity vehicles — the hedge funds, according to the firm’s second-quarter letter to its hedge fund investors. Those funds — Glade Brook Global Domestic Fund and Glade Brook Global Offshore Fund — were down 7.9 percent for the year through August 26, according to a client letter dated August 29.
In 2015, Glade Brook led the $100 million Series D financing of the Honest Co. It included another new investor, AllianceBernstein, and existing investors Fidelity Management & Research Co., Wellington Management Co. and Institutional Venture Partners.
That same year Glade Brook also launched Glade Brook Private Opportunities Fund, designed to invest in four to six private “big global ideas,” according to its offering document. It initially made significant investments in Uber Technologies and Snapchat, and subsequently made an investment in the Honest Co. and two other companies. Glade Brook declined to comment.
Under the Honest Co. financing, Glade Brook has what is called a 1X liquidation preference. This means at the very least, Glade Brook gets its money back in a deal — one times what it invested. Of course, it also gets to participate in the upside if the company is sold for a price above the valuation established when the investment firm made its financing deal. What’s more, Glade Brook and the other investors in the Series D financing get paid first from any deal, even before the founders.
However, the founders will make out just fine as well, the person familiar with the deal says. If the company is valued at less than $1.7 billion in the IPO, Glade Brook and the other investors in the Series D will get additional shares or some other consideration to compensate for the lower value.
In any case, the Honest Co.’s value has been badly diminished by reports earlier this year that it is facing several lawsuits alleging it mislabeled several dozen products as natural, plant-based or chemical-free. Of course, the company denies the allegations, but the controversy may have led Alba and her colleagues to consider selling the company sooner rather than going public and hanging on to their investment for the longer term.
As for Glade Brook, its Glade Brook Private Opportunities Fund has made five investments altogether, including a recent one in a still undisclosed, well-known Internet company, according to a person familiar with the investment. Glade Brook’s Uber investment is said to be up about 45 percent in value; Snapchat is likely to go public sometime in the first part of next year, this person says.
