Former Bain execs launch distressed-focussed firm

Prophet Equity, founded by former Bain & Company executives Ross Gatlin and George Stelling, will take its first fund to market in early 2008 with a $250 million hard cap.

Two former Bain & Company executives, Ross Gatlin and George Stelling, have 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.

Ross Gatlin

“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 and Stelling both worked at Bain for five years, and collaborated on high profile turnaround projects including Continental Airlines. In the late 1990s they went separate ways: Gatlin 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. Stelling went on to high level operating positions at several technology companies, including ON Semiconductor, which was owned by TPG, and NVIDIA Corporation.

George Stelling

The two stayed in touch, and eventually Gatlin tried to recruit Stelling to run one of Insight’s portfolio companies. After Gatlin left Insight in July, the two began discussing the prospect of starting their 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 Stelling’s extensive track records.

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 Stelling decided to focus on distressed and turnaround plays partly because of their backgrounds, but also because of 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.