Jay Foreman leads Acorn Management Group

The co-founder and former president of Play Along now leads Acorn Management Group, a private investment fund he launched last October with backing by Oaktree Capital Management; it plans to acquire children's products companies or promising product lines. While the receding economy has effectively shrunk most commercial credit markets and left the landscape littered with aborted mergers and acquisitions, Foreman maintains a sizable pile of cash with which to begin building. He says he plans to invest at least $100 million in the “kid space” in the first year, out of an initial nut of $250 million to $500 million.

“Our plan is to build a well-balanced company specializing in the 'kid' business, whether that is apparel, electronics, toys or publishing,” he wrote in an email to colleagues and friends, which was made available to Playthings. “We will start looking for companies over the next nine months and plan our initial acquisitions sometime in the first few quarters of 2009, depending on trade class and opportunities which arise in the market.”

The effort is the melding of a hard-nosed private-equity and distressed-debt player with Foreman's passionate belief that a diversified children's company might be salvation for individually contracting markets and companies. Los Angeles-based Oaktree had more than $55 billion under management last September and, according to Foreman, “prides itself on discipline and low levels of leverage.” Capitalizing on “market inefficiency,” more than 75 percent of its portfolio consists of high-yield, convertible and distressed debt, the company's Web site indicates.

For Oaktree, Foreman brings a 24-year track record in the toy and licensing industries—the kind of insider's knowledge that the investment firm says it seeks out when getting into a new business.

Oaktree's most recent quarterly report showed investments in debt and equity holdings in transportation, including UAL and JetBlue; automotive, including General Motors and Ford; broadcasting, including Time Warner Cable, Comcast and Charter Communications; financials, such as CIT Group and CapitalSource; along with positions in pharmaceuticals and medical markets. Children's products were not immediately apparent in the company's most recent 13F filing with the Securities and Exchange Commission, but if there are any, they might be represented elsewhere, such as in private placements.

“I'm looking for strategic-platform companies,” Foreman explains in a telephone interview from his home in Florida. “I'm not interested in buying a busted up, crappy company and then trying to roll other companies into it. What I'm really looking for is a good platform company in each one of those markets—people that are good operators. They may be in a distressed situation, but the core is that they either have good brands or they have good brands and good management.”

From that point, he might then consider mining one or two promising brands from a failing firm.

For the 46-year-old Foreman, the venture puts him back in the children's products game following a difficult departure from Play Along. He and his partners had sold the company years earlier to Jakks Pacific. His earn-out period expired on New Year's Day 2008—and with it, his management autonomy over Play Along. Foreman's disaffection with a diminishing role developed soon after, prompting him to leave in June. During the intervening months, his second child, a girl, was born. Her big brother is four.

By cobbling together several companies—each likely in different niche categories—into a single corporate structure, overhead can be shared and operating margins enhanced, Foreman reasons. It's a common buyout rationale.

In the early go, Foreman will need to remain sensitive to his non-compete covenant with Jakks, which still has a few months to go. But he says there are plenty of companies in the marketplace that are not currently competitors with his former firm.

“I've got some targets,” Foreman says. “There's no doubt I've got some companies whose businesses I really love, and I think the time may be right or the opportunity may be there. And I'd like to purchase some combinations that I think may be sensational. It would really make a profitable business, and one that's compelling to retail and compelling to licensors and compelling to the investment community.

“You can create a mini-Mattel or a mini-Hasbro. Now you have a billion or a billion-and-half-dollar business and you're pretty damn important to the retailer.”

Foreman's idea is not necessarily a new—or intrinsically successful. There were significant differences in strategy and financing, to be sure, but Grand Toys of Hong Kong suffered and collapsed under similar aspirations—albeit limited primarily to toys—more than a year ago. Since then, it has shed many of its assets, including its showpiece, International Playthings.

Yet the Acorn/Oaktree effort has multiple choices to pursue firms where it sees opportunity. It can negotiate straight buyouts; take minority investment positions; offer high-yield, convertible or distressed-debt financing; buy the paper from other creditors—or any combination of these.

“There's no doubt that Oaktree has a lot of options,” Foreman says. “But I wouldn't be looking to be hostile with these people. That's not my nature and this is not a commodity business where you can come in and just take over assets. These businesses—toys and apparel and the licenses—these are 'people businesses' and a lot of the principals have built them and have personal relationships. I just never see the value in hostile play because you lose too much in the ugliness that goes along with it.”

Regardless, if the company has a good business, Foreman offers, Oaktree might want to own its debt anyway for later opportunities. If the firm is or becomes healthy, the returns will be there. If the company crashes and burns, the debt-standing offers instant control over the management—in theory at least, a series of no-lose scenarios. It is also known by some, pejoratively, as “loan to own,” a term others insist fails to recognize the nuances of the strategy.

The investment horizon, according to Foreman, is three to five years to build the platform, then another two or three years to decide what to do with it—for example, sell or go public. The market crash has lowered expectations, so anticipated rates of return are less than they've ever been, while time horizons have been stretched. Two years ago, some investors were seeking 20 percent to 30 percent internal rates of return, but they're now looking at much less—7 percent to 10 percent would likely be considered very good at this point.

Foreman says the debt-side opportunity might be greater initially; most companies under-performed in the third and fourth quarters, while costs accelerated and debt covenants loom. But Foreman cautions that a toy business may not be the first acquisition.

“The first acquisition may be an apparel company or a video game company and it may take me a year to get into the toy business,” he says. “I may never get into it if the right acquisition is not there or the right value is not there. But my mission is to be in the kids' space and to try to be diverse.”