When music lovers think of legendary guitar brands like Fender and Gibson, names like Jimi Hendrix, Bob Dylan and Eric Clapton might spring to mind. But in recent years, these companies have also become closely intertwined with TPG Growth, KKR and other powerful private equity firms. 

Though PE activity in the music production space has yet to catch fire, it's trended up in recent years. This week, TPG Growth announced the sale of its stake in iconic guitar-maker Fender Musical Instruments for an undisclosed amount to Servco Pacific. The Hawaii-based private holding company has held equal-stakes majority ownership of Fender with TPG since 2012. Operations will remain the same, according to Fender CEO Andy Mooney.

Timing was a key factor in the exit. The seven-year holding time reflects TPG's typical growth investment cycle, according to a person familiar with the matter. In that time, Fender migrated from a dealer-centric to a more consumer-centric model, the person said. 

Leo Fender, a former accountant with a love for electronics, founded his namesake company in Fullerton, Calif., in the 1940s. It has since produced the instruments of choice for a generation of rock stars—Hendrix, Dylan and Clapton among them. 

The company's relationship with private equity stretches back to 2001, when Boston-based firm Weston Presidio acquired a controlling stake worth about $57.8 million. After failed IPO in 2012 that Fender chalked up to market conditions, Weston sold its ownership stake to TPG and longtime investor Servco. (It has backed Fender in some capacity since 1985.)  

PE deal activity in companies related to the music production space—which includes, but is not limited to, instrument and equipment makers, record producers and music production software—suggests that investors aren't necessarily bullish on the space. 2018 saw a decade-high of 58 industry deals, worth about $3.6 billion in total, according to PitchBook data, and 2019 deal count followed closely:  
 

Despite relatively meager deal values, private equity can still impact the industry. Consider that KKR bought Fender's long-time rival Gibson Brands out of bankruptcy in 2018. Another example: In 2017, Cirque du Soleil, backed by TPG, China's Fosun International and Canadian pension fund Caisse de dépôt et placement du Québec, conducted a leveraged buyout of Blue Man Group—now a fully-fledged production company.  

Why the general hold up? The relatively slow-growing nature of the music production industry doesn't lend itself well to private equity, according to Brian Majeski, editor of The Music Trades, a publication focused on the music products industry.  

"It's kind of a small, fragmented business, and there's not a lot of opportunity for a large private equity deal," he said. "It's an idiosyncratic, niche business." 

Though the music production industry extends far beyond guitars, deals in the six-string space are telling. 

Bain's $2.1 billion take-private of Guitar Center in 2007 likely dissuaded many investors from jumping into music. Bain saddled the company with a reported $1.6 billion in debt, clearing the way for Ares Management to buy a controlling interest in Guitar Center in 2014 via a debt-for-equity swap.

"It served as a cautionary tale for others looking at this space," Majeski said.

Featured image via Dan Kitwood/Getty Images News
 

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