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IHRSA Financial Panel Weighs In

Compared to last year's IHRSA financial panel session, which occurred right smack dab in the middle of one of the country's worst recession in decades, the mood was a little lighter and the outlook a little brighter at this year's financial panel in San Diego.

Rick Caro, as usual, served as the moderator. On the panel this year were Brent Knudsen, managing partner and founder of Partnership Capital Growth; Elise Donahue, director of LA Fitness (United Kingdom); Mike Eck, managing director of Morgan Stanley; and Phil Collins, managing director of Orchard Holdings Group.

(No, it wasn't that Phil Collins. But this Phil Collins did make a quip during his presentation that went something like, "The genesis—no pun intended..." Coincidentally, Genesis was inducted into the Rock and Roll Hall of Fame on Monday, so the pun was funny and topical.)

Caro offered his usual headlines from the past year, the first two referencing the economy's deep recession and the last headline stating that 2010 will look similar to 2009 until the unemployment rate lessens. Caro also said the number of clubs in the U.S. is relatively the same as it was last year, the number of new builds is developing at a lesser rate (despite more attractive landlord deals), franchised clubs are increasing, there were few new major club deals in the U.S. and the U.K. and few new equity companies entered the industry.

Knudsen, whose company has been involved in deals with such companies as Gold's Gym, Anytime Fitness, Spinning and Octane Fitness, begged to differ with Caro about there not being many major club deals. Partnership Capital Growth was involved in the Fitness World/Steve Nash Sports Club deal earlier this year that involved Angelo, Gordon & Co. and Mark Mastrov (more on him later). As to whether the industry has been recession proof, Knudsen said it has been resilient but not resistant to the economy.

Donahue made sure to point out that her LA Fitness company in the U.K. is different from the LA Fitness based in California. Donahue, an American, works for MidOcean Partners and considers herself a consumer products person. Some of her past deals include Slim-Fast, Clear Eyes and Air Borne.

So far, 2010 is not off to a good start across the pond, Donahue says, who adds that bad weather has hurt English health clubs. With 80 percent of LA Fitness members based in London, Donahue hopes the 2012 London Olympics will give a shot in the arm to the company. The key to success is to focus on the consumer, Donahue says.

Eck, of Morgan Stanley, which raised a half-billion dollars to redo Equinox's capital structure, says that the banks are normalizing in this economy and that private equity is "awakening."

Eck said he didn't want to sound like a "Debbie Downer," but the economy is undergoing a slow, uneven recovery—but a recovery nonetheless. There will be some vulnerability to a dip or a series of mini dips, Eck added.

"We do believe there will be better growth in the economy in the second half of the year," Eck said.

Collins has handled deals involving Mastrov and 24 Hour Fitness in the past as well as deals with Crunch and Steve Nash Fitness World involving Mastrov's company, New Evolution Fitness Company. One of Collins' latest deals involved The RUSH Fitness Complex out of Tennessee, which after an influx of $30 million in equity in 2007 grew from seven clubs to 19 clubs.

Collins said that while the fitness industry looks like the retail, restaurant and hospitality industries, it really is none of those. He added that fitness club industry experience is critical in the fitness business. He showed a slide of a cartoon that read, "It's the management, stupid," with the word management written over a crossed-out "economy."

There's a chance that the industry is going to be over-clubbed in the U.S., Collins added, creating a need for operators to differentiate. In the question-and-answer period, Collins said the amount of proposed regulation in state legislatures relating to automatic renewal of memberships is "downright scary."

"I'm hopeful it doesn't get traction," Collins said.

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