Andrew Nikou, OpenGate founder, talks challenges of raising a first-time fund

Buyouts sent a few questions to Andrew Nikou, founder, managing partner and chief executive of OpenGate Capital, which announced the closing of its debut fund this week at $305 million. Nikou launched OpenGate in 2005 after working for Platinum Equity in Europe. The firm invested its own money, building up what several LPs called an impressive track record, prior to raising its first external fund.

How long did fundraising take?

16 months.

What kind of LPs did the firm secure?

OpenGate’s LPs are blue-chip institutional investors from both the United States and Europe.

How much did OpenGate kick into the fund total?

While we are not disclosing the actual dollar amount, we can say that our GP commit was greater than the 2 percent average, at nearly 10 percent.

What is the environment like for a first-time fund?

We can only speak to our experience, but we found the LP environment to be incredibly receptive for investors seeking a cross-border, lower-middle-market, value-focused manager raising a first time-fund.

How much of the fund has been deployed?

OpenGate’s fund has already committed capital to four investments this year, with a fifth due to close in Q4. In total, these five investments reflect our strategy for investing in North American and Western European, lower-middle-market businesses. In total, we will have deployed slightly more than 40 percent of total committed capital for these five investments.

How would you describe your strategy?

OpenGate looks for broken P&Ls versus broken balance sheets. We pursue acquisition opportunities where we can improve the operational value of a business.

How does the deal environment/pipeline look?

A core tenant to OpenGate’s strategy is our ability to source opportunities directly from the corporate community. More than 80 percent of OpenGate’s deals are sourced from the parent company, whether or not the process ever enters into a formal, investment banking process. We have a strong pipeline going into the second half of 2016 but we will remain steadfast in pursuing only those opportunities that fit firmly with our investment strategy.

Do you expect an overall macro slowdown?

Yes — a macro slowdown is anticipated as there are always potential catalysts that can slow down or even freeze debt capital/equity capital markets. If your question pertains to our ability to source investments, OpenGate’s global view is that the summer period is traditionally slower for European corporates as they prepare for the second half of the year and that U.S. deal flow is starting to increase with a view to completing transactions by year end.

Has your strategy changed at all now that you have a large, dedicated pool of capital?

There has been no change in OpenGate’s strategy in that we continue to pursue businesses that are underperforming relative to their industry peers — effectively driving growth at the EBITDA level from single to double digits.

With a committed pool of capital, we have been able to pursue opportunities without the burden of highly structured acquisition terms and we continue to find businesses with greater scale and greater opportunity to grow exponentially through innovation and operational improvements.

What kind of impact is the firm seeing from Brexit?

We’ve been fielding a lot of questions about Brexit recently. The impact to date has been minimal for us. I don’t know that anyone can predict what the ultimate outcome will look like at such an early stage.

Any advice for other first-time funds?

Target size for first-time funds is an important consideration — one that LPs will absolutely focus on. The ultimate size should be substantiated by the GP’s ability to back up the number with a rationale that they can prove out. Does your strategy support it relative to the market you are in? Do you have a deal pipeline to support it? Are there past and/or pending deals that support it? Can you deploy the capital without drifting away from your strategy?

GPs should also consider their own capital commitment relative to the cover target as LPs will want to see that the GP has meaningful skin in the game.

And lastly, how will that first-time fund scale up for Fund II? Investors are wary of new funds that want to scale up too quickly. After considering all of these factors, a GP should then test the target figure with as many advisers, placement agents, LPs and other friends of the firm as possible to see what kind of response they get. Many LPs will gladly offer their guidance, as they did with OpenGate. Our earlier LP and placement-agent discussions gave us invaluable guidance in our process for determining an appropriately sized, first-time fund target.

Action Item: For more information, contact Alanna Chaffin at admin@opengatecapital.com.

Photo courtesy of OpenGate Capital