Emerging Managers Find Extra Security In NY Life

New York Life Capital Partners just might be your new BFF (best friend forever), if you’re an emerging manager looking for a big-name limited partner that can not only jump-start your fundraising but that is also eager to provide you with co-investments and mezzanine capital for your deals.

According to CEO Thomas Haubenstricker, the firm looks to spread a total of $30 million to $80 million among three or four first-time fund managers each year, making pledges of $10 million to $20 million. Those that go on to perform well for New York Life Capital can end up in the firm’s core partner program, which has more than 40 managers in it, including ABRY Partners, Avenue Capital, Kelso & Co. and TPG.

About half the emerging managers backed by New York Life Capital eventually end up in its core partner program, and about 80 percent of the general partners in the core group initially approached the LP as a first-time fundraiser. Top-quartile returns are a prerequisite to make that move up the food chain, but “we look to have a relationship with these groups that transcends the typical LP/GP relationship,” said Haubenstricker. Specifically, he looks for teams with the ability to generate co-investment and mezzanine opportunities. “If that’s less of a focus for them, it’s another reason for them not to move into the core partner group,” he said. The firm typically invests $20 million to $130 million per partnership in the core program.

Haubenstricker, who was promoted to CEO in late July, heads a team of about 20 investment professionals from the company’s Manhattan headquarters, where they manage private equity funds of funds, co-investment funds, and mezzanine funds for institutional investors. Outside investors include, according to pension fund documents, Pennsylvania State Employees’ Retirement System and the Pennsylvania Public School Employees’ Retirement System. Much of the $7 billion in total assets managed by the group comes from parent New York Life Insurance Co., and more than $4 billion of the $7 billion in assets is invested with buyout funds. The rest is divided about equally between mezzanine investments and co-investments. The firm invests primarily in the United States and Europe.

Among new initiatives, New York Life Capital has launched a fund of funds focused primarily on commitments to U.S.-based mid-market buyout funds of less than $1 billion in size. The firm has so far collected total commitments of $101.4 million. The firm also manages four private equity co-investment funds with a total of $1.85 billion of committed capital, earmarked for investments of $10 million to $50 million alongside sponsors in buyout, recapitalization and growth capital transactions in the United States and Europe. The latest of the co-investment funds, New York Capital Partners IV, closed in 2008 with $600 million. The vehicle was initially capitalized with up to a $300 million commitment by New York Life, a $200 million commitment by Pennsylvania Public School Employees’ Retirement System, and a pledge of $100 million or more by Pennsylvania State Employees’ Retirement System, according to pension fund documents.

The firm is also investing from its second mezzanine fund, NYLIM Mezzanine Partners II LP, an $800 million vehicle, which had a final close in October 2007 with commitments from 26 institutional investors, including U.S. pension plans, domestic and overseas insurance companies, and institutional investors from Europe, Asia and the Middle East. The mezzanine funds are invested $15 million to $50 million at a time in the buyouts of mid-market companies in the United States and Europe. A third mezzanine fund is in the offing, sporting a $1 billion target.

Emerging Managers

To feed these various programs, New York Life Capital uses its emerging manager program.

The firm does not have a strict definition of an emerging manager, but Haubenstricker noted that if a firm has made it to its third fund, he no longer thinks of them as emerging. Clearly it would include first-time funds, and most funds below $500 million, he said, but “there are people who are raising a second fund that is over $500 million that are still establishing themselves.” The firm has backed emerging managers raising funds of anywhere from $300 million to $1 billion. Regarding strategies, the firm is “very agnostic,” Haubenstricker said, having backed everything from an Indian buyout fund to a U.S. energy fund.

During the current fundraising drought it has seemed like the only emerging managers to get commitments are spin-out teams with big names attached to them. But New York Life Capital wants to meet teams that consist of more than just a known superstar and a supporting cast. Haubenstricker wants to explore teams “with depth”: It’s okay to have one dominant personality, he said, but you also need to have a strong, experienced investment team, both at the partner level and at the mid-level.

It is pretty tough, however, for emerging managers to get that first slug from New York Life Capital. “There’s a very high bar and an extensive amount of due diligence with emerging managers,” said Haubenstricker. The firm thoroughly assesses the investment professionals, the value proposition, and the strategy of new teams in a process that could take six months; the firm also conducts detailed reference checks.

To decide who makes the cut, New York Life Capital spends a lot of time understanding a sponsor’s track record and how value was created. One of the most difficult judgments to make is whether or not a manager created value in a sustainable way or was simply lucky in its timing. “We try to assess that, but it’s more of an art than a science,” said Haubenstricker. “That’s clearly one area where a lot of people don’t make it through to the next level. Getting to the point where we can see they create value in a sustainable way is where the funnel narrows quite a bit.”

Among those to make the cut have been funds sponsored by Exponent Private Equity, LNK Partners, Saw Mill Capital and Water Street Capital Partners; all four have garnered pledges of roughly $20 million each. (See table for more first-time funds the firm has backed.)

Although the firm made no commitments to emerging managers this year, in 2008 it pledged to Exponent Private Equity’s second fund. The shop was formed by an established spin-out team that does growth-oriented mid-market buyouts in the U.K. Exponent Private Equity Partners II LP closed in 2008 with commitments of £805 million ($1 billion).

LNK Partners got a slug from New York Life Capital for its first fund, a $400 million vehicle raised in 2006 to invest only in the consumer and retail sectors. The group was attractive in part because of its expertise in both finance and operations, explained Haubenstricker.

Saw Mill Capital is led by a very experienced team that had done deals for years without a fund, and thus had a long track record to analyze, explained Haubenstricker. New York Life Capital was impressed by how efficiently its portfolio companies operated in such areas as manufacturing. Saw Mill Capital Partners LP closed in 2007 with $270 million.

The executives of Water Street Capital, formed in 2005, impressed Haubenstricker with their extensive knowledge of the health care sector. The shop’s first fund, which closed in 2005, garnered $370 million in commitments.