Ex-Goldman exec Klemann toughs out the challenges of a fundless sponsor

The idea of having to overpay for assets in today’s hypercompetitive large-cap market helped persuade ex-Goldman Sachs banker Gilbert Klemann to leave the relative security of his position and launch as a fundless sponsor.

Klemann left Goldman in January after about 17 years and launched GHK Capital Partners, which invests deal by deal.

The hardest part of the decision, he said, was actually stepping away from Goldman. He most recently led PE investing in industrials for West Street Capital Partners VII, a $7 billion fund. 

“There’s no turning back at this point,” he said during a keynote speech at Buyouts Insider’s Independent Sponsor Connect conference Oct. 30 in New York. 

GHK targets industrials companies in the lower-middle market, which has “stronger value-creation opportunities” and where sponsors can be closer to companies and actually make changes, he said. The firm focuses on companies with $10 million to $30 million of Ebitda. 

The firm is now a three-person shop, having hired Charles Fox in August to work on sourcing deal opportunities. Fox previously worked at FlemingCorp. The firm hired Kevin Collins in February from Goldman, where he worked in the special-situations group.

Klemann is helping fund the venture himself, using his personal wealth, and sourcing capital from a group of investors.

Capital-raising has proven challenging, he said. Fundless sponsors have to raise capital to fund each deal. 

“At Goldman Sachs, there was an entire group dedicated to raising capital, and there was distance between me and our LPs,” he said. “I didn’t leave Goldman with a long list of LPs to reach out to. I underestimated the challenge of raising capital.

“You can get through a whole investment team who likes your deal, and one guy all of the sudden doesn’t like your industry and that capital is no longer there.” 

Add to that the need to find quality deals, and do it in a timely manner, and it becomes a fairly daunting prospect.

As Klemann described it, it’s “the unicorn of finding both [capital and deals] at the same time and being able to put them together … putting yourself in a position where you are either the only player or uniquely positioned to be a player and being able to convince capital sources you’re available to them.”

GHK has completed one deal so far, a proprietary transaction Klemann sourced from his current network. The firm is in talks on another potential transaction, he said.

In general, Klemann asks for terms like a 2 percent transaction fee with a portion of that being rolled into the deal, with monitoring fees of up to 5 percent of Ebitda, which are fairly market rates.

Like many independent sponsors in today’s market, he also tries to structure tiered carried interest, with a 10 percent hurdle rate, above which the GP starts to earn carry.

“We’re not going to not do a deal because of economics,” he said. “That probably doesn’t position us well for negotiations. At this stage we want and need to get these done. We’re in for the long term. The money and economics will come if we work hard and get deals done.”

Action Item: Reach GHK here: info@ghkcapital.com