- Clearlake started with one LP
- Expanded to one of the hottest funds in market
- Building culture is crucial
One vital aspect of building a lasting private equity firm (outside of performance) is establishing a culture. Strong firms have distinct, institutionalized cultures ingrained in existing employees and taught to new hires.
At Clearlake Capital Group, says José Feliciano, co-founder and managing partner, it’s one of the key aspects of the firm’s success.
Since 2006 Clearlake has grown from an emerging manager with several LPs to parent of one of the most in-demand funds in the market. As of March 29, 2016, Clearlake managed about $3.5 billion.
Speaking at Buyouts’ Emerging Manager Connect Outlook conference in New York on Jan. 24, Feliciano said culture-building includes instituting processes to resolve conflicts.
“You have to manage conflicts, you have to be able to deal with disagreements,” he said. Partners will not always agree, and the question is, how do those situations get resolved without the partnership melting down?
The firm ingrains employees with its core tenets: operations, people and strategy, or OPS. This is Clearlake’s playbook for investments, including things like improving operations, assessing management teams and working with companies on strategy.
The culture rewards people not only financially but intellectually,” Feliciano said. Younger employees get to do things they wouldn’t be able to do at larger firms, like sit on boards and help run investments, he said.
Feliciano and partner Behdad Eghbali formed the Santa Monica, California, firm in 2006. Another early partner, Steve Chang, left Clearlake in 2015.
Clearlake raised more than $180 million for its first fund from several LPs affiliated with Reservoir Capital, which also took a piece of the management company, Feliciano said. “Taking on a partner is a difficult decision,” he said, but it came down to “it’s better to own 80 percent of something than 100 percent of nothing.”
The firm raised its second fund in the teeth of the financial crisis, launching in summer 2008. Fund II took two years to raise, and for several months, from November 2008 through Q2 2009, no one returned the firm’s calls, Feliciano said.
Fundraising for Fund II was helped by some distressed investments Clearlake made after a quick November 2008 first close anchored by Reservoir Capital, Feliciano said. That enabled the firm to show LPs a track record later in the fundraising.
“The good news was it took us so long [to raise Fund II] that we got really good at it by the end,” he said. Clearlake closed Fund II on more than $410 million in 2010. It raised more than $785 million for the third fund in 2012, beating its $600 million target.
Fund IV was Clearlake’s breakout vehicle. The firm collected $1.38 billion just three months after hitting the market in 2015, beating its $1 billion target. Clearlake also raised its debut non-control fund on about $543 million in a parallel fundraising.
Fund III was generating a 29.9 percent net internal rate of return and a 1.5x multiple as of June 30, 2016, California Public Employees’ Retirement System performance data shows. Fund II was producing a 12.2 percent net IRR and a 1.4x multiple as of that date, according to CalPERS.
With the larger funds came some adjustment, but Feliciano said the decision to increase fund size comes down to a simple question: Will the larger fund lead you to slightly increase what you’re already doing, or will it fundamentally change your strategy?
If the former, then the larger funds shouldn’t be an issue. But if a larger fund is going to lead to a rethinking of strategy, then it may be time to rethink how much money you want to raise.
Feliciano said the emerging-manager landscape is both easier and harder for first-time fund managers than it was when he launched Clearlake. Many more programs are available to assist managers who are just starting out, but LPs are more carefully scrutinizing their managers and demanding more from them.
“We’re a regulated industry now; there’s a certain set of infrastructure/controls we didn’t have to deal with 10 years ago,” Feliciano said.
“LPs expect different things now. The bar is higher now, but there’s more pools of capital dedicated to” emerging managers.
Action Item: Check out Clearlake’s Form ADV here: http://bit.ly/2jRGoxF
José Feliciano, co-founder and managing partner of Clearlake Capital. Buyouts archive photo.