- Independent sponsors are a source of deal flow for LPs with co-investment experience
- Doing deals as an independent sponsor can be a proving ground for aspiring GPs
- Aberdeen often commits 30-50 pct of its PE funds to emerging managers
Whit Matthews is a senior investment director at Aberdeen Standard Investments. He spoke with Buyouts about Aberdeen’s approach to spinouts, independent sponsors and first-time managers.
What types of emerging managers get your attention at Aberdeen?
There are typically two types of emerging managers in this market. You have the groups that spin out of another firm. They have track-record attribution, they’ve all worked together before — it’s a directionally clean story, and those managers tend to get traction quickly and raise successful funds in relatively short order.
At the other side of the world, and there are more of these types of managers, you have professionals that haven’t run a firm before, they haven’t managed a portfolio before, and maybe they haven’t worked together before. In those types of situations, operating as an independent sponsor and proving out your ability to drive deal flow, get deals done and work with your new partners under a new umbrella is something that a lot of LPs want to see. Operating as an independent sponsor for 12 to 36 months before you raise a fund is something that we see quite a bit.
Do you actively seek out independent sponsor deals?
We allocate capital to a handful of those opportunities each year. It’s a great source of direct-investment deal flow for us, and it’s a really great way for us to get to know a manager and diligence a manager before they formally raise a pool of capital for a fund.
How has the independent-sponsor world changed in the past few years?
The number of independent sponsors out there is increasing, and the velocity with which independent sponsors are coming onto the scene is increasing. It feels like we don’t go a week here where we don’t hear about two to five new managers that we hadn’t heard of before, in terms of groups spinning out.
Historically, a lot of folks out there would say, “well, if they can’t raise a fund, there’s probably a reason that they can’t raise a fund.” But what we found is that there are a lot of individuals who are perfectly content doing one deal or two deals and just focusing on those transactions one at the time. And we’ve seen really, really impressive groups that have chosen to stay in that independent-sponsor model.
We think it’s a really fruitful part of the private equity landscape to be playing in. You got to be doing a lot of it, you’ve got to have folks who have perspective on it, and it’s definitely a different skillset to work with those managers, but we think it’s an important part of that lower-middle-market landscape.
Have you actively tried to develop that skillset? I’ve heard that co-investing with independent sponsors requires speed and decisiveness when a potential deal comes together.
We have deliberately built our investment team with individuals who have come from the traditional GP side of the table. For groups that want to co-invest, that’s an incredibly important skillset, but especially for groups that are looking to allocate alongside independent sponsors, having a team in place that really has a direct and differentiated view is really important.
Do you have a target allocation to emerging managers, or do you limit the size of your commitment to new managers?
We allocate all of our capital to lower-mid-market managers, and obviously emerging managers are a big part of that world. But at the end of the day, we’re not thinking, “we need to do X percent of emerging managers.”
We want to do a hundred percent of great opportunities that we think can produce outsized returns. Often that number tends to be in the range of one-third to 50 percent, depending on the vintage year, to emerging managers, but it is not a specific target.
Typically, we do not underweight our commitments to emerging managers. [If] we’re going to back a manager, whether they are a fifth-time fund who we are re-upping with or a first-time fund, our conviction should be at the same level with both of those managers. We understand that for many LPs, if you haven’t had a history of working in this part of the world, it does feel like a different risk profile. But because this is all we do and everything we do … our conviction has to be 100 percent whether it’s an emerging manager or [an] established re-up manager.