How was fundraising, especially for a first-time fund?
There’s a sea of GPs out there raising capital, it’s a good fundraising environment. A lot of institutional LPs have really increased their allocations to private equity pretty dramatically. That’s created more supply for private equity as an industry, which we think is well deserved and a good place to invest capital for institutional investors in the long run.
The challenge is: how do we find investors that understand and like what we do? And we feel like we’re a fit for their allocation models? It’s particularly challenging for funds trying to create new relationships. Most LPs, their allocations go to existing managers … those get put on the docket first, so for new GPs trying to tap into those capital pools, you’re hoping to get your place behind existing managers coming for re-ups.
How did you deal with those challenges?
Our model is focused on finding sub-sectors regardless of industry that are experiencing secular growth coupled with recurring-revenue business models. Those research initiatives cut across all sectors. We don’t restrict ourselves to sector focus. We’re hoping to find 10 or 20 companies that have recession-proof characteristics and recurring revenue.
We tend to focus on industries that have a real secular growth trend, and that are largely uncorrelated to the macro environment. So companies growing regardless of whether we’re in a recession or pro-cyclical environment, companies that grow regardless of what happens in Washington, D.C. Good organic growth opportunities with demand drivers that are largely uncorrelated to the broader markets.
Another area we use to differentiate is that we only invest in recurring revenue businesses. You can really add consistent core earnings in recurring revenue businesses in the long run, that’s what drives value.
What’s an example of this type of business?
In Fund II we invested in a business called Internet TruckStop, which is a subscription-based marketplace for logistic services in the trucking industry. What they’re capitalizing on is a marketplace shift from … a largely phone and paper-based system [for filling truck loads], replacing those antique paper and phone-based systems with a cloud-enabled, market-based solution. Shippers, trucking companies pay us annual subscription for access to the marketplace.
How did you source that deal?
We built a relationship 10 years before the investment with them. That is another differentiating factor with us, we spend time building long-term relationships. Those relationships are built around doing really deep R&D around sectors we want to be involved in. As part of those research efforts, we canvass the market, get to know the players, and find the leading players we want to build long-term relationships with.
Another company in Fund II is called Advanced Solutions Inc, a software provider for membership-based organizations. That’s largely recurring revenue software business. Our first conversation with ASI was in 2009 or 2008 probably. We’re trying to develop themes in the sectors that have really good secular tailwinds in the long run and build relationships over time. That network drives proprietary deal flow.
How are you navigating the high-priced environment?
We do think we are in a heightened period of valuations now, but the fact that we have flexible capital solutions, we think that is a great tool at our disposal. We can create value and highly structure investments that don’t only come from buying more than we sold … lots of our investments have structure embedded in them that deliver good risk-adjusted returns regardless of price.