Five Questions with Scott Peters of Growth Catalyst Partners

Co-founder of GCP discusses the PE firm’s strategy and fundraising environment amid covid-19.

Scott Peters is a co-founder and managing partner of Growth Catalyst Partners, a private equity firm investing across the marketing, media and business services industries.

In recent activity, GCP earlier this week acquired an early-stage Silicon Valley startup, The Atlas for Cities, through existing portfolio company Government Executive Media Group. Including its latest add-on, GCP has deployed over half of its debut fund, which closed on $130 million debut last month.

Peters, who spent roughly 24 years at JEGI, an independent investment bank, sat down virtually with PE Hub to discuss how first-time funds managed rough seas in 2020 and why his firms’ investment strategy ought to pay off.

How would you characterize GCP’s investment strategy?

In the markets we invest, there’s usually a gap in the middle where there aren’t a lot of fast-growing scalable companies. And the reason there’s often a void is because once companies get to $10 million or so EBITDA, they get acquired by the strategics. So, we acquire small businesses to build middle-market leading companies that can fill the void.

We’ve assembled seven platforms through the acquisition of 26 private companies, and each one of those platforms – with the exception of one – is a combination of multiple businesses. We essentially reverse engineer companies where we start with a playbook, go down-market and find smaller businesses that fit the service offering.

From my view, high returns will continue to be driven in the lower parts of the market. At the middle of the higher end of the market, it is fiercely competitive. Multiples have not come down, companies are hit hard by the pandemic, and there’s so much capital sloshing around that it has got to have a negative impact on PE returns over the next five years.

Explain the firm’s rationale behind placing limited partners as advisors, CEOs and board members within its portfolio companies?

Lot of firms will go and hire and bring industry partners on staff, then try and find places to put them within the portfolio – I call it the square pegs in round holes. But we took the view that we don’t want to have anybody on staff; we want our network to be actual LPs in our fund so that they are economically aligned.

As is the case with The Stable [a consumer brand portfolio company], where former Nielsen CEO Mitch Barnes is on the board and is also one of our advisory board members.

The PE firm has raised $90 million since the onset of the virus. What fundraising challenges resulted from the crisis?

Many LPs shut down or just completely froze; others refused to make investments where they couldn’t go into your office and spend time face-to-face. That’s still a big, big issue within the LP world. Many LPs are uncomfortable with virtual meetings and due diligence. I think they’re going to have to get over that. Video conferencing is going to become a mainstay part of fundraising and it will fundamentally change the industry, in a good way, for everyone.

We also saw tons of private equity groups pushing re-ups. They were trying to raise their next funds faster to take advantage of a perceived down market where they could go in and get great deals. There was this rush for LPs to reopen existing relationships. It became easy for them to not do any new relationships this year, put it all on hold and stick with existing fund managers who they already know well. So, a lot of first-time funds got really squeezed, which you’ll not hear about because they never got them raised.

What factors helped make this recent fundraising successful?

We were fortunate to have a great [existing] portfolio and a bunch of supportive LPs we had spent time with pre-pandemic. Our anchor tenants like 747 Capital, Serve Capital, Quilvest and Flexstone Capital had gotten to know us well, and were happy about the fund performance as they were coming in.

It wasn’t a blind pool of capital. We were able to prove it out in real time, which made a big difference. [Though] it’s a little unusual for LPs to come into a fund and actually have more than half of the portfolio companies already in line.

As we enter 2021 and the crisis deepens, from your vantage point how will portfolio companies fare?

From a business standpoint, the worst is behind us; all of the dislocation has already occurred. I don’t think anything’s going to change, but I do believe that the time to get back to work in January, February or March is going to get pushed out a little bit until we have more distribution of the vaccines. But, companies will be far more prepared in 2021 than in 2020, because they’re already in that environment right now.

The majority of companies will have some element of remote workforces permanently next year. For example, if we’re looking for the best possible marketing executive for one of our companies, we don’t have to think about geography as a factor and they don’t have to be in New York. That widens your pool of candidates dramatically, which is a great thing for businesses.

Edited for length and clarity.