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Editor’s Letter: How firms navigate the frothy market and other lessons

A big theme at Buyouts Insider’s annual PartnerConnect Midwest conference in late June was firms finding great CEOs to work with and build businesses around.

Both Russell Carson of Welsh, Carson, Anderson & Stowe and Sean Cunningham, managing director with GTCR, talked about successful investments in which they partnered with great CEOs.

In Welsh Carson’s case, the firm worked with a CEO father/son team, Rocco and Bob Ortenzio. The firm started three companies with the pair, including the latest, Select Medical, now a public company valued at about $5 billion.

“Rocky is more intuitive, more entrepreneurial; Bob is one of the best managers I ever met,” Carson said.

GTCR also partners with CEOs on building businesses, according to Sean Cunningham. The firm most recently partnered with an executive, David Snow, on Cedar Gate Technologies, a platform created to acquire healthcare IT companies.

This is one way these firms are navigating the high-priced environment. As you’ll see in our cover feature this issue, the deal environment has not slowed, despite high prices and heavy competition.

Private equity is frequently losing in processes to strategics willing to pay up for assets. Instead of going through bank-run processes, these firms take the tack of finding great executives, experts in their fields, and build businesses around them. It’s an interesting way to approach this market.

At the Chicago conference, we also learned that the most negotiated terms include capital-call subscription lines and GP commitments. LPs like to see GPs funding commitments to their own funds through cash out of pocket, rather than management-fee waivers.

And as far as subscription lines of credit, LPs are looking for disclosure about how they will be used and caps on how long they can remain outstanding.

But perhaps the biggest concern on LP minds these days is fund size, panelists said.

Investors love to get the rationale behind why a fund needs to grow so much larger than the prior pool, besides simply that the demand is there.