The following was written by Joel Stanwood, a 2nd year MBA at the Kellogg Graduate School of Management. Joel has worked with two private equity growth-oriented funds, focusing on consumer products and healthcare/financial/business services. Prior to Kellogg, Joel served in strategic, operational, and general management roles at Siemens, was recruited into the firm’s international management development program and is certified as a Lean Six Sigma Black Belt.
Headlines from the “Limited Partner Perspective” Panel
- Brett Gordon, Managing Director, HarbourVest Partners LLC
- Jonathan Harris (KSM ’99), President, Alternative Investment Management
- Ross Posner (KSM ’92), Director of Private Equity Group, Allstate Investments
- Shawn Wischmeier (KSM ’02), Chief Investment Officer, Indiana Public Employees Retirement Fund
- Andrew McDonough (Moderator), Partner, Co-Chair Private Equity Practice, Winston & Strawn LLP
* There will be a confluence of fund-raising activity in the back half of the year, as funds who pushed out 2009 launches meet those who had originally planned to begin fundraising in 2010
* Watch for a bifurcation of “winners/losers” as LPs decide where to allocate
* Distressed investing will benefit from the business cycle for a while yet
* Watch the general partners who are skilled at growth recaps outperform their peers
* The Volcker Rule will create a significant buy opportunity in the secondary market
* The balance of power will shift to LPs – watch for changes in partnership agreements (e.g. key man clauses)
* Although LPs are watching management fees closely, there will be little pressure on the 2-20 arrangement in the lower middle market
Headlines from “An Industry in Transition: What the Last 24 Months Mean for the Future of Private Equity”
- David Chapin, Strategic Development Partner, Ropes & Gray
- Ross Gatlin (KSM ’93), CEO & Managing Partner, Prophet Equity
- William “Bill” V. Glastris, Jr. (KSM ’84, NU ‘82), Founding Principal, Prospect Partners
- Kelvin Walker (KSM ’86), Partner, 21st Century Group LLC
- Andrew Ross Sorkin (Moderator), Author, Too Big To Fail; Chief Mergers & Acquisitions Reporter, The New York Times
* Before the crisis, general partners boasted about their “velocity of capital deployment” – how did the industry lose focus on the key metric of absolute returns to investors (net of fees)?
* On the Volcker Rule: Financial institutions should be encouraged to keep investments on their balance sheet, which would then drive prudent behavior and high-quality investments
* Investors in the lower middle market still have little access to senior debt; they have been innovative in closing deals in 2009 (e.g. financing using seller notes)
* The lower end of the middle market still offers the most opportunity for alpha/value creation in terms of market inefficiencies and dislocations
* Prophet Equity recently closed an oversubscribed inaugural fund by solving five key dysfunctions in the private equity landscape; below are the firm’s structural differentiators:
- Promotes operating experience within the general partnership to allow for superior operational due diligence prior to close and improved probability of investment success
- Guarantees a commitment to the lower middle market by placing a hard cap of $250mm on Fund I and also committing to a hard cap on future Fund II
- Distributes carried interest to everyone in the firm, which focuses the entire team on delivering alpha vs. beta management
- Lives by a set of 10 Operating Principles which promote win-win partnerships with investors, management teams, and within the investment team
- Principals commit a large dollar investment to ensure alignment of incentives with the Limited Partners