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Editor’s Letter: New-firm formation activity stays strong this year

As you may know, we love to track new-firm formation here at Buyouts. We did a big project last year trying to capture as many of the new firms that were getting attention from limited partners as possible.

This year apparently has not seen a slowdown in the pace of this type of activity. While numbers bear out that first-time fundraising has slowed compared to prior years, efforts to build new shops continue, sources tell me.

“That trend has been alive and well for the past few years,” an LP who tracks new-firm formation told me recently. “There’s never been a better time … to spin out, split off and hang out your own shingle.”

Another executive who works on helping launch new firms said the deal pipeline of potential spinouts and firm formation is stocked.

Along these lines, I recently wrote about a new firm called Middle Ground Capital, formed by three executives who came out of Monomoy Capital Partners. John Stewart, a former partner at Monomoy, and ex-Monomoy Directors Scot Duncan and Lauren Mulholland all left the firm last year and formed Middle Ground.

It’s still early days for the firm, sources told me, but Middle Ground is gearing up to raise its debut fund.

Middle Ground seems interesting in that Stewart and Duncan both have heavy operational backgrounds. Prior to joining Monomoy, both men came out of Toyota, Stewart from management and Duncan from engineering and production.

This mixture of private equity skills with operating experience is highly sought-after today. I’ve heard that many new shops feature both finance wizards and operators as partners — so on the same level in the hierarchy. In the past, the operator may not have been on the same partner level as the PE person.

My colleague Eamon Murphy, who specializes in tech-media-telecom, wrote about another new firm called Elan Growth Partners, formed by ex-Solis Partners executive Craig Dupper. Elan will start off as an independent sponsor, working with a network of investors on specific deals.

“A lot of institutions have a desire for direct investments, given the optionality that provides and the ability to flex up on deals they like,” in addition to “fee efficiency and more tailored carry structures that appropriately award performance and protect on the downside,” Dupper said.

The expectation is that Elan will eventually raise an institutional fund, Dupper said. The firm will invest in the western U.S. lower-middle market in manufacturing, software, business services and food.

Private Equity Editor Chris Witkowsky reflects at home. Photo by Wendy Witkowsky