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Talking Top Quartile with Genstar Capital’s Jean-Pierre L. Conte

The vintage 2003 Genstar Capital Partners III LP fund rang up an IRR of 39.6 percent as of Sept. 30, 2015, for California Public Employees’ Retirement System’s California Emerging Ventures portfolio managed by Grove Street Advisors. The performance beat the top-quartile threshold of 21.4 percent and the median of 13.5 percent in an annual survey by Buyouts, based on public pension fund data. Currently with about $5 billion AUM, Genstar focuses on deals in financial services, software, industrial technology, and healthcare.

What’s the legacy of your 2003 fund?

There were home runs in terms of deals but Fund III was also a home run in terms of strengthening our approach and putting in place positive things that helped us get to where we are today. Our focus is a big part of our strategy. We like to say we have one asset class — private equity — one office and one culture to create superior returns. Our LPs get excited because of that focus. We’re in a highly competitive market. We’re nimble. We know when to lean in and to communicate so we can move at lightning speed as opposed to filtering through a massive organization. Some firms are turning into big corporate giants in a way. Being entrepreneurial is a big part of being successful and we want to maintain that as a big part of our culture.

What was the fundraising environment like when you raised Fund III? Those weren’t particularly strong economic years.

It was not quick and easy. We were trying to get to $250 million and we got $221 million. After 9/11 and the dot-bomb, we were happy we got what we did. We turned it into a 3.4x multiple of invested capital.

What deals drove performance?

One of the home runs was PRA International, a clinical-trial company. We’ve been involved with PRA for more than a decade. When we ran across it, it was owned by Carlyle Group. It went from $9 million in EBITDA to $50 million of EBITDA in a pretty short period of time. That was exciting. PRA ended up being a 7.6x deal. Another was Altra Industrial Motion, which was a 7.1x deal. The common theme in these was there was a huge amount of building and driving change. What’s unusual about each of these companies is we got out through the public markets. IPOs aren’t usually our exit of choice, but when it makes sense, we do it.

How did you navigate the financial crisis?

We got hit in some of the more volatile-type businesses like building materials and certain industrial businesses that contained cyclical risk. We exited certain segments of the industrial sector and we pivoted toward and reemphasized new areas, mainly software, and financial services. Fund III was a catalyst to start focusing on what I’d call less cyclical, higher quality sectors, in terms of predictable cash flow.

Anything that didn’t go well and lessons learned?

Propex Inc, a spin-out from British Petroleum, which made products to help make carpeting — a very specific market.  A lot of its business was driven by new housing starts. You can imagine what happened during the recession. That ended up being a total loss. Those types of lessons represent an opportunity in private equity. When you get hit, you basically look at it as an opportunity to learn.

How has the fund contributed to the evolution of the firm?

At the time of Fund III, we had some new players, who today are part of the next generation of Genstar’s leadership team. Ryan Clark came into the firm in 2004. He got us into financial services and is now president of the firm. He was here to learn the lessons of deals that didn’t go well. It’s wonderful to have the younger leadership executives learn from mistakes, take that knowledge and build new verticals. Along with Clark, Rob Rutledge, Tony Salewski and Eli Weiss — all now managing directors — all joined the firm around that time. We all learned the lessons together and we’re actively working together and running the firm.

With private equity firms, culture is everything. It’s what makes and breaks GPs. We found that prior to 2003, it was really difficult to bring in cross-lateral hires from other firms and train them in the Genstar approach. We gave up on doing that. In the years when Fund III was being invested, we once again pivoted and decided we wouldn’t cross-hire any more. We decided to bring in young talent, train them, give them lots to do and promote from within. That’s been a super successful strategy. If you look at our managing directors today, they’re all home-grown. They were trained in our culture, which is quite positive. We don’t have any succession issues, unlike other middle-market firms.

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Photo of J.P. Conte courtesy of Genstar