Times of uncertainty create the best investment opportunities, say GTCR co-CEOs

PE Hub’s Q&A series with high-profile private equity professionals continues here with insights from Dean Mihas and Collin Roche, co-CEOs and managing directors at GTCR. In January, the Chicago private equity firm closed its its first Strategic Growth Fund with $2 billion of LP capital commitments. The co-CEOs shared their thoughts about the new fund and about today’s uncertain times.

What kinds of investments are you making with the new Strategic Growth fund, and how do they differ from investments made out of your most recent flagship fund, GTCR Fund XIII, which closed on $7.5 billion in 2020?

Dean: For over 40 years we have been investing behind our Leaders Strategy approach of backing exceptional management teams for transformation and this new fund will continue to apply that strategy in the sectors in which we have deep expertise. Our flagship has grown to the point where many investments we could formerly pursue are not large enough to be appropriate for that fund. It’s very important for us to invest into agile businesses that may have even greater rates of growth and innovation. The strategic growth fund can pursue those opportunities and we expect that the equity investments will range from $50 million to $200 million in each company over time.

What will characterize dealmaking for GTCR in 2022?

Collin: Based on the way 2021 ended and the way 2022 has started, it’s clear that we have shifted to a more uncertain environment, and it may mean the topping of valuations after a very long cycle. If the landscape becomes more challenging, we are confident that our portfolio is positioned to not only do well, but also take advantage of any uncertainty. Having experienced many market cycles across our tenures here and more generally across the long history of our firm, we are big believers in accelerating in these environments when others may pull back. We think that times of uncertainty usually create the best set of investment opportunities.

How are high prices affecting your dealmaking in terms of closing new deals and making exits?

Dean: Notwithstanding what we’d consider an environment of fairly full valuations, our firm has been very active, and we are pleased with the blended purchase multiples, growth rates and risk-return profile on what we have done. We work to develop conviction in a business’s franchise value and growth potential, and often we can pay more than other bidders because of the value we see that we can create once we are the owners, along with our management partners. We have a rigorous process to identify and validate that opportunity, and our entire investment approach is built around our belief in value creation.

How does GTCR create value in this high-price deal environment?

Collin: A key part of our strategy is to embrace transformation that others may view as execution risk because we have a great ability to implement change in partnership with our management teams. As Dean said, we work to fully understand the value proposition of a company and then we consider how that can be enhanced, which can be more efficiency, better sales execution or investment in innovation. We have talented and experienced investment professionals working closely in partnership with exceptional management leaders, all with long track records in the sectors in which we invest. That bolsters our conviction in our value creation plans.

How are you managing your portfolio through the current set of challenges, including inflation, rising interest rates, supply chain disruptions and labor shortages?

Dean: We are focused on investing to be on the right side of change, whether that be in technology and tech-enabled services or other areas of major change like medical technologies and life sciences. Those areas tend to be more resilient to the current concerns around labor disruptions and inflationary rates on inputs. In general, we are spending more time with our teams on what may happen, and less on what has already happened. We are focused on the future and being prepared for any set of developments. Of course, we are always concerned about downside potential, but we are equally focused on where we can invest into a market like this given the uncertainty. We are also fortunate to have open and constructive dialogue with our management teams about what is really happening on the ground, and that helps us work with our teams to focus on long-term value creation.

What are you most excited about in 2022?

Collin: One of the key things that most excites us is the leadership development within our firm. We have a tremendously talented and deep group, and we are seeing our people develop and take on more responsibilities. We pride ourselves on the long tenure of our professionals, with the vast majority of our leadership team having been at the firm for over 15 years, but also on our ability to develop new leaders and we have expanded our managing director group by nearly 20 percent this past year through promotions. It’s great to see a person that you know well run with new projects and work with others collaboratively to accomplish our strategic and investment goals. We are incredibly proud of our team at GTCR and the leadership potential here.