Dallas Fund-Raising Showdown: Insight vs. Prophet

One is a Dallas-based lower middle market turnaround LBO firm led by a Bain & Co alum. The other is a Dallas-based lower middle market turnaround LBO firm led by a Bain & Co alum.

Insight Equity and Prophet Equity. They’re both in fund-raising mode, so which one do you pick?

I’m not going to answer that question (I’m not an LP), but will talk “straight talk to the American people” about the differences between the two. First the facts. Insight Equity, founded in 2001, is raising $500 million for its second fund, with a new mezzanine fund to finance its own deals. UBS is placing it. Moving on to Prophet. Last year, Insight co-founder Ross Gatlin left Insight because of “strategy” disagreements, and launched a new firm called Prophet Equity. Prophet is in the market raising $250 million for its first fund. PPMs went out in July and a first close is slated for the coming months (with enough IOIs to exceed its target).

Since Prophet is the new kid on the block (and also, because Insight didn’t return my calls), I called Gatlin to explain how his new effort differs. He didn’t want to talk specifically about Insight or fundraising, but did give me some general insights (see what I did there?) on Prophet’s strategy.

Here are what I gathered to be the key differences between Prophet and Insight, or any number of other firms.

-Prophet’s funds distribute carried interest to the entire team, down to the marketing coordinator. Meaning every single employee at Prophet gets a piece. I don’t even think they get a choice. This is definitely not the norm at most PE firms, but in a way, it’s like a public company with stock options.

-Prophet’s own GPs place a giant commitment toward its funds-up to 25%, or $50 million. They can also co-invest directly in deals. Between this and the “Carry For All” rule, I have no questions about Prophet’s alignment of interests. Gatlin joked, “We not only eat our own cooking but like to be the biggest chef in the restaurant.”

-Prophet’s current and future funds have an absolute hard cap of $250 million. Gatlin is steadfast against increasing fund size. That might explain why he left Insight, since the firm’s new fund is double the size of its first. Prophet targets operationally troubled companies valued at $250 million and under, with revenues between $20 million and $500 million. Gatlin said that 98% of US companies have revenues between $20 million and $500 million. Since so many middle market PE firms focus on the actual middle market ($500 million to $1 billion), there isn’t much competition for the abundance of targets in Prophet’s sweet spot.

-Prophet has “real operational know-how.” I hear this phrase all the time and am not too impressed by it, but Gatlin did make the point that Prophet won’t use any consultants or outside ops people. “No shortcuts,” he said. The other phrase he used that struck me was “caretaking model.” I got the impression that Prophet Equity is going for an anti-testosterone firm, anti-ego image.

The last thing that I took away from my conversation with Gatlin was his approach. He said he’s against managing a portfolio. “Really?” I asked. That approach seems doomed. But he responded, “That’s what LPs do. That’s not a GP’s job. My sole goal is to drive alpha. I can deliver that and the LPs can figure out how much they want to take. It’s very different than looking at it as an asset manager trying to assess risk.”

*From my understanding, those disagreements concern Insight’s decision to raise a mezzanine fund, and the increase in Insight’s buyout fund size.