May 13, 2014
Interviewed by: David Snow
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Finding the Right Co-investment Partner

You’ll learn the resources LPs need to successfully co-invest, what LPs and GPs look for in a “good” co-invest partner and what makes insurance companies so active in co-investing.

You’ll learn the resources LPs need to successfully co-invest, what LPs and GPs look for in a “good” co-invest partner and what makes insurance companies so active in co-investing.

Finding the Right Co-investment Partner

With Tom Haubenstricker of GoldPoint Partners

Matthew Malone, Privcap: We’re joined today by Tom Haubenstricker of GoldPoint Partners. Welcome to Privcap.

Tom Haubenstricker, Gold Point Partner: Thank you, Matt.

Malone: We’d love to talk to you about co-investment, given your broad experience, but first, please give us a little background on GoldPoint, the evolution of the firm and the business as it stands today.

Haubenstricker: Sure. The origins of the firm date back to 1991. That’s when our chairman, John Schumacher, and I joined New York Life and took over responsibility for the private equity program. At that point, it consisted of about $300 million in assets. John’s idea, one we built the program around, was that we needed to concentrate our private equity fund commitments to a smaller, select group of top-performing managers. We wanted to develop deep relationships with those managers so we could leverage that into additional investment opportunities for us and deploy more capital.

Initially, we started doing that by investing off the balance sheet of the parent company, New York Life. From 1991 to 1995, we were able to build a very nice track record doing that. 1999 was a critical year, a watershed year in our development, because that year we formed a separate subsidiary. We put this effort into that and we raised our first third-party capital fund, which was an equity co-investment fund.

Fast forward to today: we’ve completed more than 130 equity co-investments, more than $2 billion of capital deployed, and very good returns. We have realized gross returns in excess of two times, an excess of 20% gross IRR, which is very accretive to our overall program. Over that same period, 1991 to today, we’ve committed more than $9 billion to approximately 275 private equity funds. In addition, we have an active mezzanine business. We’ve committed more than $2 billion to more than 100 transactions in the mezzanine space.

So, from a start of $300 million in assets in 1991, we’re closing in on $10 billion of AUM and we’ve gone from one institutional investor to well over 50 institutional investors today. We’ve seen a tremendous amount of growth over that time.

Malone: Absolutely. And there’s plenty of interest in the private equity investing world in co-investment, though not necessarily matched by activity, broadly speaking. Clearly, you have vast experience in co-investing. What are some of the particular opportunities and challenges one faces when co-investing?

Haubenstricker: There’s definitely a lot more interest in co-investment today than five or 10 years ago. Then, 15 years ago, hardly anyone knew what we were talking about when we said “co-investment.” Clearly, one driver is that people think about it as a way to lower fees and expenses. Certainly, that’s a feature of it, but I don’t think that is really the reason to do this activity.  The reason to do this activity, of course, is to generate accretive returns and as part of the selection process for the assets you are going to invest in on the co-investment basis.

Also, I think it’s a tremendous tool for helping to evaluate the private equity manager going forward. We hear from many GPs and it’s a very common thread in their comments that there is a lot of interest expressed in co-investment, much more so than actually gets executed. And there are three interrelated things you need to have in place if you’re going to be successful and really committed to the co-investment business. First, you really need a strategy—one that matches your resources and capital as well. But, how are you going to go about this business? How are you going to source the opportunities? How are you going to select the opportunities that you invest in? That leads to the second point, which is process. You have to have a process so that you can evaluate the opportunities and approve them on a timely basis. Finally, you need a team to go ahead and execute on that process. This is a deal business, so the deal flow is not consistent or even. You have to decide how much activity you want to do in this area and whether you want to staff up to handle multiple deals at one time.

Malone: You talked about what the LPs need to do this well and to execute on these opportunities. What are some challenges LPs face, marshalling their resources and putting this organization in place? Are they better relying on some partners to help them do that if they’re getting into the co-investment business?

Haubenstricker: It really comes down to the relationships they have already, the amount of time and resources, in terms of people, they want to commit, and the amount of capital they want to commit to it. Clearly, those groups just starting out don’t have the same number or the same depth of relationships. Also, I’d like to point out that there are many different ways to approach the market in different parts of the market. There are large-end transactions, where we saw a lot of co-investment in the 2005, 2006, 2007 period. Then, there’s the area where we are and have been more active, and we have been focused on recently, which is more middle and upper-middle market. And the dynamics in those two sectors are different. In the larger one, typically, those transactions were closed and underwritten by the private equity sponsors, then syndicated out, almost like a banking process to the investors. When I talk about the middle-market aspect, you often have a situation where you’re working alongside the private equity GP each step of the way as they go through the bid process, when they win the bid, and when they go to close the transaction.

So, certainly, two different approaches there. Also, you have large players who act not as a sponsor, but as a co-sponsor in some transactions. There are different ways to approach the market.

Malone: Let’s talk about the GP piece, starting from an LP’s perspective. They’ve committed to co-investing; they’ve built the resources and strategy. What, to them, makes a good GP partner? Then, following on that, what do GPs look for in an LP partner?

Haubenstricker: In many cases, it’s very similar and comparable. It’s important that there is a lot of transparency throughout the process, because neither the GP nor the LP wants surprises at the end, whether it’s the amount that’s going to available, the terms of the transaction changing dramatically, or issues that come up on either side. Transparency is very important along the way.

From a GP perspective—to the extent the LP can add any value to their process—it’s going to be helpful. Sometimes, that takes the form of providing capital to complete a transaction they couldn’t otherwise complete. Sometimes, it’s utilizing the LP’s network to provide insight to help the GP evaluate the opportunity.

On the LP side, when the GP provides the information, the work they’ve done, it is a great starting point for the LP. They’re able to get up the curve much more quickly and, therefore, be able to evaluate the opportunity on a timely basis.

Malone: Now, with GoldPoint being born out of an insurance company, it seems the insurance companies have been early adopters of the co-investment model and the most active. Why is that and what does that mean for others who are not in the insurance business who are looking to get into co-investing? Are there lessons to be learned and strategies you’ve encountered over your years of experience?

Haubenstricker: Sure. That’s a great question and one I’ve thought about a few times. The insurance companies were early participants in the private equity sector. So that is a great starting point. In addition, the large insurance companies have a lot of capital and have fairly large staffs of investment people. So, you have nice ingredients there. In addition, many times they can be patient capital. They have very large portfolios, giving them the ability to meet their liquidity needs in other parts of the portfolio so that illiquidity is not an issue. Finally, they have had a robust process in terms of valuing the opportunities. That’s allowed them to let their investment people be very creative and seek out something that’s not traditional, a bit more off-the-run or more unique, that hopefully generates more return. So, the ingredients were quite good in terms of being able to execute on co-investment opportunities. They had the relationships, the staff, and the ability to absorb the illiquidity of those investments.

Malone: What are you seeing today and what do you expect to see over the next year or two, in terms of the volume of co-investments?  What is GoldPoint seeing in terms of the number of deals? What do you expect the activity to be like in the short term?

Haubenstricker: Another very good question. As we mentioned earlier, there’s a lot more talk about co-investment than there was even several years ago; a lot more institutions are interested in participating in co-investment, either themselves directly or through co-investment vehicles, which has helped expand the market. It’s an activity that is seen by the GP as more of a typical form of business. So, they are using it where they think it can be used to their benefit. Also, they’re using it as a way to be helpful and supportive of their LPs’ needs. It’s expanding the opportunity set. Our deal flow has been very strong. The challenges in the marketplace are, in many ways, the same challenges faced by the GPs. You’re seeing relatively high prices. The investment thesis is very critical in the assessment of any transaction right now, because, given the high prices, the margin for error and the ability to execute on that investment thesis is probably lower than it has been at other times when prices were lower.

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