December 21, 2018
Interviewed by: Privcap
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Many Star GPs Might Be ‘Fading Stars’

Private equity firms that fail to deeply examine their strengths and weaknesses on a regular basis may be headed for disappearance, warn three veterans of the fundraising market.

Private equity firms that fail to deeply examine their strengths and weaknesses on a regular basis may be headed for disappearance, warn three veterans of the fundraising market.

Many Star GPs Might Be “Fading Stars”

David Snow, Privcap: Today, we’re joined by David Conrod of FocusPoint, Terry Mullen of Arsenal Capital Partners and Rudy Scarpa of Pantheon. Gentlemen, welcome to Privcap. Thanks for being here.

Terry, you’re an observer of the private equity market generally and how many veteran middle-market groups are out there. What do you think a lot of them may not yet be aware of about what’s in their future?

Terrence Mullen, Arsenal Capital Partners: I think most of the firms that have been in the market a long time—funds three, four, five, six, some of them 10—not all of them appreciate “what got them there ain’t going to get them there,” meaning their points of differentiation, where they sit in the marketplace, what their true valueadd is in a very crowded market. Lots of people to the point in the cycle have good track records or very good track records in numbers alone, but don’t clear the day because people, investors, really ask themselves where’s the market going the next five or 10 years? Who’s got a really differentiated strategy and who’s got a proven track record to manufacture money, good markets and bad? There’s definitely going to be some down cycle in the next five years—we don’t know when, right? So, who actually navigates tougher markets? It’s not always the firms that are 20 or 30 years old.

David Conrod, FocusPoint Private Capital Group: I would say that the managers that don’t adapt will disappear. I think you saw that after the lot of the telecom debacle 15 or 20 years ago, after those CLECs—that took out a number of firms did not adapt and did not evolve. The ones that did became great tech investors—and probably you’ll see some of that in the financial services sector—the firms that are continuing  to do balancesheet investing might not be around in the future and those that have evolved to take advantage of technology and investing in high-growth businesses, payments and things like that will probably be successful. We really have three categories: rising stars, established stars and fading stars. And, to Terry’s point, some of these firms don’t evolve or don’t adapt. The markets move quickly and that can take out some well-known brand names that may not have stayed as focused as they necessarily should have.

Snow: To Terry’s point, are there a number of fading stars out there that don’t realize they’re fading stars? They think they’re established stars that they don’t really know themselves? They don’t know how they’re perceived by the market?

Conrod: No question.

Mullen: I agree with you, Dave—I think the challenge is for us, for any firm, how do you really tear yourself apart year after year and say, “How do we make sure our strategy’s got big edges and advantages? How about our team and execution and continually evolving and raising the bar because it’s a supercompetitive world and we think about the companies we’re investing in?” Global markets are very dynamic, technology innovation is happening all the time. We’ve got to be moving toward where the puck is going, if you will, and on the flipside of innovation in technology, there is a lot of disruption. Companies out there in the world are not going to be around in five or 10 years. And, quite frankly, plenty of private equity firms shouldn’t be around either.

Snow: How hard is it, as an organization like a private equity firm, to occasionally pause and reflect on who you are as a firm, what you do well, what you should try to do better and what maybe some strategies you just need to get rid of?

Mullen: I don’t know if it’s hard or easy, but we’ve done it every year for 18 years very intensively. It’s a two-month process for us, and the whole firm—both at the firm level and each of our industrial and healthcare strategies—are constantly re-underwriting the market: where is it going the next 10 years, what are the edges or advantages we need to compete in? We’ve constantly spent more time, domain and technical expertise in core technology and valueadd, so these are things that we’re constantly evolving and adding. I think it’s really dangerous if you assume what got you here in the past is going to get you there in the future.

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