July 13, 2015
Interviewed by: David Snow
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Deal Flow Is Key For Guardian’s PE Arm

Guardian Life has some $44B in AUM, and its private equity division is putting that capital to work in fund of funds, co-investment, and secondaries, says managing director and head of private equity, Maurice Gordon.

Guardian Life has some $44B in AUM, and its private equity division is putting that capital to work in fund of funds, co-investment, and secondaries, says managing director and head of private equity, Maurice Gordon.

Deal Flow Is Key For Guardian’s PE Arm
With Maurice Gordon of Guardian

David Snow, Privcap: Today, we’re joined by Maurice Gordon of Guardian Life. Maurice, welcome to Privcap today. Thanks for being here.

Maurice Gordon, Guardian Life: Thank you very much, David. Happy to be here.

Snow: Guardian Life is a long-time investor in private equity as an asset class. I’d love to hear more about how the program has evolved and how you’d like to see it evolve further. Why don’t we start with a 1,000-foot view of your portfolio? Talk about the role that private equity plays in the overall Guardian Life portfolio.

Gordon: Okay. In general, Guardian Life Insurance is a 154yearold wholelife, primary wholelife insurance company. They have very longterm assets, so private equity fits in perfectly with our assetliability matching. We’ve about $82 billion of assets in total—of that, about $44 billion are investable assets that we generate a couple million a year of income. My job is to take a 2.5% to 3.5% allocation of that $44 billion and invest it in private equity. It’s not a large part of the program, but we like to think of it as a very important part of the program. It certainly has been generating very strong returns for Guardian and the policyholders.

Snow: Talk about your priorities over the next five years, by way of redeploying some of the capital you’re getting back and putting more capital to work in the private equity asset class.

Gordon: For the next five years, we’re going to be focused on different sectors within private equity. Of course, we start out with the core program, which is more of a fundoffunds program. But we’re also expanding into co-investing, into the secondaries. It’s somewhat of a three-legged stool within private equity—an institutional program employing all three segments within private equity.

Snow: How are you going to structure your co-investment program? Has that been decided yet?

Gordon: Yeah, we’ve been working on that for some time. A bit of background on co-invest: I did my first co-invest back in 1990, before it was popular and trendy. Then, I also spent seven years doing co-investing for the state of Michigan in a separate fund structure. So, I’m very familiar with co-investing and I really like co-investing. I can certainly see the advantages of having that as part of an overall program for Guardian and the returns have been very good.

I have a situation where we don’t have a large staff. There are only four, in addition to myself, on the staff. So, we’ve decided to choose a co-investment strategic partner to work with to help get me deal flow that maybe I couldn’t get on my own, within our targeted program. In general, over the years, in thinking about it for co-investing, I think the key factor of success is deal flow. You want to make sure you have lots of good co-investments to look at. Then, you can analyze and pick the best of several. You can do a much better job of picking. You get five nice deals in front of you. [It’s] picking one of the five, instead of only having two and feeling like you have to take one. So, we’re going to choose a strategic co-investment strategic partner that can build on what I have.

We’ve got a program of about $1.4 billion in committed capital. I’ve got 55 relationships, 78 funds, so I’m going to take my…core investment portfolio and build on that. Not only will I mine the deal for mine, I want to have a partner who can get me into $75 or $100million deals, so on the large sides. Then, my deals. Then, I want my partner to bring me additional co-investment deal flow so I can build more deal flow from their portfolio. And part of the way the world is changing is you’ve got the SEC involved in co-investing. I think we need to figure out how to do pre-letter of intent transactions. I need people who can get in early, before the deal is even cemented…to get co-investment deal flow from there. It’ll be an important part of the program.

Snow: Given the size of your organization, how do you feel about the opportunity to invest in megafunds? However mega they are these days versus smaller, middle-market types of buyout firms.

Gordon: That’s a good observation. Because if I had to put out $3 billion a year, I have no choice but to put large chunks of money—$100, $200 or $300-million checks into some of the mega-funds. We are fortunate in that we’re going to be investing closer, in the $300million range. So, I can put out a $25-million investment in a small fund and that works in very well with our program. My benchmarks are a bit higher and the types of returns I’m wanting to look for are just higher than what megafunds can typically produce.

Snow: Before a GP books a meeting with Guardian, what should they understand about the way your vetting process operates?

Gordon: Yeah, there are a few things. When a GP comes in, I think they really need to, first of all, show me your returns. You need to come prepared to show that you can really perform to get the investment returns we need. And we look at benchmarks such as PME—now, they have six different kinds of PME. So, I have lots of public-market equivalent benchmarks to look at, but also how they’ve done in specific vintage years for their specific targeted strategy.

Snow: I have a question for you about the relationship with the managers you have already committed to. It has to do with reporting. What about the reporting, the IR process, drives you crazy as far as sharing information, the timeliness of it and the quality of it? [Does] anything come to mind?

Gordon: Yeah. I think what you touched on is a very transformational area right now. In the next five years, the amount of data and transparency you’re going to see is going to change dramatically. And, as you know, there are groups out there now that the sponsors can send information to. You collect all the information and then you’ll shoot it out to the limited partners in a secure and safe form. So, I think the transparency and the reporting is going to be something we think is very important, we’re asking about and we’re looking forward to some of those changes. We just changed service providers. There are some great service providers as well as analytical engines out there now that you have the ability to do some very good analytics of your portfolio. One thing I like is that I can now look down at my 1,100 portfolio companies with some good transparency and see how those are those specific industries and sectors are performing.

Snow: Final question for you to look into a crystal ball a bit and talk about how you see this asset class evolving over the next say five or 10 years. What are the most important trends?

Gordon: Yeah, we touched on it a bit earlier on the co-investing side. I think the institutions are going to want to become more partners with the sponsors. And, a few years ago, where you had three different sponsors clubbing up, it didn’t always have a happy ending, right? I mean, when you have three very large egos in a room, three heads of very strong, dominant funds, sometimes it’s hard to get decisions made when things go bad. When everything is happy…and things are going well, that’s good. But when things start getting tough, it’s hard to be effective in your decisionmaking.

Snow: So, private equity, there is an app for that?

Gordon: No, there is going to be. Not quite, there will be…you can see what others are doing and where things are going. You know, I do so much on my phone right now. And I can envision what they could be having apps for. Actually, I just got elected to the ILPA board in January and my job is to evaluate the apps for the phone in the new technology. So, I’ll have some ideas on how we could possibly incorporate that.

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