October 7, 2013
Interviewed by: David Snow
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Adding Strategies, Expanding the GP Franchise

Many GPs who see success in one strategy become eager to expand their firms by raising new funds in new strategies. But how do they convince their LPs that this is the right move, that it doesn’t amount to that dreaded term: “asset gathering”? Four IR and fundraising veterans share expert views in Part 2 of an essential thought-leadership series on private capital fundraising.

Many GPs who see success in one strategy become eager to expand their firms by raising new funds in new strategies. But how do they convince their LPs that this is the right move, that it doesn’t amount to that dreaded term: “asset gathering”? Four IR and fundraising veterans share expert views in Part 2 of an essential thought-leadership series on private capital fundraising.

Adding Strategies, Expanding the GP Franchise

Private Equity Fundraising Survival Guide 

David Snow, Privcap:

Today, we are joined by Lina Russo and Mounir Guen of MVision Private Equity Advisors. We are also joined by Muhannad Qubbaj of Gulf Capital. And we are joined by Hussein Khalifa of MVision. Welcome to Privcap everyone, thank you for being here.

All of you are fundraising experts although you come at it sort of from different roles in the market, so I’m fascinated to hear your views on a very important subject today, which is expanding the GP franchise, many GPs either overtly or secretly dream in starting in one strategy and expanding into new strategies, you know, maybe from private equity to real estate, from real estate to credit, and many of them wonder how do you do it? How do you pull it off, what attributes do I need to have to convince my investors to back an expansion into new asset classes, new strategies. The MVision team has helped firms do that, and or advised others not to but Gulf Capital has successfully expanded from one asset class into others. And I’m interested, if you can tell us how your firm thought about that and then how it successfully executed the expansion.

Muhannad Qubbaj, Gulf Capital: Well thank you, well Gulf Capital was established initially as a private joint stock company with a very strong capital base. And the plan was to actually create one of the leading alternative asset managers in a region where, in general, alternative assets was a nascent buzzword. So we raised a significant amount of capital and started seeding funds in our own alternative investment silos and strategies. We started off with private equity, and the reason is there was a very growing interest in that sector in the region. The demand for smart capital was growing, and slowly the, the snowball effect continued, and private equity over the last seven or eight years has become a successful asset class in the Gulf. Interestingly enough is the next asset class in which Gulf Capital expanded was real estate. So Gulf Capital decided well let’s look at real estate, we didn’t want to invest just in general or basic residential or high end residential. Why don’t we look at mixed-use developments, which will focus on retail and commercial? And why don’t we look at housing complexes to cater for the growing population. So you need that fuel, and in this case it was the demographics and the strong spending power that’s more and more apparent in the region. Now the third area in which we’ve expanded is mezzanine and credit financing, and that actually emanated from a need

Snow: How did you get your investors comfortable with the fact that Gulf Capital could be the provider of the experts who would run all those strategies and not some other group?

Qubbaj: Well I thing one challenge would be to hire, well was actually hiring the right teams. So for private equity the focus was let’s develop the right team over three or four years organically, and that was the main focus. They weren’t all done in parallel, they were done in series actually. Then real estate was the next venture, and we said, we looked around. We didn’t find the, the strong human capital needed to develop such a big project, such, in terms of commercial or retail and a project in housing and residential so we joint ventured with the Related Group from New York. They’re, they’re amongst the best in North America so we said, well why don’t we import the talent? And supplement it with people who are regional experts, and when it came to mezzanine we actually looked at other, you know, credit experts within the region. And we hired the top of the top from competitive players.

David: Maybe follow up question for Moose you know, why do you think that Gulf Capital was successful in expanding into new franchises where perhaps other GPs shouldn’t or can’t?

Mounir Guen, MVision:

It goes to Obama campaign in the first election.

David: Good I’m glad you brought politics in.

Guen: That’s right, yeah. Because they can, one of the things you have to look at is do you have a formula that is positioned to be able to grow the business in this particular manner? A lot of private equity professionals and firms are really silos of individuals put together that are deal-focused professionals. And they don’t necessarily manage a business as much as they are very good investment professionals that have come together and work together. And the DNA of the management of a business is a different profile, and it’s interesting because sometimes what you see is you see private equity firms like historical in the United States hiring and investment banker in the belief that this person will bring the managerial talent. What they’re really looking for is an inspirational CEO or senior partners coupled with a very prominent and relevant COO who can then expand and execute the visions of, of being able to capture certain markets.

Snow: Is it in fact the case that behind closed doors a lot of GPs are in, in meetings with fundraising experts such as yourself a lot of GPs are expressing an interest in so how do I do this, I’ve got a private equity fund but I want to get into another fund and do you think I have the right stuff? Is this taking place?

Hussein Khalifa, MVision:

This happens all the time. There are many new groups that come to us with ideas, some of them that make a lot of sense because they’re matching the opportunity with the skillset. And some which quite frankly are outlandish, I think over the last 20 years both as an LP and on the placement side you know, we’ve seen groups of people in you know, in Italy wanting to do deals in China when China was you know, first became an investable market that I think five of the six members of the general partner had never been to China. There was famously a case her in the US where a general partner managed to raise a Latin American fund because they felt they had a large Mexican population in their state, so that gave them insight into the Latin American market.

David: How did that turn out?

Khalifa: Mixed results let’s put it that way. But this a question that’s asked all the time whether it’s going to different geographies, whether it’s to go into different asset classes, whether it’s to go slightly up in terms of deal size, or in a couple of cases down. Because they see an underserved market at the lower end.

David: And Lina, since you get these questions from GPs privately all the time are there good reasons and bad reasons to want to expand?

Lina Russo, MVision:

Absolutely I think the, the key is what is really the incentive for the GP to do it. Is it because they truly see and have a vision to take advantage of a compelling opportunity where they feel they have the distinct competitive advantage? Whether it’s a relatively underserved or even a segment which does have players in there, but they’ve got something really unique or they approach it from a different angle, or they have an ability to source opportunities that differentiates them clearly from the other folks in the mix, that’s great. If it’s for asset gathering and we know there are clearly folks out there that are just looking for a platform for the sake of, of a platform. That is quite dangerous, and frankly LPs see right through it. They, and they are very vocal about it as they should be. So there are right reasons to do it when you’ve got really sharp investors who have skills that are portable and can take advantage of it and really generate returns that are attractive to their LPs and prospective new LPs they should absolutely pursue it. Where it’s a, you know, an asset gather game or an AUM game I think it becomes a real challenge.

Qubbaj: We have many LPs who are invested in all asset classes with us, and at the end it just boils down to trust. If they trust you, if they trust how you are going to be disciplined with your decision-making and that you can apply your stringent process and focused process across all asset classes then you know, they gain the trust. They understand there is going to be transparency, and you know, they want to invest with the teams that are going to be built by the macro managers, yeah.

Khalifa: They almost have to believe, they almost have to believe that you have the same kind of skills in the other asset classes.

Qubbaj: But that’s what I’m saying they have to have a trust in the macro managers of the whole asset class, sorry of the whole platform and that they’re going to set up the teams most efficiently.

Snow: Well that’s where you get in, that’s where you get into the power of brand in investment management right? You say hey, we did 10X in our venture fund don’t you think that we’ll probably do a pretty good job in our growth equity or our credit fund? And many investors believe this right and are they, are they wrong to, to think that a firm that does a pretty good job managing investment talent on the buy out side can also do a pretty goo d job managing credit talent in a separate vehicle?

Russo: The way Gulf Capital has done it is finding those best in class investors for each of those strategies as opposed to spreading an existing team thin. I think that that’s one of the challenges and one of the mistakes that folks who try, managers who try and grow the platform try and sprinkle the same people across different platforms and different strategies and that’s a flawed, typically a flawed outcome because you’re not, you’re not focused on the best in class. You’re not getting the right people to execute a particular strategy who really can generate then the consistent return so that across each platform you’re driving value and you’re creating more and more investor demand.

Qubbaj: Exactly and as you had mentioned it’s finding the right management team. So you’re talking about you know, in private equity you have to be homegrown, or you have to be at least from the region or very well exposed to the region. Because cultural sensitivity is very important there.

Khalifa: Especially in emerging markets.

Qubbaj: And especially in emerging markets, however for example in real estate you, we imported management and we imported expertise, and we supplemented that because you can do that for real estate. In terms of you know, mezzanine you know, you need people who are very very focused on credit but similar to private equity they have to be you know, experts from the market and who have operated in the current marketplace, understand exactly how banks work, exactly what private equity needs are. Exactly what family is needed or portfolio company is needed, so it differs from place to place and it just depends on finding the right team. If you didn’t find the right team even though we wanted to, if we didn’t find the right team even though we wanted to go into mezzanine then we wouldn’t have launched the fund.

Guen: There is another approach to the model and that’s called incubation and the Americans have done this. And it’s depending on the older funds they had up to 30 percent, on the average one 20 percent they could opportunistically put in either a different strategy or different market. And it geographic was the first thing that they did, so they would, they would take it up to the limit in Europe at 20/30 percent and then they would launch the European product. Then they would go to Asia, and then they’d launch the Asian product.

Snow: That’s very smart yeah.

Guen: And then we saw this back in ’09 when there were debt and credit opportunities, and a lot of general partners altered the language of their LPAs to be able to put in or to take advantage of some of these anomalies that were taking place cause of the various financial crisis, the various scenario that was taking place. And then when things stabilized the main fund went back to doing its PE and here low and behold you had a billion dollar credit fund that came out of the general partner.

Khalifa: Well and when it doesn’t work out for example when a lot of general partners who had backgrounds in growth capital and buy outs went into the venture space they came back when they were raising their next fund and said well this is our track record. But in reality it’s actually a turn better because we had a 20 percent carve out for VC and we don’t do that anymore.

Snow: Which we’ve now decided to not do.

Guen: Decided.

Expert Q&A with Lina Russo, MVision Private Equity Advisers

What is unique about the way that MVision approaches the fundraising market?

Lina Russo, MVision: We spend an enormous amount of time getting to know the general partner, understanding the team, their track record and conducting the same diligence that a limited partner would conduct. Making reference calls, and building that knowledge base allows us to understand the GP. Our knowledge and insights that we have from the LP community, engaging with them and transacting with them globally, allows us to create very targeted fundraising.

From a limited partner’s perspective, we’re able to then share all of the information that we gleamed over during our own diligence process and allow them to then facilitate and accelerate their diligence process.

We have lots of our managers come back to us fund after fund, and that’s because we’re more than just an agent that’s helping them with a particular transaction. We’re an advisor that works with them to help them build their business, to help them in between fundraisings, and in creating a very transparent communication link to their LPs, both existing and prospective.

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