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Talkin’ Bout My G-G-Generation

By August 3, 2016Newsletters

Daily, we engage in talk of the various generations: boomers, millennials, X, Y, and my favorite (although decreasing in numbers), “the greatest generation”. But what of the generations of private equity?

Historically, we see three generations of PE, starting with Gen 1, the “Founders”, who raised funds from a diverse group of limited partners during the evolution of PE in the 80’s and 90’s, where they invested when the modern day PE model was coming of age and the M&A market was relatively inefficient.

This gave rise to Gen 2, the “Accelerators”, in the 2000’s, where certain groups began to scale fund size and others honed in on specific verticals; this is the era where the core competencies of PE began to move beyond the world of financial engineering.

Our experience at CMF in serving over 110 funds and 425 individual companies tells us that Gen 3, the “Innovators” has arrived. The environment for this generation requires a heightened focus and attention to identifying, nurturing and closing deals in an extremely competitive, global market and driving real value creation through the hold period. As a result, this generation has moved their Gen 2 funds to a place where investment professionals are focused on niche deal sourcing and are integrated with operating partners (in-house and outsourced) to successfully implement meaningful, value-enhancing change.

Furthermore, we are seeing the rise of new funds whose MD’s have spun out from Gen 1 and 2 and founded funds focused on the lower end of the middle market, within specific verticals, or doing specific investment types (i.e. minority deals). Palm Beach-based Blue Sea Capital, Chicago-based New Harbor Capital, Denver-based Revelstoke Capital and Dallas-based CenterOak Partners are recent examples that this trend is prevalent throughout the country.

To deliver in Gen 3, our PE clients and prospects are increasing the involvement and relevancy of operating partners and having substantive debates as to the overall organization design model for them. Models we’ve seen include:

  • Hiring a substantial team of operating partners at the GP level,
  • Hiring functional operating partner leaders internally and having them manage a network of independent contractors and focused consulting firms, and
  • Identifying several “partner firms” by functional area and engaging them on an “as needed” basis.

There are certainly other models out there, but we believe the involvement, role and structure of the operating partner within the GP and portfolio companies will see substantive change in the next five years; GP culture, risk management, industry focus and fund size will be substantial drivers.

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