Ex-Ares execs on how to build an institutional PE firm

LightBay Capital, formed by two former Ares Management partners, has focused on employing a differentiated strategy.

Nav Rahemtulla and Adam Stein, previously partners at Ares Management’s private equity group, founded LightBay Capital three years ago. The firm closed its first fund on $655 million in January last year and has made three acquisitions to date. Rahemtulla and Stein spoke to Private Equity International about their experience with raising a debut fund for the second time and building LightBay into an institutional private equity firm.

What was the strategy you wanted to build and follow at LightBay?

We are primarily growth investors and help companies accelerate their growth through capital, product and people infusion. Our belief is that mid- and lower mid-markets are currently underserved by an “all weather” strategy. We have the capability to assess risk/reward opportunities across the capital structure so we can take advantage of market dislocations by making distressed debt, structured equity or rescue capital investments.

We built LightBay’s deal sourcing model “PATH”(Process, Access, Thesis and Hustle) internally and all investment team members play an active role in it. We have a philosophy of “leaving no stone unturned” and employ rigour to all investment opportunities from due diligence to value creation at the outset of an investment. We target investments of $50 million to $150 million in the consumer, healthcare and business services sectors, primarily in North America.

Did you have to change your perspective in coming from an established manager to becoming a new, emerging one?

This is our second time as a first-time fund, as we joined Ares prior to it raising its very first private equity fund. The market conditions at that time were tough because of the dot.com bubble bust. When we founded LightBay we braced ourselves for an extremely long fundraising process. We thought it would be tough because the environment has become so competitive, but we were pleasantly surprised that we closed our fund way earlier – in about eight months – than the two years we had accounted for.

We are extremely proud of the 13-person team we have assembled at LightBay. They are highly motivated, entrepreneurial and have the potential of becoming outstanding leaders, internally and at our portfolio companies. We also found that the profile of young professionals who self-select into established firms is very different from the ones that wanted to be part of LightBay.

In addition, we found that management teams and sellers of companies love the fact that at LightBay they can deal directly with the senior members of the team. We also have a deep group of approximately 40 operating executives who provide us with investment support. They have also made direct personal investments into the fund and provide tremendous industry and functional expertise for our portfolio companies.

Some of your LPs are also invested in Ares. How did you avoid conflict with your older firm?

At the time of our separation, we were collectively serving on the board of directors of 10 companies. Once we had decided to start LightBay, we focused on ensuring a successful transition for our portfolio companies and our former colleagues. We worked collaboratively with the Ares founders on an organised and thoughtful transition and communication plan. This allowed us to commence work in building LightBay and still provide appropriate levels of support for the firm. Our long-standing personal relationships, as well as the orderly and respectful nature of our transition, have led to a mutually beneficial ongoing relationship.

Apart from fundraising, what were the other challenges in starting a company?

The biggest challenge was continuing to invest in organisational infrastructure, team development and capital deployment all at once. We had to really strike a balance in that. That’s why we kept our first fund size reasonable – $655 million – so we could pay attention to building up LightBay as an institutional investor and be measured in our investing.

We also found that LPs have become more sophisticated in their manager evaluations. We had one group run us through a cognitive, personality and motivational assessment. We appreciated this as we have used something similar with our team and management groups. Fortunately, the investor is our partner today, so we must have passed!

What can we look forward to from LightBay this year?

2019 has been a great year so far. We have made three investments in the last 12 months and hope to add one to two more investments this year, round out the rest of our team and continue to build on our infrastructure and capabilities. We set up the LightBay Foundation, which benefits from a fixed percentage of our management fees and carried interest. The foundation supports high-impact organisations focused on domestic poverty alleviation and providing families with better access to healthcare and education. We recently formed our first strategic partnership with an organisation that supports foster youth in California who age out of the system to pursue secondary or post-secondary education.