Five Minutes with Rick Nathan

As Toronto-based Kensington Capital Partners Limited works to exit the mega-fund sector, managing director Rick Nathan explains the firm’s current perspective on investing in both private equity and venture capital.

You recently sold your investment in Bain Capital Fund X to another limited partner in the fund. What was your motivation for exiting that fund?

We have increasingly focused our private equity portfolio on the mid-market and we have lost confidence in the mega-fund segment. Even though the Bain folks do a lot of smaller deals – what would be considered upper mid-market – it’s a $10 billion fund [and] is still subject to a lot of those challenges that you find in that mega segment. Kensington is not doing any more mega deals and we’re opportunistically adjusting our portfolio to exit from them. The space they’re in right now just doesn’t fit with our strategy.

Were you ever particularly exposed to the mega-fund segment?

It was never a major part of our strategy, but it was one part. In 2006 and 2007 we made a few investments in the mega sector. In the last few years, as the economy and the private equity market have evolved to the current cycle, it seems increasingly apparent to us that it will be much more difficult for the mega funds to achieve the kinds of returns that they had initially targeted and that are available in the mid-market today. This is the second sale of a multibillion dollar fund that we’ve completed in the last couple years and we continue to hold one other, Thomas H Lee VI, but we’re not currently looking to sell out of that.

You’ve said that right now is a good time to be investing in North American mid-market private equity, growth equity and venture capital. Why is that?

It’s a good time for the more mature companies [because] the mid-market private equity world is a culmination of a couple factors. First of all, the economy is on the upswing and it’s still in the relatively early stages of that upswing. I would contrast it with the period around 2006 and 2007, which with hindsight we can see was a market peak. So companies have a little bit of the economic wind at their back to be able to grow a little easier than you would have in a different economic environment.

What about the political uncertainty in US related to things like government spending and the debt ceiling?

The economy is kind of ignoring that. It’s important to the stock market. It could obviously change, but at this stage there is still stronger employment growth [and] stronger economic growth than we’ve seen for some time, and that’s helpful. Secondly, the continued historically low interest rates remain very helpful for private equity investors. Thirdly, I would say that large corporate cash balances of large public companies continue to position them very well for acquisitions and exits out of private equity portfolios.

What is your current outlook on venture capital, especially in light of the Canadian government’s C$500 million commitment to Canada’s venture capital industry over five years?

On the growth equity and venture capital side, we continue to see many interesting opportunities in mobile and media. I congratulate our government on having pulled together a strong plan for venture capital in Canada. It’s very much needed and while we’re still waiting to see more details it looks like what they’ve proposed has an excellent chance of being effective for our market. I think it’s terrific.