Friday Letter It's spin out time

LPs are right to be paying attention to the latest wave of new managers attempting to establish themselves.  

The private equity industry is one built largely by fiercely ambitious individuals. Take the Blackstone Group, for instance. In 1985, Stephen Schwarzman and Peter Peterson set out with hunger, a vision and just $400 million at their disposal. Twenty six years later, Blackstone is a publicly traded, heavily diversified investment business, with $150 billion of assets under management and offices around the world.

It is unlikely that anyone will ever repeat this kind of feat and build another truly international giant today. Private equity as an industry is approaching maturity, and the seats at the top table of global players are taken by the likes of Blackstone, Carlyle, TPG and KKR.  

On the other hand, throughout the history of this asset class, limited partners have often done well by backing a first-time team, or a spin-out from an existing franchise.

To be sure, rarely have such start-ups begun with a plan to create a global empire – Schwarzman and Peterson in all likelihood didn’t either. But those who did succeed in building viable businesses in the industry doubtlessly had something essential in common: the drive and determination required to launch their own firm, raise the first fund, invest it, manage a portfolio, sell it off profitably and then start over.

Today, unsurprisingly at such time of upheaval and volatility, some individuals are attempting to do just that.

Spin-outs are happening in Western markets, for instance. Private Equity International reported exclusively this week that Dominique Mégret and Bertrand Meunier, the former head of French buyout firm PAI Partners and his right-hand man respectively, have founded a new venture, M&M Capital. Earlier in the year, John Sinik, a former managing director at Towerbrook Capital Partners, launched his own debt management business, Metric Capital Partners. Many others are doing similar things.

Elsewhere, in Asia, a new crop of managers is coming to the fore also. Several groups in China are making great strides (and are certain to give the aforementioned Western elite a serious run for their money at least in their Asian home markets, and possibly even elsewhere). Limited partners wanting a part in this development will do well to catch up with those Chinese newcomers before access becomes a problem.

Not all LPs are willing to take a punt on emerging managers, but some are up for the challenge, despite the heightened risk profile. One institutional investor interviewed on condition of anonymity said: “It’s a matter of taking a calculated bet on a new group. Today’s environment is a great time to put capital there. We’ve frankly seen some of the higher profile, best emerging managers benefit from a rush of capital pretty quickly.”

And for those professionals who get their spinouts right, the rewards on offer can be substantial – bigger still than the fortune you can make as a rainmaker at Blackstone Group. This is why private equity will continue to produce people brave enough to strike out on their own. LPs willing to look for alpha in unexpected places could well reap the rewards, but will have their work cut out.