Nathan Brown
(Managing Director – Wind Point Partners)

Omar Hassan
Principal and CFO – Cloverlay

Heramb Ramachandran
(CFO – XPV Water Partners)

Brian Ramsay
(President – Littlejohn & Co)

Alex Slusky
(Founder and CIO – Vector Capital)

Béla Szigethy
(Co-CEO – The Riverside Company)

Ted Virtue
(CEO – MidOcean Partners)

What is the biggest challenge facing you in the next few years?

Heramb Ramachandran: Supply and demand. There is an abundance of private capital and a finite amount of deals. Valuations remain high, and I don’t see this reversing any time soon.

Brian Ramsay: Sourcing new deals at a reasonable valuation will continue to be our biggest challenge over the next few years. Since the great recession, a winning PE strategy has been to buy great companies for whatever it takes to prevail and then benefit from expanding multiples on exit.

This approach has become a very crowded trade, however, and PE buyers have started to stretch their definition of ‘great’ to include companies with more complex stories. This will at some point play to our strengths, so even a mild economic softening or financial market hiccup should lead to interesting opportunities for Littlejohn as a value investor with unique distressed and special situations capabilities.

Ted Virtue: With all the capital that has moved into PE, we need to remain disciplined to where we have a knowledge-based advantage. We need to continue to have the best knowledge, networks and management resources in the sectors where we invest.

Omar Hassan: It’s talent retention. This means we have to build an attractive culture beyond compensation. So we treat everyone like owners here, and make sure everyone feels their contribution matters.

Nathan Brown: The biggest challenge is to continue developing best practices that allow us to succeed as the market continues to become more competitive. We meet quarterly to assess how we can improve in all areas of firm activity: deal sourcing, CEO recruitment and assessment, value-creation plan development and deployment, and others.

How is the relationship between GPs and LPs evolving?

OH: They’re more sophisticated, and looking for a continuous collaboration with GPs. We’ll have periodic updates with LPs about our pipeline and discuss things we’ve passed on that might still make sense for them in a different area of their portfolio. LPs aren’t just clients; they’re partners.

Béla Szigethy: It’s constantly evolving for the better, meaning greater transparency in both directions: LPs being clear about what they want and GPs being transparent about what we expect to deliver.

BR: For the last several years, LPs have been looking to deepen their connections with PE firms they view as priority relationships. This might mean committing larger dollars to a smaller number of GPs, seeking co-investments with trusted firms or supporting the growth of PE firms by allocating to their new strategies.

NB: GPs and LPs are finding more ways to collaborate and add value to one another. LPs have become more sophisticated on how to leverage their experience and network to bring ideas and new capital to GPs. We’ve benefited from LPs bringing us deal ideas, referrals to executives and secondary opportunities.

Alex Slusky: The days of only spending time with LPs around fundraising are gone. We are in constant communication with our LPs and we often approach them early if we are pursuing an especially large deal that we may not otherwise be able to complete on our own, or seek a complex financing package. They’ve become true partners to our business.

Are you diversifying?

OH: We’re a relatively new firm that launched in 2015, and we feel LPs would like us to stay true to our core competencies.

BR: For nearly 25 years, our focus has been to deploy capital in situations that can benefit from some sort of transformation. We started with control private equity, then added expertise and solutions in special situations and distressed debt. More recently we have built teams to invest in performing credit and more highly structured capital solutions. When an opportunity arises to use that knowledge to support a business transformation, we want to be able to say yes.

TV: MidOcean diversified into credit in 2009, where we now manage over $8 billion in assets across a number of strategies in corporate debt. These credit strategies stem from our specialised experience and expertise in the mid-market, drawing on the strong industry-focused network of contacts our team has built up over close to two decades. We now manage two long/short credit strategies, several long-only mandates and a number of customised credit vehicles, in addition to a fast-growing CLO business.

NB: We have been investing in three core sectors over the past 20 years, which has given us diversification. However, we’re constantly analysing the market trends within those sectors and shifting to where we see the most opportunity. Lately, we are focused on markets and business models that are high free cashflow and recession resistant.

What issues keep you awake at night?

BR: The biggest risks to deals and portfolio companies right now are geopolitical. The ever-widening political divide in the US and many other countries is fuelling alarming policy initiatives from both ends of the political spectrum. While we have contingency plans in place, we are obviously limited in our ability to mitigate these risks.

BS: With a broad portfolio, lots of folks tending to their own companies, somebody doing something stupid along the way is always a concern. Compliance-related issues and headline risks can really hurt an investment.

NB: We’re benefiting from this strong market, so we’re currently sleeping well! We have tried to build a portfolio that will perform well in a recession, so that we can continue to sleep well. But each recession has different characteristics and it likely will provide challenges that keep us up at night when it comes.

AS: Rarely does a month go by when I don’t read about another large pool of capital increasing its allocation to private equity. They look at how PE has outperformed other asset classes over the last 20 years. This flood of money is depressing returns and distorting incentives across the entire industry.

How is artificial intelligence changing things?

HR: AI is a potential game-changer in the sourcing of deals. The sweat equity devoted to building up a pipeline that currently might take months and years could potentially be replaced by data-mining bots with real-time analytics.

OH: AI’s chief contributions are going to be the back and middle office, where it can address recurring tasks. To me, it’ll be a cost reduction exercise.

BS: Each of our portfolio companies is in some way benefiting from AI. I would love to see our own firm use AI to help make better investment decisions. We have a broad universe of companies and experiences for an AI algorithm to draw upon. Can’t wait!

Are you launching a secondaries process to provide liquidity to investors?

NB: We closed a secondaries process on a 2006 vintage fund last year. We had three portfolio companies remaining and had recently recruited new CEOs and developed a new value-creation plan at each company.

We were able to get an attractive offer from a new investor that ended up being a win-win-win-win solution for the original LPs, the new LP, the GP and the portfolio management teams. We don’t see a need to launch another process in the near future as we are seeing some early liquidity events on our more recent funds and hope to manage those to a 10-year life.

BS: We have provided investors in older funds some assistance in finding buyers for their positions. We would like to do more here, since investors in general are seeking liquidity more often.

What is a trend that doesn’t get enough attention?

TV: Over the past 15 years, virtually every mid-market PE fund has transformed from a generalist fund to a sector and geographic-focused fund. Sector knowledge is now table stakes to effectively source and operate successful companies.

NB: We have seen the need for minority equity or preferred equity increase in the mid-market. We have accessed capital from other private equity funds to meet this need in our own portfolio.

OH: The use of operating partners might face greater scrutiny. There’s room for conflicts of interest and perhaps LPs are paying too great a share of the cost. I expect more transparency around these fees in the future.

BR: While great companies get pre-empted at jaw-dropping multiples, an asset that has even a little hair on it may find that nobody shows up at auction. The leverage markets are similarly bifurcated. Some bank deals are two times oversubscribed at record tight spreads, while for others, the underwriters can’t find a bid. In this environment, some of these ‘busted’ deals are worth a closer look.