New Mountain on why it decided to raise a non-control fund

The growth investor raised over $10bn last year across its sixth flagship and a debut fund for minority stakes.

New Mountain Capital last year raised $10.2 billion across two funds, including a $9.6 billion flagship vehicle and its debut non-control private equity fund.

The New York-based alternatives manager collected $640 million against a $750 million target for its minority stakes fund, Strategic Equity Fund I, from investors including the Indiana Public Retirement System and AustralianSuper.

The trend of GPs taking minority positions in companies as well as retaining non-control positions after exit is set to increase over the next 12 to 24 months, according to Dechert’s 2021 Global Private Equity Outlook. Half of GP respondents in the law firm’s survey said they increased their target of minority investments. The minority alternative is comparatively more appealing to GPs because it reduces investment risk, increases the firm’s pool of investment targets and makes the deal more attractive to founder-owners, Dechert said in the report.

Steven Klinsky, New Mountain Capital
Klinsky: Same playbook and decision process for SEF

New Mountain founder and chief executive Steven Klinsky and managing directors David Coquillette, Matt Holt and Adam Weinstein spoke to Private Equity International about the firm’s fundraising and the advantages of a non-control fund.

Why did New Mountain create a non-control PE fund?

Klinsky: For years, we have seen good opportunities that did not fit in the flagship fund because the investment was not for control. We had a series of great opportunities that we had to turn down.

We said to ourselves: ‘Let’s have a bucket for each style so the LPs can have both buckets or choose which one they want to be in.’ We decided to set it up separately so that it would be more custom tailored for what the LP specifically wants.

It is a process that works perfectly for us because we’re already hunting in specific sectors. Now, if we find a great non-control opportunity, we can act on it in the Strategic Equity Fund.

Why do the non-control fund now?

Holt: We have seen good non-control opportunities over many years, so we are not trying to catch any particular short-term market condition in the Strategic Equity Fund. And the opportunity set keeps expanding as our team keeps growing and uncovering new opportunities.

How are you assessing deals for the Strategic Equity Fund?

Klinsky: SEF [Strategic Equity Fund] uses the same analytical team as our flagship. It’s the same playbook and the same decision process. If we’re working on a transaction, we don’t know if it’s going to be a control position or non-control sometimes until the end.

How was the Strategic Equity fundraise?

Coquillette: We were very happy with LPs’ reaction to it. When you do something for the first time, there’s always a little bit of, ‘This all makes a lot of sense, but come back to me when you’ve done it once before.’ The investor base in Strategic Equity is quite sophisticated and, we believe, value-added.

Once we had gotten across to our LPs the basic value proposition of SEF, we dug into the granular questions: How are you going to build a portfolio? How are you going to deal with the fact that you don’t have control? We successfully traced it back to many of our experiences with minority partners in our transactions, and more importantly over 20 years of growth-oriented investing and business building. This all combined with our capabilities in thesis origination, underwriting, partnership and proper governance.

Weinstein: We were already at the tail end of the Strategic Equity fundraise when covid-19 hit. The virtual fundraising environment has proven to be effective and has shown a more personal side of the NMC team, our investors and management teams. The personal side creeps in a bit more in remote working where we get to see each other’s houses or catch glimpses of their families, which helps in relationship building.

Have you started investing from Strategic Equity Fund yet?

Weinstein: SEF I has thus far made two portfolio investments: Lincoln Investment Capital Holdings, a full-service investment advisor and broker dealer, and IMA Financial Group, a property and casualty-focused specialty insurance brokerage.

Are fund terms different in SEF compared with the flagship vehicles?

Coquillette: It’s really a similar structure and concept as our flagship funds. For SEF we have an even greater emphasis on co-investments and have made it a committed part of each investment we make. That’s an important thing to think about when we are out in the marketplace – the scale of capital that we can put behind transactions in SEF is not limited by the fund size at all. We have the ability to execute on arguably any deal that we think is attractive.

Are there limitations to the value-creation levers that you can pull in SEF?

Klinsky: Certainly with less control you can’t change management at will. On the other hand, you can become partners with great teams and you are often able to get a better price since there is no control premium to be paid. Plus, in some cases, you can be in a convertible preferred position with greater structural safety.

On the value creation front, let’s say the company wants to do add-on acquisitions they’ve never done before, or a digital transformation of their operations or expand in international markets. We can bring all that to a company even without full control. We can bring all the support, and be in a safer position potentially without having to pay the control premium.