Citrin Cooperman Hosts Breakfast Attracting a Group of the Most Active Investors in the Independent Sponsor Space

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Last week we had the pleasure of attending a breakfast hosted at Citrin Cooperman’s Manhattan headquarters for a lively discussion on the fast-growing independent sponsor space. Attendees included independent sponsors, private equity firms, investment bankers, and service providers to the space.

Our major takeaway from the event was that plenty of capital seems to be available to invest in independent sponsor deals, but what was in short supply was robust deal flow. Really well-done meeting. A special shout out to Sylvie Gadant from Citrin for organizing the whole affair, and Heather Madland from Huron Capital for bringing her team in from Motown to lead the discussion. Well done.

The 3 Keys to Becoming Irresistible What the people I adore all have in common….Guest Article by John Gorman

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There’s a routine question asked in job interviews, first dates, table games and so on: What is the most important thing you look for in other people?

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There’s variations on this format (i.e. “What’s the most attractive quality you look for in a potential partner?” Or, “What’s your greatest strength?” And so on) but, in general, the answer remains the same: The character trait you hold above all. When pressed, I’ve often stumbled and resorted to something trite and probably not true: honesty, humor, confidence, charisma, etc. Those are fine answers but they’re not in my estimation the correct ones.

And so one day I sat down on my pleather couch, brewed some holy basil tea, queued up some Anderson Paak on the Spotify and really, truly tried to whittle down the essence of what makes truly admirable, special people exactly that. I analyzed people I looked up to, people I was attracted to, and people I just couldn’t dream to be without. And I found that the answer could never be just one thing, and that many of the things I think I admire are manifestations of other, deeper things I admire more. Here are the three components that, when taken together, create a spellbinding supernova of a person — one who can command a room and control their destiny, one who can be both altruistic and intelligent. And so I give them to you and make a case for each.

Humility

This trait is the root of all growth, learning and kindness. It’s the belief that you are not yet so great that your mind cannot be opened, and it’s the presence of mind to remember that we are all interconnected equals, and that injustice against one is an injustice against all. It is, flatly, an absence of entitlement. People who exhibit humility let their work speak for itself, they remain stoic in the face of their own suffering, and they remind themselves — and others — that life is fragile and therefore valuable. Humility quells ignorance and cultivates grace. I want this in the people I hold dear.

Curiosity

Without curiosity, you cannot be enthralling or even engaging, nor — most rudimentary of all — successful. It is frankly impossible. Curiosity drives an insatiable quest for knowledge, culture, novelty, experience, beauty, art and connection. It is the bedrock upon which you can build a life filled with stories, memories, accomplishments and relationships. People who exhibit curiosity can become masters, or polymaths, or auteurs — but they must first always have an open mind. They first seek to listen, to absorb, to immerse, to traverse. The world is too large and their time on it too short to ever remain fully satisfied in their pursuit of whatever new ideas pass in front of them. I want people around me to remain curious, routinely examining the world through fresh eyes, and using their eyes to find fresh corners of the world.

Empathy

This trait is the miracle drug of humanity (and elephants, and dolphins). It is the simplest, sweetest attribute one can possess, and the most worthwhile one worth cultivating for social success. Empathy brings people closer, and makes others feel understood and less alone inside. And if there is one thing we’re all looking to become a little less of, it’s alone. When I see truly empathetic people, I see people who genuinely care, but also people who remind us that sometimes it’s okay to be still with someone else and not invade their space or encroach their boundaries. This unique ability to understand the world through others’ eyes and cut to the heart of what others are feeling and experiencing. Empathy breeds compassion, connection and love. It is an important precursor for honesty.

You may have noticed the three are closely related. This is no mere accident. In fact, when you stack humility, curiosity and empathy, you can easily see how they amplify each other.

Humility is the soul. Curiosity is the mind. Empathy is the heart.

Humility is how you value yourself. Curiosity is how you value your others. Empathy is how you value the bonds between yourself and others.

Humility is the soil of knowledge. Curiosity is the water that helps it grow. Empathy is the sunlight that shows us which way to bend.

And if you take any two without the third, you’re missing a crucial component: Humble, curious, apathetic people are slothful. Humble, disaffected, empathetic people are sensitive but not very interesting. Brash, curious, empathetic people are exhausting. But when you bring them all together, you create a benevolent triad.

These three traits are the key to becoming warm, smart and memorable. They’re irrepressible and irresistible. They’re my favorite qualities in others: the most attractive, the strongest, the most admirable. And whether I’m hiring them, dating them or learning from them, these are the qualities I look for above all others.

John Gorman, Amateur life coach & insightful writer. Read More by JOHN

Merida Capital Launches Third Fund Targeting Cannabis Space

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Mitch Baruchowitz’s Merida continues to build positions in the cannabis space. The firm just launched its third fund that will look to invest $200m across the entire cannabis ecosystem. The PE firm is only two years old, but has already invested in several dozens players in the space.

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Merida also announced the opening of an office in Toronto, Canada to look at deals in a country where cannabis is entirely legal.

eVestment Reports March Hedge Fund Performance at +0.87%. YTD #’s Best Since 2012

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Demand for hedge funds is rising according to last week’s JPM industry report. The latest performance numbers released by eVestment suggest the demand will continue to increase as the industry shot the lights out by laying down the best YTD returns in 7 years.

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Let’s examine the data. Q1 2019 or YTD show an average gain of +5.40%. While March came in at +0.87%. India funds were the biggest winners in March with a + 10.35 %. Funds with a China focus we strong as well, posting a +5.03% number for March and a +18.65% number YTD.

Other interesting points from the March eVestment hedge fund performance data include:

Among primary strategies, Managed Futures funds produced big gains in March, returning an average of +2.78%, bringing Q1 2019 returns to +2.81%. The group has a long way to go to offset 2018 average losses of -6.02%. The largest funds in the space returned an average of +4.74% in March, but again still must recover a lot of ground to offset 2018’s losses of -7.48%.

Other big winners in March among primary strategies included Macro funds, which returned +1.56% for the month (+2.44% YTD) and Quantitative Directional Equity funds, which returned +1.28% in March, bringing YTD returns to +4.60%.

On the other end of the return spectrum, Event Driven – Activist funds took a dive in March, with returns coming in at -2.55% for the month, however, their YTD returns are still in the green at +5.48%, a far cry from the -10.36% these funds returned in 2018.

Among primary markets, Commodities funds were the only funds in the red for March at -0.35%, while YTD returns are still in the green at +2.61%.

To see the full array of data & view other eVestment reports> eVestment

Survey Indicates Demand for Hedge Funds is Increasing

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According to the most recent JP Morgan survey of Institutional investors, demand for hedge funds is increasing as investors continue to seek returns that beat the traditional market benchmarks.

“While sentiment toward hedge funds has become increasingly critical after a turbulent 2018, investors plan to continue to utilize hedge funds as a primary source of alpha generation in 2019 — and to increase their overall asset allocation to hedge funds” according to the survey.

A third of institutions that responded are going to boost allocations, which would be a significant uptick of 15 percent over last year. Only 13 percent plan to downsize their hedge fund positions. And bit over half (55%) will stay even year over year.

Mike Monforth at JPM said, “Hedge funds are positioned well and investors are becoming more aware of the value propositions they can offer in certain markets….. “It’s a diversification play.”

Investors remain concerned about hedge fund crowding, style drift and transparency, according to the survey. JPMorgan said it polled 227 investors with about $706 billion in hedge fund assets for its annual Institutional Investor Survey.

Fee pressure on the industry continues as according to the survey “more than half of all investors are currently negotiating or looking to negotiate fees paid to hedge fund managers. The standard “2 and 20” model has become outdated as allocators look to incentivize managers through alignments of interests such as with the “1 or 30” fee structure which has grown significantly in usage over 2017 and 2018. Nearly half of all respondents paid less than 1.5% on average in management fees to their hedge fund managers in 2018.”

Macroeconomic and credit strategies will likely see an uptick this year as well. While fundamental long-short equity, event-driven and managed-futures strategies will likely see outflows, according to the survey.

The survey found new launches continue to be an increasing trend among investors. Mostly for diversification and lower fees. “However, the bar remains high for emerging managers to receive allocations. 69% of investors surveyed indicated a willingness to consider allocating to new launches, in line with last year’s survey results. Of those considering new launches, roughly half made at least two new launch allocations in 2018” according to the data submitted by investors.

Citrin Cooperman Annual Report on Independent Sponsors Reveals a Growing Industry Becoming Ever More Sophisticated

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When we launched the first Citrin Cooperman Independent Sponsor Report last year, our goal was to shed a light on the largely unchartered landscape of the independent sponsor world, the “Wild West” of private equity, as one of last year’s esteemed contributors Bruce Lipian aptly described it. Last year’s Report was the first of its kind, reaching a large number of independent sponsors (245 to be exact) on a
wide variety of topics – firm evolution, deal flow, capital raising, economics and liquidity events, among others.

This year, we wanted to capitalize on the success of last year’s Report and to dig deeper. We continue to explore the themes covered last year, but we have also expanded our analysis of economic terms, in response to feedback from many of you. In a sector where one broken deal can be financially
devastating and one successful liquidity event can set you up for life, the stakes have never been higher. And so this year, based upon responses from over 200 independent sponsors, we have identified typical” terms and calculations while also finding considerable variation in economic structures. By sharing these data points, both the typical and atypical, it is our hope that independent sponsors and their capital providers will have a greater understanding as to what the market will bear.

When we started our independent sponsor survey effort last year, there was no playbook for the sector. This year, we hope to create the beginnings of one so that all independent sponsors – novice and experienced alike – may benefit from the findings shared. We are indebted to our survey respondents and our esteemed group of external contributors, both independent sponsors and capital providers, for sharing their insights with us and for making this year’s Report possible. We hope that you enjoy the Report, and we look forward to discussing our findings with you.

Sincerely,
Sylvie Gadant, Partner, Citrin Cooperman

 

THE RESEARCH

This is Citrin Cooperman’s second Independent Sponsor Report. This year’s Report incorporates results from an online survey and interviews with leading independent sponsors and capital providers. Some statistics used throughout the Report may reflect rounding.

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This year, 208 professionals in the independent sponsor space shared their views on industry outlook and operational issues such as deal flow and mechanics, capital sources, deal economics, relationships with portfolio companies and liquidity events. The survey was conducted in April and May 2018, and interviews with leading independent sponsors and capital providers were conducted in July 2018. One hundred and seventy five respondents identified themselves as independent sponsors. Like last year, the majority of these independent sponsors are at firms that have been in existence more than five
years. Most firms (60 percent) have two or three principals, and 27 percent have only one principal. The majority have one non-professional staff member. All major regions of the United States are represented by our respondent population.

Not surprisingly, many of the younger firms (80 percent of them) represented firms (80 percent of them) represented in our study (defined as those in existence less than five years) have not had a liquidity event. Among older firms (those in existence more than five years), 25 percent of them have had four or more liquidity events. Of those firms that have had liquidity events, 12 percent have returned an average realized equity multiple of greater than 5x.

The independent sponsor space has experienced a significant evolution over the past two decades. In
the early days of the model (back when independent sponsors were still known as “fundless”
sponsors), former private equity and investment banking professionals dominated the space. But now,
as our research shows, professionals from other backgrounds – company management/ operations
and consulting, among others – are seeing it as a viable career path. They, like many, are embracing
the risk inherent in the model, realizing it allows them greater control over their investments and holds
the lure of outsize returns.

“The model makes good economic sense both from a GP and LP perspective: you have the benefits of
not dealing with the dollar cost averaging of multiple investments and fund management issues
associated with committed capital,” explained David Acharya, Partner, AGI Partners LLC. “In addition, the model has strong limited partner alignment on issues such as fees, carried interest and discretion to review each investment opportunity.” Like the independent sponsor sector itself, the firms represented by our respondents have also meaningfully evolved over the years.
Once our respondents gained a track record, they found that capital flows more freely. Several
noted that they are now seen as a legitimate alternative to funded groups, whereas early on, that was not the case. Many respondents described how their network of capital sources expanded and changed over the years. For some firms, capital partners have become more institutional. Other firms partner with family offices. Repeat funding relationships have become an option, especially for those with decent track records.

Deal sourcing strategies have also changed for our respondents through the years. When many independent sponsors were just starting out, broker referrals and auctions were the dominant sources of deal flow. Once independent sponsors developed a track record with a few deals under their belt, inbounds and proprietary deal sourcing became more popular.

In addition, many of our respondents have become more selective in which deals they pursue. Some avoid auctions entirely. Others have changed their focus, for example, moving up-market to focus on control buyouts or companies with higher EBITDA. However, all independent sponsors face a uniquely tough situation – the need to balance myriad demands – sourcing, portfolio management, capital partner relationships and general operations to name a few – with limited resources. In response, many of our respondents have added personnel, both principals and junior staff, which enable them to  respond quicker to inbound opportunities, source more deals, allocate resources more efficiently and manage investments more effectively. Streamlining processes is also essential to scaling an independent sponsor firm. Recognizing this, our respondents have employed various strategies: implementing CRM systems to manage investor and contact relationships, creating investor portals, establishing protocols
for investigating deal leads, managing due diligence and streamlining portfolio management. “Replication of returns comes from replication of processes,” advised John Fruehwirth.

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THE CAPITAL PROVIDERS’ PERSPECTIVE: EVOLUTION OF THE INDEPENDENT SPONSOR SECTOR

As the independent sponsor model has grown in popularity over the past two decades, it now has more credibility and traction with capital sources. “In the 90’s, independent sponsor deals were typically referred to us,” said Evan Gallinson, Managing Director, Merit Capital. “But we soon realized we were getting good deals from this source, then called fundless sponsors, and they were adding great value
post-close.” Merit Capital launched a specific outreach effort and created its first fundless sponsor conference in 2005. “Now, we are the ones actively seeking independent sponsors and proactively trying to build relationships,” he added. “These relationships have also developed into more of a two-way street, and we sometimes are referring out deals to independent sponsors when the deal isn’t right for us.” Gretchen Perkins of Huron Capital agreed. “We are in active outreach mode to independent sponsors. We want to maintain visibility with this crowd and be there for them when they find an opportunity and need capital to complete an acquisition.” Capital sources available to independent sponsors have also expanded significantly. “Even in the past five years we have seen a radical change,” said John Fruehwirth, Managing Partner, Rotunda Capital. “Endowments, families, and institutions recognize there is good talent in the independent sponsor field, and they are trying to harness it
through one-off or repeat relationships………FULL REPORT HERE 

 

Buy-Side Pay in London and NY: Hedge vs PE

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When it comes to the buy-side, you’re bound to earn just a tad more working in private equity than at a hedge fund. You’ll also have a better chance of taking home a bigger pay package if you work in New York as opposed to London, though the geographical difference isn’t near as stark in private equity as compared to hedge funds, according to new analysis.

As you can see in the first chart below, senior-level private equity professionals – people at the director level or higher – take home an average of roughly $576k if they work in New York, according to The Pay Index, a salary database powered by financial recruiter Leathwaite. In London, total compensation for private equity professionals drops to $491k, nearly a 15% difference. Meanwhile, at hedge funds (second chart), senior professionals earn an average of $548k in New York and $437k in London, more than a 20% difference.

While people working in private equity earn a bit more than those employed by hedge funds, the latter group doesn’t need to wait nearly as long to see if the fruits of their labor. Deferred cash and stock compensation only make up around 12% of total pay at hedge funds. That number balloons to nearly 34% for private equity professionals working in New York and London – around 4 percentage points higher than the global average.

So, if you knew where each path led, which direction would you take? In New York, for example, senior private equity staff earn, on average, around $28K more than hedge fund employees in total compensation. But they also see $136k more in deferrals, usually in the form of carried interest, which may take years to be realized. Would you rather take the cash in hand?

Private equity pay London and New York

Hedge fund pay, London and New York

Pitch Book Named Best Research Provider

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SEATTLE, March 20, 2019 /PRNewswire/ — PitchBook, the premier data provider for the private and public equity markets, announced today it has been named the Best Research Provider by Private Equity Wire, as part of its 2019 Private Equity Wire Awards. Private Equity Wire is a leading publication serving institutional investors, wealth managers, investment managers and advisers across all asset classes. The Private Equity Wire Awards are based on a ‘peer review system’ whereby Private Equity Wire’s readers elect a ‘best in class’ in a series of categories via an online survey. Categories include, best private equity managers, investors, consultants, advisers and service providers. Audiences recognized the value of the PitchBook platform to fundraise faster, build custom benchmarks, source investments targets, conduct smarter due diligence, plot exits and ultimately drive value for portfolio companies.
“At PitchBook, our mission is to deliver a better way for our clients to do their job,” said John Gabbert, CEO and founder of PitchBook. “Winning the Private Equity Wire award for Best Research Provider based on client and peer voting is a tremendous honor and validates our dedication to providing the highest quality data and unparalleled customer service.”
Since launching in 2007, PitchBook has become the go-to resource for data and research on the private financial markets, including private equity, venture capital, and mergers and acquisitions. The PitchBook Platform, mobile app, API and analyst research empowers users to make informed investment and business decisions by surfacing hard-to-find financial data on companies, investors, funds, LPs and service providers. PitchBook is one of the fastest growing financial information companies in the world, having seen a 65% increase in customer base in 2018 alone and nearly doubling global headcount since 2016. For PE firms in particular, the PitchBook Platform has informed some of the most influential deals in the space with its mission-critical intelligence and real-time private- and public-market data that allow PE firms attract and retain the best investors, identify and vet investments and generate market-beating returns.

Looking at Hedge Fund Pay in NY & London

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From efinancial careers:

Among the biggest misconceptions about hedge funds is that everyone takes home massive seven-figure paychecks. The fact is, less than 10% earn more than $1 million annually. That said, reaching the upper ranks at a profitable hedge fund can provide a very comfortable financial future – as long as the firm can manage to keep its doors open, something many have struggled to do in recent years.

Using data from The Pay Index, a salary database powered by financial recruiter Leathwaite, we broke down average compensation for senior hedge fund professionals – people at the director-level or higher – for both New York and London. We also looked at their average base salary, bonus and any deferred cash or stock compensation over the last 18 months. The gender data is in the second chart below.

As you can see, senior hedge fund professionals in NY come out well ahead, taking home roughly $548k, with base salary and bonus totals closely mirroring one another. That bests the average in London by more than $100k. The $437k in total compensation across the pond also includes 16% in deferred salary, compared to just 11% in New York. But the biggest difference is with bonuses. Senior New York hedge fund professionals earn an average bonus of $241k, compared to just $164k in London. Based on any metric, you’re liable to earn quite a bit more in the U.S. financial capital than in the U.K.’s.

Meanwhile, we also looked at how senior male hedge fund professionals fare compared to their female colleagues. As there aren’t that many women in the senior ranks at hedge funds, we compared the numbers globally to ensure a statistically significant number of responses were included. Like in other recent studies, the numbers reveal a significant pay gap. Men take home around $74k more than women, a difference of roughly 15%. Moreover, women see around 18% of their total compensation deferred, compared to 11% for men, who also earned a 32% bigger bonus.

The 15% gap is actually a smaller figure than ones found in other recent studies, including Citi’s. The bank said in January that women at the firm earn 29% less than men. While calling it an “ugly number,” Citi CEO Michael Corbat said the bank is more than 50% female. He pointed to the “imbalance at the senior job and leadership level” as part of the explanation for the gap. Leathwaite’s numbers don’t include junior positions, so the difference at hedge funds can’t be explained away based on seniority. However, the positions women hold at hedge funds may play a prominent role.

A 2018 Preqin study found that women account for 26% of senior investor relations and marketing roles at hedge funds. Meanwhile, women hold just 6% of better-paying senior investment jobs. Ironically, several different studies have found that female investors and financial advisors generate better returns than their male counterparts, mostly due to making fewer trades.

Report from Goldman Disputes That Corporate Tax Breaks All Went to Stock Buybacks

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Growing up I watched my father quickly debunk anything thrown his way that lacked factual underpinnings by waving his hand in the air and loudly proclaiming it as “nonsense”!
Last week David Kostin, the well regarded Goldman equity strategist channeled my father by declaring the oft repeated narrative that corporate tax cuts were only used for stock buybacks as NONSENSE.
Kostin writes in his report that “Growth investment has accounted for the largest share of US corporate cash outlays every year since at least 1990.” He continues by showing us the data indicating that in 2018, S&P 500 companies increased their spending on capex and R&D by 13% to $1.1 trillion. “This fact is contrary to the popular belief advanced by some politicians that buybacks dominate corporate spending.” said Kostin.
He continues, “US companies have consistently returned cash to shareholders for nearly 140 years. This established historical pattern contradicts the perception of many commentators that significant cash return is a recent development.”
Most interestingly in the data is the lopsided stock buyback programs indicating the practice was concentrated in a handful of companies. “In 2018, buyback spending jumped by $279 billion or 52% above the prior year’s level. However, just 20 stocks in the S&P 500 index accounted for 38% of the $819 billion in aggregate cash spent to repurchase shares during 2018, but those firms represented fully 69% of the $279 billion overall increase in share buybacks. Unsurprisingly, these companies from six different sectors also had the largest amount of earnings trapped overseas.”
Clearly that level of inflows into the US economy was beneficial in numerous ways.
So next time someone argues that corporate tax reduction is used primarily for buybacks, tell them to call Mr.Kostin. He will say that notion is NONSENSE!