5 questions with Brandon Nielson

Keystone National Group recently closed its first fund of funds with about $75 million in capital commitments raised from wealthy families, executives and foundations. So Joshua Payne sat down with Brandon Nielson, managing partner of the Scottsdale, Ariz.-based firm. The following chat was edited for clarity.

Q: How do you plan to deploy the fund?

A: It’s a diversified fund with an emphasis on small and lower middle-market buyouts. About half of the fund will be deployed in what we call small buyout funds, which, for us, range in size from $100 million to $400 million in capital commitments.

Q: What commitments has the fund already made?

A: We’ve made eight commitments already. We did rolling closes and had our larger investor come in early, so that allowed us to make some commitments along the way. I don’t want to disclose the names of the funds, but we’ve committed to two very large buyout funds, one middle-market buyout fund, one growth equity fund and four small buyout funds that all fit within that $100 million to $400 million fund size. We expect to make additional commitments in the next 12 months, investing in 12 to 15 funds total.

Q: How does Keystone gain access to the top private equity fund managers?

A: It’s really the relationships that our principals have built during our careers, at Keystone while we’ve been laying the groundwork for the firm, but also in our previous careers. Our investor base includes many current and former C-level CEOs, executives and entrepreneurs, which makes us an appealing limited partner to many of the small and lower middle-market buyout funds. A lot of these smaller general partners appreciate that we really do understand their space.

Q: How has the credit crunch affected your investment strategy?

A: For our small GPs, they’ve really not been affected, at least not so far. Many of the small and lower-middle-market buyout funds that are already in our fund of funds are still purchasing companies in that 5x to 6x EBITDA range, so they’re only putting on 2.5x to 3.5x, maybe 4x total leverage, and these deals are still getting done. In fact, several of our small GPs are reporting stronger deal flow than ever. There are one or two in there who are seeing it get a little tougher, but it’s not near the pain you’re feeling on the large end in terms of deal flow because the debt is often not syndicated. It’s often a regional bank that is just holding on to the debt, as opposed to having it sold off.

Q: Keystone plans to donate 20% of its carried interest to charities. Which causes do you support?

A: They will be selected in the coming years. However, one of our partners is active in microcredit lending and so we expect to do something in that area. My guess is that will be one of a couple of different things we’ll support.