1. Keystone recently closed its first fund of funds with approximately $75 million in capital commitments from wealthy families, executives and foundations. How do you plan to deploy it?
It’s a diversified fund but it does have an emphasis on small and lower middle-market buyouts. Approximately half of the fund will be deployed in what we define as small buyout funds, which is, for us, range in size from $100 million to $400 million in capital commitments. This is the space where our firm and its principals have particularly strong relationships and have actually spent several years benchmarking and researching funds.
2. What commitments has the fund already made?
We’ve made eight commitments already. We did rolling closes and had our larger investor come in early, so it allowed us to make some commitments along the way as we continued to fundraise. 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 in total.
3. How does Keystone gain access to the top private equity fund managers?
It’s really the relationships that our principals have built during our careers, both at Keystone while we’ve been laying the groundwork for the firm, but then also in our previous careers and positions. Our investor base is unique. It 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.
4. How has the credit crunch affected your investment strategy?
For large and even the middle-market buyout funds, we expect the cycle to be extended. It will take them a little longer to deploy the funds that they’ve raised. 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. The deals are still getting done and when you’re buying something for 5x or 6x cash flow, there’s a lot less risk to the bank as well.
5. Keystone plans to donate 20 percent of its carried interest profits to charities around the world. Which causes does the firm support?
The particular organizations and causes 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.
Edited For Clarity