Five Questions With … David Kennedy, Managing Director, Serent Capital

1. Serent Capital, led by yourself and Kevin Frick, former consultants for McKinsey & Co., closed this month on a debut $250 million fund. It seems as though you raised more money than you expected and did it faster than you expected. How do you account for the response by limited partners to your debut fund?

I think LPs are largely looking for more exposure to smaller-market buyouts. Secondly, our backgrounds, which are nontraditional for private equity given that neither of us is coming from an existing firm, nonetheless resonated a lot, particularly with the strategy we’re following, which is a pretty intensive business-building strategy. The fact that I’ve been an operator who’s built a business was compelling to LPs. I think the two issues are building a business after you invest and diligencing to make sure you get into a great business. Kevin had done 60-plus diligences for everything from mega-buyouts to growth investments over the last several years.

2. Your firm focuses on service businesses. What is a “service business,” and why is that your focus?

We’re talking about businesses that have pretty light balance sheets. There’s no manufacturing or even light manufacturing. They tend to be more scalable, and there’s also not a huge amount of competition from other buyout firms. Services can be harder to lever, so people tend to shy away. Kevin and I both are contrarian by nature, and we believe in trying to hit ’em where they ain’t, if you will. Growth services businesses is a sector where you can both scale businesses rapidly and make great returns for investors and have limited competition in doing that.

3. Are you going to be a control-stake investor, a growth-stake investor, or both?

We’ll do control more often than not.

4. Do you have a preference for working with existing management teams or bringing in executives of your own choosing?

We don’t have a preference. We’re very comfortable bringing in a management team to the extent a founder wants to exit. We’re also very comfortable working with an existing management team to the extent that we like them. I think our backgrounds make us intrinsically less nervous about swapping out a management team—more so than guys who have a deal background as opposed to a business-building background.

5. You’ve raised the fund, which is a big hump to get over. But now you’re entering a choppy deal environment. Do you think you’ll be able to put your new money to work in the next six months?

I think the environment is good for us, believe it or not. For us, there was never a lot of debt in the first place, partly because we’re looking at light balance sheets and there’s not a lot to borrow against. The usual sources of debt for us are going to be seller notes, which are still there, and mezzanine funds, and a bunch of those guys are still there. For us, the leverage is still there and valuations are going down.