1. You co-founded Method Advisors, a Boston-based fund-of-funds firm with $125 million in capital, in 2007. Your firm has recently started raising its second fund, which has a $150 million target. What can you tell us about your firm’s focus?
We are much more concentrated than many competitors, and plan to commit to just 10 to 15 small private equity funds that invest in companies with about $10 million in earnings. We like the small end of the market because it’s not as cyclical as the large end, and it outperforms with the greatest consistency.
Although we don’t have a sector focus, many of the funds we look at do have a regional or industry focus. Smaller funds tend to have relationships in one area of the country or in certain industries. For example, we have a fund that focuses on small information technology companies, and another one that has a great network for sourcing deals in the southeastern United States.
2. Are there particular areas you find attractive?
Not necessarily. We focus more on evaluating the quality of the management team than on trying to target certain industries. There are clearly some industries that don’t make sense at the small-company level, such as infrastructure and certain types of energy companies. The funds that we invest in tend do to be focused in sectors like business services, information technology, and light manufacturing.
3. How would you characterize the performance of your first fund?
We’re happy that our first fund has gotten off to a great start. We held our closing in 2009, so it’s really only a few years old. We told investors that we were going to try and tackle the J-curve as best we could, and we’ve been successful. It turns out that although 2009 was a brutal time to raise money, it was an ideal time to invest. And our timing gave us the opportunity to buy into some funds during the market downturn.
4. I understand that a couple of your investors are union pension funds. What are they looking for?
Union pension funds as a whole were relatively late to private equity investing, so there is still a large opportunity for alternative managers to access that market. We think we can provide a valuable role in getting that exposure in a diversified way, but in a way that is not so diversified as to dampen the chances for good performance.
5. How do you identify talent at fund companies?
It’s a mixture of the quantitative and the qualitative. It’s digging into past track records. It’s speaking to as many people as you can to corroborate the strategy that a fund is describing to potential investors. But it’s also about getting to know the general partner through as many personal meetings as possible. It’s a very long process for us to get comfortable enough with a management team to ultimately make a commitment, which can take a year or two years. In some cases, we have known a general partner for a decade or more before making our first commitment.
At the same time, we need to be a lot more proactive in finding quality smaller funds, using the network that we’ve built to find funds that may not have a marketing effort or a dedicated business development professional. These funds can be small, five-to-seven-person teams that typically raise money from local wealthy families and institutions, but it’s these funds that, in many cases, have a great chance of succeeding.