Bart Molloy is a managing director at Monument Group. We spoke with him about the rise in emerging managers and the firm’s relationship with independent sponsors.
1. How is the PE sector performing today compared with 25 years ago?
Private equity remains the most exciting asset class in that it continues to evolve, with increased emphasis on domain specialization and operational expertise, as well as a wider range of vehicles available from which to participate, secondaries of various flavors and LP direct co-investment being two examples. At the same time, institutional investors have generally increased their conviction that private equity is a vital component of long-term outperformance for their portfolio, and transparency across the industry has made great strides.
[Despite] the increase in competition over the past two and a half decades, the various levers a general partner has at his or her disposal to add value have also been increased and refined. Despite many changes, it remains as true as ever that understanding the components of team, track record and strategy and the interplay between those ingredients is critical to evaluating a manager’s chances to outperform over future investment cycles.
2. Funds often invest in sectors such as TMT, healthcare and software. Has there been a shift in where investments are being made?
There has been continued emphasis on what we’ve seen on domain expertise. [An emerging manager’s] expertise fits well with the trends that are happening in a given industry. I wouldn’t necessarily say that it’s a change on the risk spectrum, but … it is kind of a specialization emphasis. Even within groups that may focus on multiple industries, they’re typically going to have teams and operating partners with more of a narrow focus. That’s definitely the trend we’ve seen and I think that within the limited partner community they are typically looking for a group that has an articulated edge.
3. Why are we seeing a rise in emerging managers?
There are a number of characteristics in emerging managers that limited partners find attractive and some are related to that hunger factor. Typically, in emerging managers, you’re going to see the decision makers being very close to the deals. [They will work] with the portfolio company executives versus firms that may have been around for a long time and where the most senior executives are doing investment committee by PowerPoint, where they have stepped back a bit from that day-to-day sourcing and execution. Limited partners will actually prefer the strategy where the most senior folks are really involved in the deal themselves.
4. How is the PE space prepared to handle an economic downturn?
It’s a question that’s absolutely on every limited partner’s mind. Is a given strategy able to be stress-tested for some sensitivity toward being able to withstand a recession or a prolonged economic slowdown? … If you’re in private equity, the holding times may potentially extend, but managers and GPs have the expertise and the proven track record of being able to work and continue to grow the underlying fundamentals of a business.
I think also in general, people in the limited partner community are interested in an all-weather strategy. I think that’s one that can do well if the general stock market isn’t just moving up and to the right. You’ve seen people look at credit, you’ve seen people thinking about operational distress funds and the skill set needed there. We continue to hear about strategies that are non-correlated, so the underlying factors can be a bit different and not driven by the economy. Infrastructure is one of those that we’ve seen people take interest in just given that they’re quite often able to lock up a core return that’s not dependent on underlying economic performance. It’s really a pay-for-success type of strategy.
5. How does Monument Group work with independent sponsors?
Our typical formal engagement in a role is not going to be with an independent sponsor. It’s going to be with a group that may have been a very successful independent sponsor for a period of time, but for the right reasons, maybe looking to transition to a typical blind pool investment vehicle. I’d say that the other role that we have with independent sponsors is that we love to have a dialogue with them. Often they have a fresh approach to businesses and interesting deal flow. If we can informally pair them up with limited partners, who would either with a larger or smaller amount of their allocation look to work with those groups as co-investors.
In terms of our discussions with prospective general partners, [talking to independent sponsors] is always an active part of what we do. Often the answer is, ‘You guys are great and you should continue to keep doing what you’re doing. Here are some potential sources of capital for you.’ There are other circumstances where a group has been a successful independent sponsor but feels that their strategy might be best served with a dedicated pool of capital where we do get involved and help them make that transition toward an institutional LP base.
Edited for clarity by Teddy Grant