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Genstar’s large buyouts performance catches LP’s eye for Fund X

Nebraska Investment Council staff said the firm's last two funds have outpaced the rest of its holdings in that sub-asset class.

One of Genstar Capital‘s LPs pointed to outperformance by its previous two funds in large buyouts as one of the reasons why staff wanted to re-up to its latest vehicle.

According to memo from Nebraska Investment Council, Genstar Capital Partners IX and Genstar Capital Partners VIII both outperformed the state pension’s portfolio in large buyouts. Nebraska committed $50 million to both funds and is considering another $50 million commitment to the firm’s tenth fund.

Staff provided third quarter returns for 2018, 2019 and 2020 for both funds as well as the state’s large buyout portfolio. Fund VIII had a 91.1 percent net internal rate of return in Q3 2018, 47.2 percent in Q3 2019 and 30.2 percent in Q3 2020. Fund IX only had meaningful returns for Q3 2020, which had a 35.3 percent net IRR.

Nebraska’s large buyout returns, which include the Genstar funds, were 13.2 percent in Q3 2018, 13.7 percent in Q3 2019 and 14.8 percent in Q3 2020.

LP base for Fund IX

Public pensions are an important part of Genstar’s LP base. It raised most of its last fund from public pensions like Nebraska, funds-of-funds and advisors or consultants, according to information presented to Teachers’ Retirement System of Louisiana last week.

Fund IX closed on $5.5 billion in February 2019, according to a press release. About $1.8 billion, or 33.6 percent, of that came from public pensions, the presentation said.

Funds-of-funds invested $887 million and advisors and consultants $783 million, accounting for 16.1 percent and 14.2 percent of the total fund, respectively.

In total, the fund had 134 LPs. Other LPs include insurance companies (9.1 percent), family offices and high net-worth individuals (8.9 percent) and asset managers (6.8 percent).

Notably, the two smallest categories were endowments, which only invested $140.5 million, or 2.6 percent of the fund, and sovereign wealth funds, which invested $115 million, or 2.1 percent.

Genstar also raised an overage vehicle alongside Fund IX, which closed at $1.1 billion.

Fund X and beyond 

A Genstar spokesman declined to comment on the LP make-up for the firm’s current offering, Genstar Capital Partners Fund X. That fund is targeting $8 billion, with a $2 billion overage vehicle, according to a memo prepared by Louisiana Teachers’ private equity consultant, Hamilton Lane. This was first reported last year by the Wall Street Journal.

The fund launched last October, according to Buyouts data. Besides Louisiana Teachers, which committed $50 million to the fund, the only other LP commitment in the Buyouts database is Merced County Employees Retirement Association, which committed $8 million to the fund. Nebraska approved a $50 million investment Thursday.

Fund X will continue the firm’s focus on financial services, software, industrials and healthcare. It will target 12 to 16 investments in companies with enterprise values between $250 million and $1.5 billion, with equity investments ranging from $150 million to $750 million.

According to the Nebraska memo, Fund IX is charging a 1.75 percent management fee with a 20 percent carry past an 8 percent hurdle.

Recent funds have been split relatively evenly between its chosen sectors, though financial services and software have dominated Fund IX, taking up 31 percent and 33 percent of its investments, respectively, according to the Louisiana Teachers materials.

Genstar’s recent funds have all been strong performers, landing in the first quartile.

As of September 30, 2020, Fund V, a 2007 vintage, had a 15.8 percent net internal rate of return and a 2.3x total value to paid-in multiple. Fund VI is a 2012 vintage and has a 37.7 percent net IRR and 2.7x TVPI. Fund VII, a 2015 vintage, had a 29.5 percent net IRR and 2.0x TVPI. Fund VIII, a 217 vintage, had a 30.2 percent net IRR and a 1.6x TVPI, and 2019 vintage Fund IX had a 34.9 percent net IRR and 1.2x TVPI.

San Francisco-based Genstar was founded in 1988 and is led by chairman and managing director Jean-Pierre L. Conte, president and managing director Ryan Clark, and managing directors Rob S. Rutledge, Tony J. Salewski and Eli P. Weiss.

Nebraska also singled out managing director for human capital Katie Solomon for her talent management across the firm’s portfolios, citing her “systemic process to grade teams” and her leveraging of the firm’s network when hiring executives.

Action Item: read the Nebraska Investment Council memo on Genstar’s tenth fund here.