GHK’s Klemann on establishing a new firm in a challenging market

What is your background, and what led you to launching your own firm?

I spent my career at Goldman Sachs before deciding to launch GHK. I wanted to move into the mid-market, where I saw more opportunity for value creation relative to the large deals we focused on at Goldman.

You initially operated on a deal-by-deal basis. Why did that make sense?

We completed two deals on a deal-by-deal basis prior to launching the fund. The primary reason was to establish a track record as our own firm, away from Goldman, and to prove out our thesis in and around the mid-market industrial space. It was always our intention to raise a fund, and those first two deals were helpful for demonstrating our capabilities and for establishing relationships with LPs. We then lined up our third deal to be the first deal of the fund. In other words, we used it as a mechanism to drive the first close.

Why do you think you were successful in a market that is so challenging for first-time funds?

I think investors liked the focus of our strategy. They also liked the fact that a number of our team had worked together at Goldman prior to launching the fund. I started GHK on my own, but with the intention of bringing people over, over the course of a couple of years, which I did. That meant there was some continuity among the investment team, and this was valued by LPs. The success of our pre-fund deals was also crucial for demonstrating our differentiated approach.

What areas of due diligence did investors spend most time on?

Investors went into depth across the board, but particularly around our sourcing engine, and our differentiation in terms of how we drive value creation across the portfolio. They looked at the depth and substance of our executive network, our pipeline of deals and our relationships with intermediaries. But the real challenge for emerging managers over the last couple of years has been getting mindshare from LPs, who have been unbelievably busy. It was oftentimes a lack of bandwidth, rather than a lack of interest, that we were fighting against.

Did you receive much pushback on terms?

The short answer is no. Our fees are market standard. The desire for co-investment is very high among investors, however, given the economics relative to fund commitments. And at $410 million, our fund is functionally undersized, which means co-investment is a very important part of our story.

We haven’t guaranteed co-invest to anyone in any of our deals, but, practically speaking, we are putting $100 million to $250 million of equity to work in any given transaction. A substantial portion of that equity will come from co-investment, which means our fund will function more like an $800 million or $900 million fund. Co-investment can be an important driver of a first-time fundraising. It also allows investors to observe the way you operate up close.

What advice would you give other emerging managers raising their first fund?

It is, objectively, a very challenging undertaking, and there will be bumps along the way. Perseverance is critical. You need to be able to accept the inevitable rejection and maintain conviction in your thesis. Mentally and emotionally, it is tough, and we consider ourselves very lucky to have gotten in and out of the market, particularly in the midst of a pandemic.