GP Profile: Geneva Glen Revives The Captive Fund

Firm: Geneva Glen Capital LLC

Investment Pros: Managing Directors Jeff Gonyo and Adam Schecter; Vice President Tom Wuellner

Strategy: To invest up to $40 million in companies generating $3 million to $20 million in EBITDA in business services, consumer services, consumer products, food and niche manufacturing

History: Started by Gonyo in 2008 to invest his own money; launched as a captive fund in July 2010.

A new firm is on the scene in Chicago with a model that harkens back to the industry’s roots.

Geneva Glen Capital LLC has as much as $400 million to invest in companies generating $3 million to $20 million in EBITDA in such sectors as business services, consumer services, consumer products, food and niche manufacturing. The firm is led by Adam Schecter and Jeff Gonyo, who were former executives with WHI Capital Partners and Wind Point Partners, respectively.

Despite its war chest, Geneva Glen does not boast support from endowments, insurance companies, pensions or other typical limited partners. With the exception of commitments from Schecter and Gonyo themselves, Geneva Glen is entirely backed by Wanxiang America Corp., the Elgin, Ill.-based affiliate of Wanxiang Group Corp., the $10 billion Chinese automotive parts supplier.

Schecter and Gonyo’s decision to go the captive route partly reflects how difficult it is for buyout shops, particularly new managers like Geneva Glen, to raise capital. The arrangement allows them to focus on investing. “We’re not on the fundraising treadmill,” Gonyo said.

Indeed, it’s easy to see the appeal of the captive fund model given the fundraising market.

Buyout firms, still chipping away at some $425 billion of uncommitted capital, raised $21.5 billion in the second quarter, according to Thomson Reuters. That’s more than double the $10.2 billion raised in the previous quarter, but it’s still sluggish compared to the $36.2 billion raised in the same period last year. Investors remain hesitant to lock up capital in an illiquid fund while the stock market remains skittish and the potential for a double-dip looms.

Schecter and Gonyo aren’t the only private equity executives taking another look at partnering with a company or wealthy family, a model with roots in the early 1900s. A top executive with a multi-billion dollar buyout shop who is weighing options for his future recently told Buyouts that he, too, is looking at captive opportunities precisely to sidestep the chore of fundraising and the pressure of putting a fund to work within a pre-determined number of years. “Many GPs would be attracted by the more stable, long-term relationships that would come with a much smaller, less cyclically exposed LP base,” the executive explained in an e-mail. “The current system of fundraising cycles creates significant adverse effects for GPs as well as LPs.”

Unlike syndicated shops, which typically have five years to invest a fund, Geneva Glen has no set time limit by which it has to invest a certain amount of cash. Instead, Wanxiang has mandated the firm to do seven to 10 deals, investing as much as $40 million in each. The firm can do buyouts, minority deals, recapitalizations, and it can hold companies for longer periods of time than most buyout shops, both Schecter and Gonyo said.

This freedom from the confines of investment periods relieves Geneva Glen from the pressure of buying or selling a company rashly, Schecter and Gonyo said. “Not having the clock ticking insures that any decision we make concerning a portfolio company will be exclusively in the best interests of that specific investment,” Schecter said. “It’s a terrific position to be in to have patient and flexible capital in this marketplace.”

Getting Started

The bud of what would become Geneva Glen formed in 2005. That’s when WHI Capital, which itself manages a captive fund for Chicago investment manager William Harris Investors Inc., was pursuing Rockford Powertrain, a maker of power train systems and components for bulldozers and trucks in which Wanxiang held a 35 percent stake.

WHI Capital couldn’t come to terms with Wanxiang on the company, ultimately sold to GKN plc, the British engineering business. But Schecter and Pin Ni, president of Wanxiang America, struck up a friendship and kept in touch, with Schecter sometimes forwarding investment opportunities to Ni that wouldn’t work for WHI Capital. A few years later, Ni reached out to Schecter to discuss ways that Wanxiang could put extra money to work to generate private equity-like returns.

Gonyo, meanwhile, had left Wind Point in 2008 after 10 years as a partner at the firm and 20 years in private equity, including stints at Heller Financial and the predecessor to GTCR Golder Rauner. During that time, he generated a 63 percent internal rate of return and a 5.2x investment multiple on deals he helped lead, according to Gonyo. “I was at the point in my career where I wanted to be a founder of a firm and make my own mark in the industry,” Gonyo said.

Gonyo founded Geneva Glen in April 2008, operating as a “sole-practitioner” private equity sponsor, investing his own money in deals and in partnership with other co-investors. He and Schecter had known each other from the Chicago business community for more than 15 years, ever since Gonyo was a vice president at Heller and Schecter was an attorney with Katten Muchin & Zavis. Schecter joined Gonyo in July, bringing with him the Wanxiang commitment.

To be sure, captive funds also have potential downsides, said Larry DeAngelo, the lead banker for financial services at SunTrust Robinson Humphrey. These include restrictions on how much you can spend on personnel, office space and other infrastructure, and forfeiting a larger slice of carried interest. Also, while a limited partner-supported fund makes a capital call for a deal and a few days later it gets the money to invest, a captive’s parent might require a more arduous deal-specific approval process.

“The whole thing revolves on how stable the funding is and how involved the parent is,” said DeAngelo, formerly a managing director with Roark Capital Group, an LP-supported fund, and before that a managing director with Wachovia Capital Associates, the old investment arm of Wachovia Corp. “If you have a lot of autonomy and you have stable funding, that’s the best.”

The Geneva Glen team believes it is in a good spot on all of these fronts. The firm has office space in downtown Chicago. As far as personnel, Schecter and Gonyo have one office manager and one other investment professional, Tom Wuellner, vice president, a former senior associate at Wind Point.

Gonyo agreed that executives at captive funds typically take a haircut on carry compared to peers managing funds with more LPs. He declined to comment on Geneva Glen’s arrangement with Wanxiang, other than to say it is in line with most funds.

Gonyo and Schecter added that Wanxiang is a passive investor and doesn’t dictate what types of investments Geneva Glen makes, as do some captive parents. For example, Gonyo noted that Geneva Glen would avoid investments in the automobile sector, even though that is Wanxiang’s main area of business. As far as an approval process, Geneva Glen gets approval from Pin Ni, with whom they are in frequent contact.

Despite all the benefits of having what Schecter calls “patient capital” in a difficult fundraising market, he and Gonyo might still try to raise money from other investors in the years to come, if needed to execute on strategy. “Wanxiang has very significant resources,” Schecter wrote in an e-mail, “and we would only pursue that path if it made sense for both GGC and Wanxiang together.”