

When a funds-of-funds manager like
After 20 years in the industry, first at
The Chicago-based firm, with $3 billion of assets under management, manages pools of capital in the fund of funds and direct co-investments fund arenas, with most of the 20 investment professionals working on both types of investment funds. The firm mines the portfolios of its GPs for attractive co-investment opportunities, often taking a lead position in pricing and structuring financings, Sacks said.
The funds of funds generally commit over a three-vintage-year period, during which they’ll typically pledge to about 40 GPs raising venture capital, buyout, growth, non-U.S. private equity and special situations funds. Sacks called the relatively small number of pledges a virtue in that it “shows conviction in backing high-potential managers in a well-diversified portfolio.” Raising mid-size funds of funds under $1 billion “mitigates the pressure to have to deploy lots of capital to weaker players,” Sacks added. “We can keep the quality bar very high.”
Mesirow Financial Private Equity’s strategy is to have about 25 percent of its money in venture capital; 35 percent to 40 percent in U.S. mid-market growth or buyouts; 20 percent in special situations, including mezzanine or industry-focused strategies; and 20 percent to 25 percent in private equity funds based in northern and western Europe. Another 5 percent to 10 percent may find its way into companies headquartered in the emerging markets via managers based in the United States or western Europe. In addition, more than 20 percent may go to secondaries, which, Sacks said, provide a way “to soften and shorten the J-curve, to get early performance, and to deploy capital more quickly.”
Three Qualities
Like most LPs, Mesirow Financial Private Equity does not automatically re-up with its managers. “Nobody gets a free pass,” Sacks said. “We’re very focused on making sure that managers have delivered what they promised.” The firm has historically recommitted to 80 percent to 85 percent of its managers. The reasons for not returning to a manager might include an outsized loss rate, the departure of key investment professionals, raising a bigger fund, moving into strategies Sacks is not comfortable with, or a lack of performance. So what does it take to catch the firm’s eye and open its wallet?
No. 1 is having a deep domain expertise with a focused strategy, like buyout shop
Another quality Sacks looks for when evaluating a group is a stable team and a fair way of rewarding people. “Turnover is a red flag,” he said. A few years ago, Sacks was looking at a small buyout firm that had an older, experienced person who did all the marketing and fundraising and who “took most of the profits,” he said. Some younger people in the firm accounted for most of the performance but were not receiving enough of the rewards. “It felt like an unstable situation,” said Sacks, who did not commit to the team. About 15 months later, “most of the guys left and formed a small fund that we backed that’s been very successful,” he said.
In evaluating fund terms, Sacks pays special attention to key-person provisions, which govern what happens in a fund if certain people leave. When Sacks runs a performance attribution analysis, he wants to be able to attribute the performance to individuals on the team. “Sometimes there’s one or two people that have produced the lion’s share” of performance. “So if a firm has four deal people and two of them have produced 80 percent of the performance, the key-person clause better focus on those two guys. What happens if they leave?” Sacks said.
Needless to say, Sacks also looks for an attractive track record with a low loss rate on invested capital. A relatively low loss rate demonstrates the quality of the GP’s investment sourcing model, due diligence, monitoring and value creation, Sacks said. “What we don’t like is a track record with one big home run and lots of strikeouts. We prefer lots of singles and doubles, the occasional home runs, and very few strikeouts.”