LP Profile –

The limited partner community is often characterized as a fraternity, and by extension, some may be quick to dismiss Northgate Capital as the industry’s jock fraternity. Four-time pro-bowler Brent Jones, “Touchdown” Tommy Vardell and Mark Harris, all ex-NFL players, launched the firm in 1998. Bain Capital veteran Jared Stone joined the firm in 2003 and former McKinsey exec Hosein Khajeh-Hosseiny rounds out the partner roll, having been hired four months ago.

The story goes that Northgate was the subject of a Harvard Business School Case Study, and while the students at first took turns ripping the very idea of a firm launched by ex-football players, once they saw Northgate’s presentation the students were easily convinced that this was for real. Soon after, more than 100 resumes flowed into the group’s mailbox.

“Brent, Tommy and Mark had been investing for the better part of the 1990s in venture capital and buyout funds and even directly in deals,” Stone says. “In the process they became very savvy and sophisticated in the asset class and they were also able to develop great relationships with the fund managers themselves.”

Even as the start was modest, Northgate has clearly developed into a player among the funds of funds. The firm raised its first venture capital fund in the spring of 2001, a vintage that has not been kind to the hardened industry vets, nevermind an apparent greenhorn. The firm can’t disclose any performance data, but the fact that Northgate completed its follow-up, 2004-vintage venture fund after just a couple months of fundraising and closed the fund more than three times oversubscribed speaks volumes.

On the buyouts side, the idea to create an LBO fund of funds was hatched when Northgate’s LPs approached the firm about raising a separate buyouts vehicle. By chance, one of the partners lived next door to Stone, who was working at Bain Capital. “I had been working on [Bain’s] Fund VII at the time and happened to be friends with Tommy, Mark and Brent. They initially asked me for some input and advice, and long story short I came on as a partner,” Stone says.

Northgate closed its first buyout fund in 2003 at $120 million. As Stone describes it, their approach to buyouts sounds easy. “There are really five ways to create value in a buyout. There’s sourcing, due diligence, structuring the deal, creating value post acquisition and finding an exit,” he says. “We look at these five drivers and pick out which firms have the most distinctive approach in each of these categories.”

While it may sound easy, many have discovered otherwise. However, looking at the representative GPs in Northgate’s first vehicle, the firm clearly has a knack for picking winners. Offerings from Blackstone Group, Leonard Green & Partners, Golden Gate Capital, Jordan & Co., Bain Capital, New Mountain Capital, Kelso & Co., Oaktree Capital Management, Friend Skoler, Lineage Capital and CIC Partners dot Northgate’s portfolio. The firm made its last commitment from the buyout fund in the middle of last year, and according to Form D filings, Northgate has started fundraising for its successor buyout fund of funds.

Northgate has primarily kept its focus on the U.S., but with the hiring of Khajeh-Hosseiny and the subsequent opening of its London office, the firm is expected to increasingly target investments in Western Europe as well as select opportunities in developed areas of Asia.

Other, less obvious characteristics Northgate looks for is GPs that are willing to put some of their own skin in the game, and by that they mean more than the traditional one percent contribution. “We subscribe to the philosophy that we want to back firms that are willing to eat their own cooking. We implement that aspect to our own funds, and I think it speaks to the broader question about risk management,” Stone says.

Northgate, like most other LPs, tries to confine its investments to the upper quartile performers. But perhaps more important to Northgate is that GPs are able to demonstrate a consistency across their portfolio rather than finding “just one deal that got them past the threshold.”

Northgate has also made an effort to invest its funds across a horizon of vintages. The firm has used secondary transactions to gain exposure to as far back as 1997, and has restrained itself from overweighting its portfolio in any particular time period. “Warren Buffett said it best in that there are no called strikes in investing,” Stone says. “We’ve tried to be consistent and make sure our vintage-year exposure is smooth… We’ll only commit to fifteen or so funds over a two to three year period.”

The firm will also co-invest in a particular buyout or VC investment should an attractive deal arise, and the firm has allocated roughly 10% of its capital to pursue such opportunities.

Just as Northgate has shown restraint, the firm expects the same from the GPs it invests in. “It’s music to our ears when we hear a fund manager say that they borrowed less than they could have,” Stone says. “One, it shows they’re being disciplined on price, and two, it demonstrates that they’re serious about creating value.”

Northgate’s investor base is comprised of both institutional LPs and family partnerships, split roughly down the middle. Interestingly, there is not a single NFL player among the firm’s limited partners.

As the HBS case study on Northgate demonstrated, the firm may take some initial lumps for its NFL DNA. But then the partners at the firm have proven they can take a hit. And since Northgate now has the stats to back up its model, nobody will find the firm apologizing for its football pedigree.

“The culture at Northgate is a very driven environment and if you look at all the backgrounds of all the partners, there’s a common thread of striving for excellence,” Stone says. “It’s not something we’d downplay at all.”