Makena seeks anchor stakes in first-time funds

  • LP backs up to six new GPs a year
  • LP manages $19 bln from endowments, foundations
  • Makena typically allocates $50 mln-$75 mln for PE funds

As a key executive at an institutional LP with a large allocation to private equity, Makena Capital’s Brian Rodde prides himself on spotting young PE funds in the middle market and becoming an anchor investor.

“We don’t think it makes any sense to make subscale investments with first-time managers,” Rodde, managing director at Makena, said in a phone interview with Buyouts.

“One of the best ways to go about securing places in GP funds is to be there at day one with great managers. You develop a much stronger, deeper relationship if you step up and play the role of an anchor LP or an anchor investor in a fund. They never forget the people who put them in business.

“If a team is spinning out and has a good track record and clean attribution and a cohesive team, they should be successful in this market,” he said.

With about $19 billion in assets under management from North American endowments and foundations, Makena Capital allocates about 20 percent to 25 percent of its assets to PE. The Menlo Park, California, firm typically allocates $50 million to $75 million to private equity funds, but it may write smaller checks to smaller funds or first-time managers. Abry Partners is among the firms with which it’s invested.

On average, the firm partners with four to six new managers per year.

Compared with publicly traded companies, privately owned middle-market companies represent a larger potential investment pool, with 50,000 businesses each making more than $50 million a year in revenue in the U.S. It’s a far less efficient market with deeper investment opportunities, he said.

“We have a bias toward middle-market managers,” Rodde said. “They have the ability to directly improve the operations of companies they own. Middle-market firms have more opportunities, more exit options and more opportunities to create value.”

Manager selection remains a key factor in capturing higher returns among middle-market GPs, he said.

“If you’re going to invest in a much larger universe of small- and mid-cap managers, you have to allocate more time and resources because there’s more of them to sort through,” Rodde said.

“If you work with large funds, it’s a short roster and they come calling on you. It’s a much more difficult challenge to find the right middle-market mangers to back, but it’s worth it if you have the time and resources.”

Makena Capital also manages sleeves in various asset classes such as real estate and absolute return.

The firm takes part in co-investments, but it doesn’t hinge its investment decisions and return expectations on a GP based on fee discounts from co-investment opportunities. The uncertainty about the volume and quality of co-investments makes it unwise to base GP commitments on them, Rodde said.

He isn’t trying to time the M&A market or a change in the macroeconomic picture. That’s what their GPs do.

“At the end of the day, we outsource the timing of markets to our managers, and they’ve proven adept at that over time,” Rodde said.

“Our managers have done a great job of selling assets over the last three years and they’ve reduced their investment activity. They’re effectively timing the market by selling more and buying less when M&A markets are running a little bit hotter.”

While Makena Capital continues to research all markets and GP strategies, it keeps coming back to middle-market managers as offering the best risk-adjusted returns, he said.

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