LPs

Talking Top Quartile with Rick Magnuson of GI Partners

-
Photo of GI Partners founder Rick Magnuson courtesy of the firm.
GI Partners Fund III, the $1.9 billion buyout fund from GI Partners, rang up an IRR of 15.6 percent, compared to a top quartile threshold of 18.2 percent and a median of 11.5 percent for the 2008 vintage, according to a Sept, 2015 analysis of public pension fund data by Buyouts.  Breaking out the fund’s European investments, GI Partners Fund III performance would have been top quartile, according to a source. Rick Magnuson, founder and executive managing director of GI Partners, spoke about Fund III in a keynote address at PartnerConnect West 2016 on Sept 27. The following is an edited version of his remarks on the fund and the firm.

Bring us up to date on the firm?

We find ourselves today on our fourth fund, soon to go into our fifth. On the PE side a little over $6 billion to date has been raised there. On the real estate side, we have four separate accounts, around $6 billion of equity about $8 billion of asset value. So we’ve got two very separate teams, two separate strategies. It grew organically. It is a bit unique for a middle market shop to have that but it says a lot about our background and our skill sets.

What deals drove performance for Fund III?

If you look thematically at where we were incredibly successful, it was in two areas. One of our themes is downside protected growth. We always want to make sure our investments are downside protected whether it’s by assets, by cash flows, or by contracts. And we always use modest leverage. The other theme was taking advantage of the macro environment and being somewhat contrarian.

But you also had the Financial Crisis to deal with. How did that go?

When the Financial Crisis came, we had no problems. We saw it as an opportunity so we went on the offense. Tapping our technology skill-set we bought a company that was having financial problems called The Planet, a dedicated hosting company for the information technology (IT) market. We merged it with a company called SoftLayer Technologies. Through SoftLayer’s unique data center architecture and proprietary API for dedicated servers, we developed a cloud computing platform which was sold to IBM for $2 billion in 2014. It’s become IBM’s cloud computing platform and grown significantly under their stewardship.

We also acquired a co-location business called ViaWest, Inc. It’s a managed hosting and co-location business in with a geographic focus in the Western U.S. ViaWest was sold to Canadian cable company Shaw Communications Inc.

What about your contrarian deals?

Two large investments come to mind there. One was First Republic Bank, based here in San Francisco. We participated in a buyout of the business which at the time was owned by Bank of America Merrill Lynch. It was a distressed sale which required accelerated due diligence. Because of federal rules on concentration of capital in banks, there were three private equity shops that bought it. We took it public within six months. In terms of getting a high IRR back to our investors, it was quite quick.

The other one was Waypoint Homes, formerly Waypoint Real Estate Group, we bought in 2011. It was a company here in Oakland using technology to help sort neighborhoods, prices and homes and putting it in real time on an iPad. We created a business buying these distressed homes out of auctions, using this data-driven analytic approach, and today we own 3,500 homes that are all doing quite well.

Is there an initial public offering in the works for that?

We have sold the management company to what is now called Colony Starwood Homes, [which began trading in January on the New York Stock Exchange]. We still own the individual homes which have appreciated nicely. My guess is, we’ll probably merge them into a public company, or an apartment REIT, because the homes have very similar characteristics as apartments. The assets we own offer a high current yield and a great IRR and a great multiple on invested capital.

Are you hiring?

We’re constantly hiring people because the business is growing. With associates, our model is to bring people in who have worked at an investment bank or an equivalent for two years, and then they come in and we help them get into business school or law school. Our current hiring has been more focused on the value-add operating side for private equity side. Two years ago, we hired a partner from Bain & Co. who was our consultant on technology deals. That person has now become a partner on our investing team, and has set up our operating principal program.

We brought an alumni from McKinsey & Co and we’re taking this value-add program across our portfolio. We’re hiring in that area. We believe that in this high multiple environment, you have to demonstrate you can add value.

Photo of Rick Magnuson courtesy of GI Partners