Swinging the direct investment pendulum back to investors

Submitted By James Williams | 19/01/2021 - 5:07pm -

New York-based Grafine Partners, established by former Riverstone Holdings’ executive Elizabeth Weymouth, is hoping to fill what it regards as a key gap in the market, by providing institutional investors with a dedicated direct investment platform; one that places emphasis on patient, creative and sophisticated capital and a way for large investors to look beyond the usual ‘2 & 20’ fee model charged by traditional commingled funds.

Weymouth, who founded Grafine Partners and acts as Managing Partner and Chair of the Investment Committee, has been in the investment world for 25 years, building up two substantial investment platforms; one at JP Morgan Private Bank, and one at Riverstone. As such, thinking of investments as solutions to capital has been ingrained in her thought process for many years. 

Speaking with Private Equity Wire, Weymouth explains: “I decided to launch Grafine Partners upon noticing some white space in the PE world. The problem that needed to be solved for the most sophisticated institutional investors is that they increasingly want to invest directly into operating companies rather than participating in a traditional blind pool PE fund. With the growth of the big buyout firms, these investors have really been disintermediated from the source of deal flow and the alpha they had been used to getting. 

“For many alternative asset managers, the focus has shifted from true alpha generation to growing AUM and generating management fees.” 

One of the by-products of this explosion in AUM, she says, was that the traditional blind pool PE fund charging 2 & 20 no longer met the needs of some investors such as SWFs, large families and endowments. “Instead, they preferred to invest directly. An institutional direct investment platform didn’t exist, which is why I set up Grafine Partners.”

Family office flexibility

Grafine seeks to provide the flexibility of a large family office model, acting as a principal investor to build profitable and scalable businesses alongside talented industry investment and operating partners. One key trend that feeds into this strategy is that of a growing number of PE professionals spinning out of the large buyout shops to set up their own investment firms: again, one of the symptoms of the explosive growth experienced by the large buyout managers. 

“These are talented people, probably number two or three in the firm after the founder(s), who have been very entrepreneurial growing the firm and created an excellent track record of investments, but perhaps no longer want to be part of a big behemoth. These are people who want to be close to the deal, want to be entrepreneurial, and want to focus on business building and strategic capital,” comments Weymouth.

Grafine aims to back some of this new talent and help them scale up their PE businesses over the years, as well as provide capital solutions to corporate management teams seeking to build new businesses. In both instances, it is giving investors direct access to the deal flow. 

At its core, Grafine offers two platforms; one is a principal investment platform, where investors commit capital to Grafine to invest and build sector specific verticals alongside veteran management teams and investment teams. “We are providing foundational or seed capital and strategic expertise to our industry investment partners. The other platform is a merchant banking capability, where we can structure one-off investments alongside our capital partners,” Weymouth explains. 

To achieve this, Weymouth has built a multi-disciplinary team including Luis Enriquez, Partner, Kathy Park and Allen Waldrop, both Managing Directors, and Nicole Musicco, Operating Partner. Moreover, Grafine has assembled a strong advisory board that includes Lord Browne of Madingley (currently Executive Chairman of L1 Energy), Brown University’s CEO Joe Dowling and Sandra Horbach, Managing Director and Co-Head of US Buyout at The Carlyle Group. 

120 platform opportunities in 2020

Grafine’s investors are, in every sense, active participants in the deals that Grafine seeks out. They are ‘true partners’, says Weymouth, as opposed to merely being ‘limited partners’. 

Weymouth confirms that the team reviewed 120 platform opportunities in 2020, launched by people with stellar reputations in the industry, of which 48 were investment teams spinning out of established firms. 

“We’ve executed on one vertical already and we have a couple in the pipeline.

“Two other sources of deal flow we look at include: management teams of corporates who want to access capital for new companies they are establishing but who don’t wish to become portfolio companies of large alternative asset managers. And family-owned companies who have never grown beyond their own balance sheet and are looking for ways to fund acquisitions. 

“We have a couple of families in our network who have opened up their deal flow to share with us, and who view us as like-minded capital partners,” outlines Weymouth.

Of the 120 platform opportunities, 30 have involved management teams approaching Grafine directly. 

Weymouth illustrates the point by referring to the CEO of a top European firm the Grafine team have known for a couple of decades. She says that he and his former COO have recently joined forces having identified an interesting opportunity set in the market, and have approached Grafine to be a partner to help establish the company and execute the mission. 

Central to the way Grafine decides where to spend the next decade investing is therefore based on identifying these individual management and investment teams with terrific track records, wishing to get involved in new initiatives; be they corporates or PE management companies. 

One manager that Grafine recently backed is Ascendant Capital Partners, a real estate investment manager. 

2x return objective

Grafine’s network of investors, or ‘capital partners’, is substantial; these are institutions with a lot of capital to invest in the private markets. 

Weymouth says that when evaluating any deal, the team is looking to generate a minimum 2x net return and a sizeable investment opportunity set. “We don’t get too involved in VC, where deals tend to be smaller than our capital partners are interested in. We look to ensure that each of our verticals can scale to the multi-billion dollar range.

“We’ve launched and scaled a real estate platform in 2020 (Ascendant Capital Partners) and we are picking industries, and management teams, that have the capacity to put significant capital to work. Our sector focus really depends first on the high quality nature of the industry partner and the opportunity set. That said, we are currently focusing on technology, healthcare and financial services.” 

Earlier on, reference was made to a growing number of PE professionals spinning out to establish their own first-time funds. Weymouth is in no doubt that this is likely to be a continued trend in 2021, and if proven correct, could provide a good pipeline of deal opportunities for Grafine to explore; after all, this is a global investment mandate it is overseeing. 

Asked why she thinks this trend will continue, Weymouth says: “Some want to return to working in smaller, nimble organisations without the bureaucracy of working at a larger institution. They want to return to focus solely on their passion of investing while having more control of their fate. 

“We are purposely under the radar but I can confirm we’ve already seen a large number of spin-outs in our network and I’m sure we will see more in 2021.” 

In the flow 

For institutional investors, there is great appeal, in theory, to pursue direct investment programmes, given that the economics are more favourable. But in practice, it represents a significant challenge if they don’t have the infrastructure, or the human capital, to prosecute deals and manage the ongoing risks. 

In that respect, Grafine Partners might well be viewed by some as a compelling option to explore. 

As Weymouth is keen to emphasise: “We are in the flow and have seen a number of interesting off-market deal opportunities, which is attractive to investors. Also, our ability to bring capital from our partners closer to the deal, working hand in glove with the alpha generators, is really attractive. The pendulum between GPs and LPs is constantly swinging back and forth. In my view, we are helping swing the pendulum more towards a certain set of LPs who want more direct investing opportunities.”

For those interested, the name Grafine is a derivative of Graphene, an allotrope of Carbon whose properties make it one of the strongest, most flexible and most transparent materials in the world; all properties Weymouth and her team seek to emulate. The ‘ine’ suffix is a personal twist that plays on Weymouth’s Danish heritage. 
 

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James Williams

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