Private equity is in a boom phase. Record levels of money are chasing deals and private equity funds are making tasty returns for their investors. So how does a private equity group differentiate itself in a crowded market? How can you be different but still make great returns for you and your investors?
Dan Kipp thinks there is a way and he is pursuing it. The founder and managing partner of City Capital Ventures (CCV) reckons there is a part of the private capital market that’s underserved, but where investors can make excellent returns.
“What tends to get abandoned sometimes is the lower-end of the growth market, below the $100 million level. I’m not talking startups, there’s plenty of venture funds for them,” he says. “Rather businesses that have something good going but need to graduate from an entrepreneurial business/family business to a more professional, actively managed organization. In effect, businesses at inflection points that are willing to take on a growth partner to get them to the next stage.”
Most private equity groups aren’t looking here, says Kipp. “That’s because for most of these firms there is a natural inertia – and that is to get bigger and not to think of anything else. Why? Because there are more fees to be made. Past success begets more capital which begets larger funds which begets more fees. And the only way to capture those fees is to take on more capital and pursue ever-larger deals,” says Kipp.
Outside of that thinking is where Chicago-based CCV says it can gain its advantages. “There is money to be made in the seams of the market - places that might not be as convenient for many other private equity firms,” says Kipp. “We believe smaller companies present the most attractive opportunities to create long-term economic value in today's world.”
CCV was formed in 2015 at the invitation of City Capital Advisors, a Chicago-based advisory firm formed in 2006 by former William Blair senior partners. The advisory shop wanted a principal investing team that could invest capital from its partners as well as family offices and private funds, many of whom were their clients. The goal from the start was to be nimble and eclectic and not adopt a “one size fits all” approach.
“We provide our family investors unique rights not available as LPs in a fund and treat the companies in which we invest the same way," Dan Kipp, Managing Partner, City Capital Ventures
“We live by the mantra of ‘Bespoke Capital’, as we believe a core strength is customizing the capitalization and terms of each and every investment”, says Kipp. “We provide our family investors unique rights not available as LPs in a fund and treat the companies in which we invest the same way. This combination is powerful in the smaller end of the market.”
Currently, CCV has stakes in three businesses: Matt’s Cookie Company, which it acquired in March 2016; Diedrich Roasters, acquired in the same month; and ProSteel Security Holdings, in which it made a strategic investment last June. Two additional investments are under Letter of Intent and expected to close soon.
“We love businesses that pivot off an inflection point in consumer behaviour,” says Kipp. “We use that as our true north.” He says that a good example of this philosophy is the purchase of the Idaho-based Diedrich Roasters.
“Why did we acquire a majority stake in Diedrich? We had studied the growth of the global coffee market, particularly in new markets like China and India. And we saw in Diedrich a niche business that had proven itself over four decades with an excellent niche brand but one that could be taken to another level, given the global growth in the consumption of coffee. There appears to be a good opportunity - for us and our family capital partners - to make excellent money here.”
Kipp has assembled a team of top talent to help him track down deals like Diedrich Roasters - and, moreover, to take them on a more profitable journey. These members include CCV’s co-founder and managing director, Allen Tibshrany, who has more than 17 years’ experience working with privately-held and publicly traded companies. Allen worked at the Chicago private equity group Sterling Partners after several years at global management consultancy A.T. Kearney. And vice presidents Brad Blinn, an ex-Goldman Sachs investment banker, and Michael Humenansky, a former management consultant for Booz Allen Hamilton, round out the investment team.
“Too many PE practitioners think of investments as simply purchase multiples and debt ratios”, says Tibshrany. “The construction of our team reflects our belief that you build true value by creating cash flow, not merely buying it.”
Kipp himself spent 13 years at Salomon Brothers back when it was arguably the top firm in the world of finance. Afterwards, he was recruited to Bank of America and became the investment bank’s global co-head of the consumer & retail investment banking group and head of its Chicago office. And prior to setting up CCV, he co-founded Winona Capital Management where he served on its board and investment committee.
Kipp says his consumer experience helps CCV to find deals. “No doubt, the consumer world is a long suit of ours. We certainly have some good connections and a great Rolodex in this area, but we’re willing to look at other niches in the commercial and services sectors where we have executives and a network that can give us a competitive advantage.”
When it comes to the deals and the management of them for CCV there is a dominant theme with all of them. “We’re trying to be good stewards and guides in helping these managers to grow their businesses,” says Kipp. “We aren’t interested in messy turnarounds, nor distressed deals.” He adds: “And it’s just as important for a company to choose us to work with as it is for us to choose them”.
But what about the limited partners? Who’s the perfect limited partner (co-investor) for CCV? Kipp says there has been interest from across the board from ultra-high net worth individuals investing by themselves to top family offices. But perhaps the sweet spot for CCV are those family offices that don’t necessarily have all the in-house skills to execute direct private equity deals. “We can effectively be their business development and investment team in the private markets - ‘training wheels’ for those wading into private direct investments for the first time.”
CCV’s approach is well-suited for those private groups and families that desire a more connected relationship with their private market investments, but can benefit from curated deal flow, experienced due diligence and professional post-investment oversight.
With so much noise around the global private equity and private capital markets, it’s refreshing that groups like CCV can find a niche in a part of the market that’s not capturing the attention of the bigger players.
But that niche in no less profitable, or successful, than other deal sizes. As CCV's Tibshrany says: “We find small companies with big potential at moments that matter most.” Given CCV’s expertise and approach, that sounds like a pretty good pitch to investors.
City Capital Ventures
Chicago, Illinois, USA