Family offices look to take direct general partner stakes in private equity firms

Goodhart Partners is seeking finance from family offices for a strategy which invests in private equity firms, as opposed to their funds.

The deals are being put together by Goodhart’s Volunteer Park Capital Fund, whose investors will become a general partner, enjoying greater status than standard investors, known as limited partners.

Volunteer has negotiated the purchase of minority interests at Albright Capital Management, chaired by former US Secretary of State Madeleine Albright, and Capital Spring, which finances US restaurant franchises

By selling GP stakes to Volunteer, private equity firms gain access to liquidity during periods when group cash flow is on the wane, pending fund distributions. 

GP stake sales have become increasingly popular, with funds led by Blackstone, Goldman Sachs and Dyal Capital Partners regularly targeting private equity firms.

Goodhart’s backer, North-East Family Office, profiled in Family Capital last week, is an investor in Volunteer. Another backer is YardHouse Family Office, based in Denmark.

Talks with other family offices are in progress, according to Goodhart partner Justin McKie who said Volunteer is out to raise $200 million from subscriptions ranging up to $30 million.

Using money raised to date, Volunteer has negotiated the purchase of minority interests at Albright Capital Management, chaired by former US Secretary of State Madeleine Albright, and Capital Spring, which finances US restaurant franchises.  Negotiations to invest in a digital private equity firm are in progress. 

Michael Daley, based in Seattle, runs Volunteer. He is best known for persuading top-decile global equity manager Rajiv Jain to leave Vontobel in 2016, to set up GQG Partners. Since inception, its funds have risen to $40 billion.

Daley says: “We would look at private equity managers who have, say, raised a couple of funds and need capital to take their business forward with a third one. 

“Firms can be illiquid but still be valuable. We are happy to supply equity finance in the right situations, where the existing partners are reluctant to write another cheque or increase their leverage.”

Deals involve lengthy negotiations, including an agreement that money will be put onto a balance sheet, prior to being used for a GP commitment. Daley says: “We don’t want to see our money frittered away.”

Rather than discussing exit conditions at the outset. Daley prefers to leave those talks to another day: “We could just choose to stay put.”

He seeks to protect the capital of his clients by negotiating a priority return of their cash if firms run into trouble:  “Essentially, what we have is an asset-backed debt security to cover the downside, and equity on the way up.

“We believe we can appeal to family offices because we offer risk mitigation and capital protection around attractive capital returns.” 

Daley expects net returns from Volunteer ranging up to 20% a year. This would equate to an exit multiple of 2.5 times. Its base is 75 basis points, and 20% of cash distributions, over a hurdle rate of 7%. 

Daley’s deals are carried out in private markets and generate long-term returns stretching over seven or eight years. They offer insights into the private equity sector, which can be useful to family offices considering further investments. 

Volunteer’s clients also get the opportunity to hobnob with principals and deal generators.

Albright can offer access to private equity players in emerging markets, who have dealt with financial slumps, ranging back to the Latin American debt crisis of the 1980s

CSFC Management, which carries out business as Capital Spring, provides debt and equity for US drive-through franchises set to thrive in the Covid-19 era. Its team, led by Richard Fitzgerald, are renowned within their sector.

Goodhart, which manages $930 million, offers connections of its own to managers investing in Japan and emerging markets. 

Co-founder Alan Bartlett is Goodhart chairman, as well as chief investment officer at $70 billion Templeton Global Equity Group, chaired by Sandy Nairn of Nairn Capital.

The firm, owned by Franklin Resources, was the creation of the late mutual fund manager Sir John Templeton, whose success as a contrarian investor made him a billionaire.