Capital Allocators – Inside the Institutional Investment Industry
Alex Abell - Lower Middle Market Buyout Investing at RCP
Thu May 02 2024
Private EquityInvestment StrategiesMarket IntelligenceAnalytical ToolsDiversified PortfoliosSecondary TransactionsRisk AnalysisBuilding Relationships
Description
The podcast features a conversation with Alex Abell, a managing partner at RCP Advisors, discussing his 23-year career in lower middle market buyouts and the use of analytics in private markets. Topics covered include career journeys, capital allocation strategies, market intelligence, evaluation processes, analytical tools, investment decision-making, deal-level data, diversified portfolios, secondary programs, risk analysis, building relationships, and early impressions.
Insights
Specialized Fund-of-Funds Platforms vs. Larger Asset Management Firms
There are differences in how specialized entrepreneurial fund-of-funds platforms like Quelos and larger asset management firms like BlackRock approach capital allocation strategies and risk-return behavior.
Importance of Deal-Level Data
Deal-level data provides an advantage in evaluating emerging managers and making informed investment decisions.
Building Strong Relationships
Building strong relationships in private equity investing is important for successful outcomes.
Chapters
- Career Journey and Capital Allocation Strategies
- BlackRock and Quelos Strategies
- Market Intelligence and Evaluation Process
- Analytical Tools and Investment Decision-Making
- Investing in High-Quality Companies and Deal-Level Data
- Consistent Process, Diversified Portfolio, and Secondary Programs
- Secondary Transactions and Private Credit Markets
- Risk Analysis and Building Relationships
- Building Relationships and Early Impressions
Summary
Transcript
Career Journey and Capital Allocation Strategies
00:05 - 07:33
- Alex Abell, a managing partner at RCP Advisors, discusses his 23-year career in lower middle market buyouts and the use of analytics in private markets.
- Abell shares his career journey starting from working at Hewlett-Packard's pension fund to joining Coelos Group and eventually BlackRock's private equity platform.
- Differences exist in how specialized entrepreneurial fund-of-funds platforms like Quelos and larger asset management firms like BlackRock approach capital allocation strategies and risk-return behavior.
BlackRock and Quelos Strategies
07:11 - 14:28
- BlackRock focuses on larger investments in various areas, broadening their strategies beyond niche bases.
- Quelos created a proprietary database for market intelligence and tracking managers' data and strategies.
- Private equity professionals mainly analyze track records through vintage or benchmarking methods.
- Atlas Diligence was founded to create a sophisticated database tool for evaluating managers in the private capital world.
- Atlas Diligence initially focused on small market buyouts, aiming to provide value-added tools for that segment of the market.
Market Intelligence and Evaluation Process
14:01 - 21:08
- The podcast discusses how Atlas Diligence created a platform to provide market intelligence and investment memos for sophisticated LPs.
- They focus on evaluating a manager's performance at the deal level to compare them more specifically with other private equity deals.
- Using benchmarks based on fund vintage has flaws, emphasizing the importance of timing and specificity in comparisons.
- Qualitative assessments play a significant role in their evaluation process, complementing the data-driven analysis they provide.
- They developed an objective grading system to compare managers based on both qualitative and quantitative measures.
- A 'focus list' was created to guide clients towards potentially strong investment opportunities among different types of managers.
Analytical Tools and Investment Decision-Making
20:50 - 27:32
- The focus list guides clients towards the best managers, categorized as A-managers with many strengths and few weaknesses, and B-managers with a balance of strengths and weaknesses.
- Collaboration between Atlas and RCP advisors led to the development of analytical tools for investing in smaller market funds.
- Managers who stick to their strategy over time tend to produce repeatable returns, regardless of fund size or company valuation.
- Data analysis is crucial in investment decision-making, providing context and validation rather than a direct formula for success.
Investing in High-Quality Companies and Deal-Level Data
27:12 - 33:53
- Investors focus on buying high-quality companies with better EBITDA margins to reduce risk and generate better returns.
- Data validation is crucial in evaluating investment strategies, but it doesn't determine if a strategy is good or not.
- Operational data plays a significant role in assessing managers in smaller parts of the market with limited track records.
- Investing in growth and operational improvement rather than financial leverage is emphasized for generating returns.
- Deal-level data provides an advantage in evaluating emerging managers and making informed investment decisions.
Consistent Process, Diversified Portfolio, and Secondary Programs
33:23 - 40:21
- Successful private equity managers have a consistent process and strategy for deal-making to achieve outsized returns.
- Unique sourcing strategies and value creation capabilities are key factors in differentiating successful private equity teams.
- Constructing a diversified portfolio across size, sector, and strategy is essential for investing through market cycles.
- Geographical focus is primarily on the US and Canada with an emphasis on understanding how different strategies perform through various market cycles.
- Secondary programs can be utilized to exit older funds or invest in opportunities where there is more value in selling than holding.
Secondary Transactions and Private Credit Markets
39:54 - 46:26
- Different types of secondary transactions exist in private equity, including single asset and multi-asset deals.
- Private equity activity has been impacted by challenging exits and increasing interest rates.
- Smaller parts of the market are less affected by macro effects due to lower leverage and reliance on private debt funds.
- Managers are more positive about potential exits, with varying success stories in achieving desired valuations.
- Private credit markets have become more sophisticated, creating competition that benefits equity holders during capital raising.
- Concerns exist about the sustainability of investing in smaller companies if capital becomes scarcer in higher market layers.
Risk Analysis and Building Relationships
46:11 - 53:05
- Private equity returns historically outperform public equity and other alternatives, leading to continued interest from institutional investors.
- Analyzing risk in private equity investments is crucial for evaluating managers and avoiding potential pitfalls.
- Measuring inter-portfolio risk systematically can provide a more comprehensive view of investment performance beyond just end numbers.
- Avoiding mistakes in investment decisions is as important, if not more important, than finding the best opportunities to achieve asymmetrical return profiles.
- Building strong relationships in private equity investing is important for successful outcomes.
Building Relationships and Early Impressions
52:42 - 56:21
- Private equity investing involves building relationships with limited partners and sharing information.
- The speaker credits Andy Berman for giving them a chance in a highly quantitative job that shaped their thinking.
- A valuable advice received was to focus on listening during conversations instead of just waiting to talk.
- Early impressions in a new job or company are crucial as they can shape how others perceive your competence and work quality long-term.