How to Keep Your Best Talent from Spinning Out and Competing with You

From the football gridiron to the modern day battlefield, coaches and generals alike have often subscribed to the principle that “the best defense is a good offense.” The same is true in private equity where the market is constantly evolving and the firms that are most willing, and capable, to adapt to meet the challenges of this more competitive environment will likely be the big winners. Many seasoned middle-market groups have resisted the temptation to go up-market and are looking to stay disciplined without stagnating. One example of how middle market firms are staying relevant is by growing within the middle market and providing a broader set of capital solutions to the same buyer and seller community that they have worked with historically. They want to be able to leverage their reputation, sourcing capabilities and network in order to grow laterally across complementary strategies. This phenomenon has been dubbed the “rise of the mini megas” as these middle-market platforms have begun to resemble their larger mega PE fund peers.

The reason that middle-market firms are gravitating towards this model is because they have begun to appreciate the value of their brand and the impact that they can have with the LP community by offering a suite of products that captures a greater portion of LPs’ mindshare. Adding verticals to a platform is a time-consuming and complex undertaking, which is why the mega funds, with their robust resources, were the early pioneers of this model. Platform expansion has some significant barriers to entry in that it requires considerable planning, infrastructure and investment on the part of the sponsor. In some cases, sponsors seek to leverage their in-house talent, but in most cases they are looking to attract teams that specialize in areas that are synergistic to their core business. Sixpoint has seen a spike in fund-level “private equity M&A activity” over the past year or two, and in our own business we find that GPs are increasingly looking to partner with orphaned groups or fundless sponsors. In order to successfully hire in new teams, it’s important to have the ability to properly assess each professional, his or her track record and his or her cultural fit with your firm. Countless sponsors have made critical mistakes in this process. Likewise, it is important to have a keen understanding of how the LP community will respond to these changes. That being said, a strong capital base to support these endeavors and the build-out is not sufficient in making this type of platform expansion successful. The right capital partner can also be a strategic partner by assisting in the identification of under-the-radar teams looking to join branded middle-market platforms and who will be complementary to the parent platform. The ideal capital partner can also provide immediate validation with early, first close dollars and can help set balanced fund terms.

As more middle-market firms look to recruit these teams, the competition has gotten intense. Each vertical is essentially a small company within the overall architecture of the firm and, as such, requires sensitivity with respect to talent recruitment/development, fund formation/structuring and comprehensive marketing capabilities. Sponsors that are expanding their core set of offerings face numerous challenges; having an advisor with a diverse set of firm-building skills to assist in the process will dramatically enhance the receptivity of this approach with existing LP relationships as well as prospective investor relationships. Sixpoint has extensive experience working with sponsors that are expanding their platforms and we welcome conversations with sponsors considering this option for their growing firm.

Next on 60 Seconds with Sixpoint: Top 5 Private Equity Trends in Middle-Market Private Equity

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