Episode 80: Bradford Pilcher of Bonaccord Capital Partners on Unlocking PE Firm Growth Through GP Stakes
On this episode
Shiv interviews Bradford Pilcher, Partner at Bonaccord Capital Partners.
In this episode, Brad unpacks the GP stakes strategy – what it is, how it works, and why it’s more than just a passive investment. Learn how mid-market private equity firms can grow through capital formation, thoughtful product diversification, and talent strategy. Plus, learn what LPs should look for, why marketing and positioning matter, and what makes a PE firm truly stand out.
The information contained in this podcast is not intended to constitute, and should not be construed as, investment advice.
Key Takeaways
- About Bradford, founding Bonaccord, and about GP stakes strategy (3:00)
- How to vet PE firms for potential investments (8:57)
- How past fund performance affects deals, assessing the viability of the business, and diligencing their portcos in the process (13:00)
- The investment model for GP stakes in private markets businesses and looking at long-term business continuity (19:37)
- How to think about exit strategy when it comes to GP stakes investments and the pace of liquidity (25:36)
- GP stakes investment strategy vs being an LP, the LPs that invest in these firms, and how to look at returns for those LPs (31:50)
- Helping firms grow from a value creation standpoint, and talking about talent management and retention (41:40)
- How can PE firms improve their internal ops? Best practices and where they can do a better job to be more profitable (50:18)
Resources
- Bonaccord Capital Partners
- Connect with Bradford on LinkedIn
- Email Bonaccord
Click to view transcript
Episode Transcript
Shiv: Alright Brad, welcome to the show. How's it going?
Bradford: Very good. Thank you for having me, Shiv.
Shiv: Yeah, excited to have you on. So why don't we start with your background and Bonaccord Capital and let's go from there.
Bradford: Sure. So my name is Brad Pilcher. I'm one of the founding partners here at Bonaccord Capital Partners. We're a private equity firm that focuses on acquiring equity interests and exceptional private market sponsors. Our business was founded back in 2017 by AJ and Farhad and myself, but our partnership goes back much farther than that where we first worked together in the early 2000s, deploying capital, a large insurance company. Subsequently worked together at a large asset manager focusing on building out their capabilities and alternatives, launching new products, identifying new distribution opportunities, launching new platforms, and very much looked to build that combination of investment mentality and operating mentality into the way that we pursue the GP stake strategy.
Shiv: Got it. And expand on that a little bit for folks that aren't familiar. What do you mean by GP stakes?
Bradford: Sure. GP stakes is a strategy that I think has generated a lot of interest and a lot of buzz over the course of last, you know, increasingly two to five years, but one that still has a lot of fundamental misperceptions about it. GP stakes to many investors is something that looks or seems or feels like a very esoteric strategy, but the reality is what we do is very straightforward. We are a growth equity investor who invests in the managers of private markets funds, whether that be private equity or private credit or real estate and real assets. And we invest in the businesses that manage those funds. So rather than investing in the funds themselves, we invest in the entities that earn the two and 20. And so just like any other growth equity strategy, we look to identify exceptional companies, to invest in those companies on fair terms, and then help those companies to grow so we can generate value for our investors and for the principals of the firms who have trusted us to own a piece of their business.
Shiv: Got it. So the PE sponsor will raise money from LPs and go deploy that capital through different funds and buy companies that eventually exit those investments. Along the way, they'll earn a management fee and carry. But on your side, your model is to invest in that firm itself so that whatever they're earning from these investments, you have a part of that.
Bradford: That's exactly right. So it's really interesting because the people who invest in our funds are also typically the same people who invest in the types of funds that our portfolio companies manage. And so typically as an LP, as a limited partner in funds, you're looking at investing in one fund at a time and you are owning a portfolio of assets. You are paying a management fee to the manager of that portfolio of assets. They are receiving carried interest and you are receiving a return for that individual fund that is net of those fees and carry. What we do is a little bit different. We're looking at the whole business, right? And if you look at the type of companies we invest in, they will typically have multiple product lines. Within those multiple product lines, they'll have multiple vintages. And so when we come to a firm, they might have eight funds across multiple vintages, across multiple product lines, each of which is generating management fee revenue, which is a very attractive recurring revenue stream that they get for managing the funds that are earning carried interest, which is their share of the profits of the fund, provides a lot of upside exposure to the strategy, and who are using their balance sheet to make investments in their own funds. And so we are buying a piece of that whole thing across every fund, across every strategy, across every income stream. And, you know, that's not something a lot of people are familiar with, but I'd give you an analogy that I think Shiv, particularly for you, given the name of this podcast, would be familiar. In technology space, a lot of people are focused on recurring revenue business models. That's really what a private markets firm is. And so if I were to tell you that I had access to a company with quarterly recurring revenues that are contracted for up to a decade, where those revenues are paid by immensely credit worthy counterparties with strong collateralization, where that company is generating really strong positive free cash flows, operating at up to 50% margins and with a 50-90% dividend payout ratio and that's a company that you can invest in at a high single digit multiple of earnings, that's something you probably find pretty interesting, right? That's GP stakes. But instead of it being an enterprise software business, this is an asset management business, but with many of the same attractive characteristics that you would see in the technology space.
Shiv: Very interesting. Yeah, I think the interesting, I guess, way that this changes how we look at private equity firms in some ways is because PE firms in themselves are businesses. They are in a way operating on P&L. The management fee lets them run the firm. The carry helps them actually get a return on all the time that they're investing into these companies and raising these funds. But very few people look at the firm in and of itself as a business.
Bradford: That's exactly right. And so it's our job as an investor to help them to succeed as a business. And I think, you know, GP stakes, if it's done right, is very much not a passive strategy, right? As like any growth equity strategy, you are rolling your sleeves up, you're getting your hands dirty, you're helping the firms to grow. In our case, of course, as a non-controlled partner. So anything that you would think about with any traditional business, what products do you launch? How do you get those products on the shelf? How do you diversify your customer mix? How do you grow talent within the firm to be able to support your growth? How do you optimize your financial model? And ultimately, how do you think about financing the business and M&A? All of those things are relevant in GP stakes in the same way they would be if we were investing in a widget company.
Shiv: Right, I guess it requires though for you to vet the PE firm and their investment thesis and how they've generated returns historically the way an LP would, but then you're also just, every time they're making an investment, are you involved in that? Like how are you vetting these firms beyond just looking at balance sheets and income statements? Because in this case, it's more complicated than that because their future viability is dependent on how successful they're gonna be with the investments that they've made.
Bradford: Yeah, that's exactly right. And what I would say is we look at the balance sheets and income statements second after we kick the tires on the investment strategy. And so a question we often get is how do you as a GP stake investor look at a private equity firm differently from or similarly to how an investor and their funds would look at them? And the thing that I would say is we care about all of the same things that a limited partner fund would care about plus more. Right? So it always starts with the investment capabilities. Is this firm who has a differentiated investment strategy, who has a sustainable investment strategy that will work for many years into the future, who has a playbook in terms of how they approach origination, how they approach value creation, one who has a long, durable, sustainable track record that should persist into the future, all of those same types of things that an LP would look at as well as of course, how the firm is constructed from a people perspective to continue to support that. And from our perspective, you know, if it's a firm whose funds we don't think are compelling, whose strategy we don't think is compelling, we're not even going to bother to progress to stage two of the analysis. But if it is, then we want to look at everything else. Then we go from looking at this private equity firm as investors to looking at them as business managers and even more importantly, business builders. So from a business manager perspective, what else are we looking at? Well, first of all, just as if you were investing in a traditional company, we want to understand who their customers are, right? Who is investing in their funds? How diversified is their investor base? How scalable is their investor base? How loyal have their investors been over time? And what does that imply for their ability to grow in the future? In addition to that fact, we're looking at their product diversification, right? Are all of your revenues concentrated in one product line? Or are they diversified across many product lines, which gives you much more durability? We're then looking at, yes, the financial model of the business, right? How profitable are they? How are they staffed at? How efficiently are they operating? And then we're looking at what opportunities are for the future and equally importantly, how can we help them to capitalize on those opportunities? I would say one of the critical criteria that we consider when we make an investment, which sounds a little bit silly, but it's really important, is can we help? Right? If we can help a firm, then we can actually be an active investor in the business and we can differentiate ourselves when we buy. We have invested tremendous time, effort, resources into developing our value creation capabilities. And where we can leverage those capabilities to help a firm to succeed, they're going to look at us as a preferential buyer. And that means that we can invest in great firms and we can do it without using price as a differentiator. If they think that we're just capital, then we're just going to get competed out on price. And of course, we look to pay fair prices to sellers of great companies, but we don't want to win on price. And if we don't have an ability to help, we can't win. The second side of that, the flip side of that same coin, is this a management team who is thinking holistically about the business, about its ability to grow and is seeking partnership. Again, if they are seeking a partner who can help them to grow, that allows us to leverage our capabilities to help succeeding firms to succeed more to help firms who encounter challenges to navigate those challenges. And so all of those elements of partnership and culture for us as a non-control investor are just as important, if not more important than what you can fit into a spreadsheet.
Shiv: Yeah, you open up a lot of threads there. First, tell me about, you said you're going to vet the investment strategy before you even look at the balance sheet on the income statement. Totally get that. A bunch of LPs do this as well. How much are you looking at past fund performance? And the reason I ask this is I've also seen, because we have so many private equity partners and relationships, we've seen some of our partners really struggle. And I've even seen a couple of firms even go under because they haven't been able to raise subsequent funds because of past performance. So how much are you looking at that piece of like, hey, what were the past investments you've made? How are those doing? Will you be able to generate enough of a return to now go raise your next fund? Because that's really the viability of this business, if you will, the ability to raise more funds from LPs.
Bradford: Yeah, that's absolutely true. Look, we're looking to invest in firms who really know how to invest. And one of the great indicators of that is a remarkable historic track record. If you look across our portfolio. So we've deployed $3 billion across 17 investments in 15 distinct firms. And within those 15 firms, about nine of them are kind of pure play private equity firms. If you look across those nine private equity firms, at the date of our investment, their average historic realized track record was a 3.8 times gross multiple invested capital. That's a big number. Those are really good investments. Now, past performance is great, but as any good compliance officer would tell you, past performance is not indicative of future results. So we want to see that great historic performance. We also want to see a playbook and a focus and resources that will support future performance. But Shiv, you point to a really interesting thing that we spend a lot of time on. Because when we invest, there is a past track record of fully realized investments, and that's known and that's done. There is everything that they're going to do in the future, and that's us doing kind of subjective analysis of what we believe will happen in the future. But then there's a whole large portfolio of investments that exist today. And some of those might be on the cusp of getting exited in three months. And some of them might be investments they made three days ago. And so from that perspective, we're doing a lot of the same types of analysis that a private equity secondaries investor would do and going through name by name, line by line, looking at each company, understanding how they're valued today and where the sponsor anticipates selling those companies and what those companies would have to achieve in terms of, you know, revenue growth and margin expansion, debt paydown, multiple expansion, to validate whether we believe that the sponsor can in fact achieve those results. Not surprising when we underwrite like most people, we end up realizing that we believe many of those companies will be sold for less and it will take more time. That's just conservative underwriting. It's not that we believe the firms aren't great. But what you point to that's really critical, especially today, especially post 2021, is there has been a massive flight to quality among institutional LPs as it pertains to performance. And whereas, you know, five, 10, 15 years ago, if you had an interesting strategy where there weren't five other firms pursuing that strategy, or where LPs might've had less sophistication and identifying great content, you might've been able to talk your way through a poor track record. Today, you cannot do that. Today, if the track record's not right, you're in big trouble. And so that is a critical thing that we focus on. But it also goes beyond that, Shiv. Going back to understanding LP dynamics is, when we diligence these firms, we can look through every single one of their LPs and understood how they've invested fund over fund and how they've grown and how loyal they've been, how much turnover there's been, how scalable they are. And importantly, you know, we have a massive network effect. In our portfolio, we've got 15 partner sponsors, many of whom have overlapping LPs. We haven't started talking about this, but we have a 13 person strategic development team whose focus is raising capital for our partner sponsors. And that's 13 professionals across North America, Europe, the Middle East and Asia, who have collectively connectivity with 2,200 investors. And so we are in the room every day with every type of investor globally. And that gives us a tremendous amount of intelligence that allows us to validate both how do these types of investors look at the strategy, but also how do these specific individual investors look at the strategy. And that's a huge competitive advantage for us, both prior to consummating investment, but also in driving that investment after we've invested.
Shiv: Yeah, I guess as you were talking and explaining this process, it almost feels like running several due diligence processes at the same time because you invest in a firm if they have 20 portcos, like you have to diligence all the portcos to understand the value of the firm. So can you talk about that diligence process and like how detailed is that? How much depth are you getting into each of those investments to really understand the value of this entity that you're deploying capital into.
Bradford: Yeah, it's quite detailed and it needs to be right. I mean, that's where great investments are made or fail. Not just because of the cash flows that come out of those current investments, but because of the implication for future growth that the success or failure of that existing portfolio has. And so again, you know, we're doing qualitative and quantitative analysis. And again, this is an area where our breadth, not just as an investor independently really matters, but also some of our institutional synergies. So we at Bonaccord are a part of a New York Stock Exchange listed business called P10. And P10 is a business that owns many other private markets firms. And some of our sister companies include Private Equity Fund of Funds, Venture and Growth Fund of Funds, and a whole ecosystem of other companies that are really active working with these firms. So even above and beyond the intelligence that we have from being invested in 15 private markets firms from having seriously diligenced over 200 private markets firms. We can also leverage the synergies that we have as an institution to understand what our sister companies have seen about the broader market and the types of companies that we're diligencing. So it's a really powerful differentiator to execute our strategy.
Shiv: Yeah. What percentage of the firm do you end up owning as you're deploying capital into these firms?
Bradford: Yeah, you know, the most we have ever done in an individual investment is 25%. The least is in the single digits. I would say the typical is in the mid teens. And it's a balancing act. You know, we want to own enough of the business for it to be material, but we don't want to own too much. And the reason is really straightforward. Private markets businesses are people businesses, right? At the end of the day, they don't own property, plants and equipments. They don't own a portfolio of patents or intellectual property. These are businesses that are able to continue to generate revenues and generate returns by virtue of the exceptional people who work at the firm. And those people are incentivized, yes, in the first instance by carried interest in the funds that they help to manage. But as they look at their long-term career trajectory, they're incentivized by the ability to someday being able to be a shareholder in the business. And so if too much of that equity is owned on the outside, it makes it more challenging for these firms to continue to incentivize, retain great people. Now, what's the right amount of outside equity ownership? It really depends upon the business model and the majority of the firm. But our focus is on investing in mid-market firms where so much of their growth is ahead of them. So it's very different if we're investing in very, very large companies. And so we really like to see the very substantial majority of equity held internally. Now, what we especially don't like to see is passive equity. Now we don't believe we're passive equity. You know, we're in the room with our portfolio companies every day seeking to help them to navigate their challenges. So the more active we are, the more justifiable it is for us to own the portion of the business that we do. So that's what we're focused on every day. If we're helping our portfolio companies to win, then we're going to win and our investors are going to win.
Shiv: How does the investment model work? Because let's say you own 25% of the firm, like an LP will commit capital, the capital gets called when there's an investment to be made. In your case, you're investing into the firm. So does it work like just like any other investment where you're deploying capital and it's either primary capital or secondary capital? Just would love to understand how you look at that in terms of the model in itself.
Bradford: Yeah, that's a really good question. So pretty much every deal is a mix of primary capital, that's cash going on the balance sheet of the company in return for buying newly issued shares from the company, and secondary capital, which is acquiring existing shares from current shareholders in the business. And every deal is a mix of both for the most part. And we look at it from the perspective of what generates the best financial return for our investors. Oftentimes, we get asked a question from investors, which is, you know, aren't you concerned if there's any secondary sale of equity? Doesn't that mean you're just putting cash in people's pockets who aren't going to care about the success of the business anymore? I would say that it's my personal belief that that question is in some ways misguided, but it's driven by a really valid consideration. And the valid consideration is that the most important risk factor in a GP stake investment is continuity of personnel, continuity of team, right? If you're investing in a way that is disruptive to the continuity of the people who are driving the success of the firm, that's going to be a really bad investment. So that concern is real. Now we can have a whole hour long conversation about how we think about long-term business continuity, but I say there are a few things that we do to ensure it. Number one is having really long-term contractual commitments from the partners who participate in the deal to remain with the firm with very substantial punitive measures if that long-term commitment is breached. In addition to that fact, we're making sure that the right provisions about them being able to maintain their team. And we're also diligencing how deep is their team, how capable is their team, how have they allocated out carry. And then we look at long-term equity succession, right? How broad is the cap table today? What provisions or plans have they made for being able to diversify the cap table in the future? And it's an interesting thing that not many people would expect, but I think gives LPs a lot of comfort that in the vast majority of our transactions, they are concurrent with a broadening of the internal shareholder base. So in fact, around the same time, sometimes it's just before, sometimes it's just after, sometimes it's in the same transaction, the existing shareholders in the firm are admitting additional shareholders from their internal team, which really helps to stabilize the firm. Without going down a very long rabbit hole about business continuity, if you just take as an article of faith that we focus really hard on ensuring that through transaction structuring, then we can look at primary and secondary as what drives the best return for our investors. And there are a whole host of considerations that cause both of them to be attractive. You know, primary capital is cash on the balance sheet. can drive increased investment in the business to help it to grow. We as a minority investor typically own a portion of that balance sheet. So if we put cash on the balance sheet that belongs to us, that is invested in the products on a gross of fees basis, that generates a great return, but primary is dilutive, right? And so we only want to put as much cash on the balance sheet as can be used and not more because we're diluting ourselves. And if we dilute ourselves to drive growth and to generate a great return, we're thrilled to do that. But if it's just to say, you know, don't worry, it was primary, not secondary, that's really working against the interests of our investors. And then the second point is, without going onto a whole diatribe about it, there are a lot of really favorable tax attributes about secondary acquisition of shares that aren't present in primary that help the after-tax discounted value of the investment for our LPs. And so that's something we think really hard about.
Shiv: How do you and how does your firm think about the exit, right? Because when a PE firm acquires a business, at some point there's a whole period you want to exit that company. That's how you generate the return and the carry and all that stuff. But in this case, you can't really sell a PE firm. Maybe you can sell your stake, but just help me understand that it's the return really just the ongoing proceeds that are being generated from the transactions of the PE firm itself. Or do you look at it beyond that and are there other forms of return that I'm not considering?
Bradford: Yeah, it's a great question. I'm happy you asked because it's one of my favorite topics to talk about. I think it's one of the most frequent, I would say, misperceptions about GP stakes that this is somehow a fundamentally illiquid asset class in a way that other non-control investments are not. The truth is, if you look at the history of GP stakes in private markets firms, or GP stakes more broadly in alternatives, the hit rate for liquidity is tremendously high. But the sample size is small. And I think that's why many investors don't appreciate the success in generating liquidity that GP stakes has had. Now, it's not identically the same as any other growth fund. And one of the reasons for that is that there is a mix typically of single investment realizations where, you know, we would buy a stake in XYZ PE company and then sell the stake in XYZ PE company versus portfolio monetizations where you package together an entire portfolio of GP stakes and monetize those together. On the single investment side, that realization can take multiple forms. It can be getting liquidity in a control sale of the business. know, minority stake buyer buys 15% of a company. The firm sells control of the business to a larger acquirer and the minority stake partner chooses to participate in that sale. It can be when it private market sponsor ultimately lists and you can get liquidity in the public market. Or to your point, it can be a direct sale of that GP stake to another GP stake investor who's either a financial or a strategic buyer. But then we've also seen a substantial and growing prevalence of portfolio transactions where entire GP stake portfolios are packaged up and sold to strategic or financial buyers. But if you look at what's happened in the market since 2018, there have been six portfolio monetizations in GP stakes. There have been 10 portfolio refinancings. There have been 10 single-stake liquidity events, whether those be IPOs or control sales or investor-to-investor GP stake sales. And this is in a young market. Now keep in mind, for private markets GP stakes, the most mature fund that has a dedicated focus on private markets is just now approaching 10 years old. And these are investments that are underwritten to be held typically for up to 10 years. And so we are only just beginning to see the liquidity cycle in GP stakes. And not surprisingly, it's accelerating substantially. But there are two dynamics, I think, that are really important to understand about why this pace of liquidity will only get better. One is the accelerating pace of control M&A among private markets firms. If you went back in time 10 years, there was kind of an idiosyncratic number of control acquisitions of private markets businesses. And a lot of those were, for example, insurance company buying private credit firms. But what's happened over the past years is that's accelerated tremendously. So if you look at the number of announced material control acquisitions of private markets businesses, from the teens up to 2020, that number was kind of consistently below 20 firms per year. From 2021 to 2023, that accelerated to 25 to 30 firms per year. So it was already substantial acceleration. But then from 2023 to 2024, it went from 30 controlled acquisitions of private markets firms to 54 controlled acquisitions of private markets firms. So 80% growth. Going back from 2021 to 2023, you had on average between $350 and $400 billion of AUM acquired and controlled transactions. In 2024, that number grew to $715 billion of AUM acquired and control transactions. So the pace of control acquisitions has accelerated massively. And there are a lot of drivers for that. One is the increasing number of listed private markets firms, importantly, how well their stock has traded. You know, if you look at a cop basket of publicly traded private markets firms, they've consistently traded in the mid 20s. And again, GP stake transactions, you're oftentimes doing in the high single digits. So there's a tremendous amount of room for listed private markets firms to use that valuable public currency to do acquisitions at multiples that are very returns accretive to them and get great multiple uplift to the owners of the business at that point in time. So that's one really strong driver. The other really strong driver is just the amount of capital that's flowing into GP stakes. It's grown tremendously. Whether it's large cap GP stakes transactions or mid-market GP stakes where we play our seed stage investments. And importantly now, secondary transactions and GP stake funds and very large pools of capital, including some sovereign wealth funds who've defined GP stakes as an asset class. And the best analogy I can look to from a liquidity perspective is secondaries. If you roll the clock back 15 years, PE secondaries is probably mostly a lot of acquisitions of single LP interests. And over time that grew into LP-led GP secondaries of individual interests or portfolios with equity acquisitions or preferred equity acquisitions and then GP-led secondaries through single asset continuation vehicles, multi-asset continuation vehicles, and a whole host of other transaction types. The more, this sounds kind of self-definitional, but the more liquidity flows into the market, the more liquid the market becomes. And we're going through that process in GP stakes in real time.
Shiv: Why not just be an LP? Like what's the, what is the net benefit that comes from the GP stakes model? Because LPs still have access to the funds that these firms are investing into. You still get a piece of the action, if you will, when they're making these investments. So what comes from the GP stakes model that is not available to LPs?
Bradford: Yeah, well first of all I say I hope people are an LP, especially in the firms that we own a piece of, because if people stop being LPs in the funds then that wouldn't be a successful model. I'll give you kind of a half tongue-in-cheek answer to that question, which is to say, you know, why should you own Apple stock rather than just buying iPhones? Right? They're in many ways different things. Now it's more closely related the circumstance of GP stakes because a portion of what drives our return is the return of the funds, right? I mean, we earn carried interest. And so that's driven by fund performance. But you just get a very different return profile on GP stakes for a few reasons. So if you look at what we buy when we buy a GP stake, we are buying a portion of fee related earnings as the profit of the management company. So that 2% management fee that comes in every quarter come rain or come shine. We aren't a portion of the profits that are attributable to that. Yes, we buy carried interest and we also own a portion of the balance sheet that's typically used to invest in the funds. But first of all, there's tremendous vintage diversification across all of those because when we invest in 2025, we're probably investing in a firm that has a 2016 vintage fund and a 2020 vintage fund and a 2024 vintage fund. And they've got that across two or three different product lines and they will launch many funds in the future. Number two is we have exposure not just to that carry and balance sheet, but also to the fee profits, which are tremendously stable and durable and recurring. And as an investor in a fund, you don't have any exposure to fee profits. But importantly, across all three of those income streams, have exposure to long-term growth in the business. If you look at private markets today, it's an industry that's forecast to experience 12% organic growth on a go-forward basis. And of course, we believe we're investing in the best firms who without us could grow faster than the market because of the quality of their returns and with our support can have higher conviction in achieving those targeted growth rates. Now we're not going to invest in a firm and tell them to grow in a way that doesn't make sense. It's a typical concern that LPs have that, uh-oh, here comes the GP stake guy. They're going to take this firm I really like and start telling them to triple fund size and launch a credit product and do a bunch of SPACs and a whole bunch of things that will cause them to take their eye off the ball and decrease returns. That's in fact not what we do at all. We're looking at firms who have a long-term business plan that we believe makes sense and then we're helping them to achieve that. But with that being said, if the firm is successful in growing, then all of those income streams should grow as well. So that combination of yield that comes from exposure to profits, the really durable downside by virtue of the long-term locked up revenues of the business, and they're really compelling macro dynamics in private markets for continued growth. All lead to a very targeted exposure to a really attractive market segment and a different type of investment return that you get as an LP and a sector specialist buyout fund or a unitranche credit fund or an infrastructure fund that would be managed by the firms that we own a piece of.
Shiv: Are you guys raising money from LPs on your side for your firm?
Bradford: Yep. Yeah, we're capitalized as private equity funds. So for compliance purposes, I'll be generic about it, but we manage multiple funds that have many LPs in them. Now, there are different segments of the LP universe that have been really big backers of GP stakes. I think insurance companies and wealth type investors have been overrepresented in GP stakes, not just for us, but I believe for the broader market and there are a lot of great reasons for that that we can get into in a longer conversation. But yes, we have regular LPs and in many cases, there are great synergies. I mean, we have any number of LPs who have come into our fund and then have proceeded to become great LPs of our portfolio companies. We've got one investor who I believe has formed six new sponsor relationships because they're in our portfolio and they want to be supportive of the firms they own a piece of so that's really synergistic. We raise plenty of money for our portfolio companies, for investors who are not invested in our fund, but the ones who are invested in our fund have a really strong strategic rationale to partner with the companies that we own a piece of.
Shiv: Is there, and that's great, that's helpful. The reason I asked that question is, there some sort of, because in some ways it's splicing the same activity on the front end of the market, which is investing in companies, whereas LPs have a piece of it from a fund angle, you're kind of investing it from a firm angle. And so one of the common criticisms of this model is that it's kind of a derivative market, right? Where, and there can be some systemic risk associated with that. I'm curious what your take would be on that.
Bradford: Yeah, it's an interesting perspective. I would say certainly from a systemic risk, I don't view that as a problem. A systemic risk comes from highly levered businesses and the companies that we invest in typically have little to no leverage. You know, from the perspective of LPs, yes, if they own a piece of the business and they invest in their funds, you can look at it one of two ways and they're probably both accurate. One way, the glass is half full way is they can actually drive growth in the value of the company they own a piece of, right? They all become strategic investors in the business and have the ability to make their investment more valuable by virtue of, you know, driving business to a company they own a piece of. The flip side is, yes, if you own a piece of the business and do more of your investing with the business, then you are concentrating your risk with that business. But I think at the end of the day, you know, we take pride in the fact that we're investing in firms with exceptional investment capabilities. So I don't think we have a single LP who would invest money with a firm who's not investing well because they own a piece of it. But I think what they often see is, you know, this is a portfolio of pre-qualified, exceptionally high performing firms. And so they have great familiarity with and conviction in the businesses, which makes it pretty easy for them to then go out and make further LP commitments.
Shiv: How do you look at returns from your work and your activities for your own LPs? Is there a certain return or hurdle rate that you're driving towards or hold periods that you're kind holding yourself accountable to? How do you look at your investments and your returns there?
Bradford: Yeah, it's a great question and probably is some context I should have given in answering your previous question. So the return characteristics of GP stakes are unique, right? It's really a strategy that has an element of income and growth or stated otherwise, we are looking to make investments that can deliver private credit levels of yield on a gross basis as well as private equity levels of appreciation. So let's talk about the how and the why. So the how is quite straightforward. We're investing in firms with long-term locked up capital, recurring revenue, and have very little in the way of cash requirements. They're not servicing debt. They're not holding inventory. They don't have to invest in property, plant, and equipment. They don't have growing working capital needs. And so as they generate profits, for the most part, those profits can be distributed to owners of the business. And we are some of the owners of the business. Now, there's one big capital requirement that they have. They want to put a ton of capital into making GP commit in their funds because they believe in the funds and because investors want to see that. But when we invest through that primary capital, we're typically providing a lot of capital that can be used to fund that GP commitment activity. So that means they're generating a lot of profits and they're distributing profits to investors. And so that allows us to underwrite our investments to very strong long-term yields. Over a 10-year horizon, we're typically underwriting to double-digit annualized gross dividend yields. But we're not a credit investment. Right? Where you get great yield while you own the credit. And then when the loan matures, you get your principal back. In addition to earning that income, we own interest in businesses that we think will grow materially. And so, you know, we'll typically underwrite to generate a further two to three X from realization proceeds on a gross basis. And you add all of that up and that's, you know, typically underwriting to a comfortable three X plus return investing in businesses where the downside risk we believe is much more limited because we're investing without leverage and because the companies have tremendous long-term locked up revenue and again, very little debt to service. Now we typically had asked the question by investors, okay, that sounds great. What's the catch? The catch is pretty straightforward. It's just time. We have a longer term investment horizon, right? We are looking to own our portfolio for a decade. And the reason for that is twofold. Number one, to generate those strong long-term equity returns without leverage. We want to see those firms grow over time. And two is, the yield is really important to our investors. They want to own a substantially yielding investment for a substantial period of time. And that means if we sell too quickly, that yield goes away. And so that's where we're looking to generate from a return perspective. So it's very different from if you're investing in a great middle market buyout firm who's trying to, you know, buy a company for a fair price, do a bunch of add-ons, drive organic growth, and then sell the company for a three X return in five years. That's a great strategy. We own pieces of companies who do that really well and we hope people continue to invest with them. But ours is something we think that is diversifying and differentiated and serves an important role in many portfolios.
Shiv: Yeah, yeah, that's really helpful. I want to turn to something that you had brought up earlier on value creation and it's connected to what you answered. How do you think about supporting these firms that you're deploying capital into and actually helping them grow from your value creation side as a firm?
Bradford: Yeah, it's incredibly important. And I talked a lot about capital formation, right? And that is one of the most important pieces where we have a 13 person team across North America, Europe, Middle East and Asia, all of whom act as an extension of the firm's internal investor relations and business development capabilities. So don't think of us as a placement agent. We don't get paid for raising money. Our interests are aligned to see the value of the business grow. And we're providing a service to our partner sponsors, which is what we call our portfolio companies as part of the partnership. And that's tremendously important, but that's not everything. When we think of value creation in private markets businesses, there are really four verticals. And we divide those across top line growth and stabilization, talent management, financial model improvement, and then M&A and corporate financing. And let me dive into each of those. So you talk about top line growth and stabilization. It starts at the very beginning with brand and marketing. You know, if you go back in time 15 years, for most high performing private markets firms, marketing was, you know, once every three years, they'd call up their placement agent, they go out and they do LP meetings for three to six months, they close the fund in a single close, and then they'd send out quarterly letters every quarter. I'm oversimplifying a little bit, but directionally, that's the way that many businesses operated. They called up LPs when they needed money and there was great demand for growth in private markets and much more limited supply of great private markets firms, and that was a straightforward process. That doesn't work in today's market. There are so many more firms in the market. There's so many exceptionally high performing and high caliber firms. And there's a lot of content chasing LPs who have now very sophisticated programs where they have much more visibility to the whole market of available private market strategies. And so now we've reached the phase where even from just talking to LPs, it's not just about calling when you need money, right? It's about off-cycle marketing. It's about regular quality reporting and staying in front of your LPs and holding events. But beyond that, traditional marketing priorities like having a web presence, managing your social media presence, conference participation, you know, sponsoring events, all those traditional tools you see in more traditional businesses, they matter in private markets now. And of course, if you look at the mega scale firms, the hundred plus billion dollar firms, they probably all were ahead of the curve in realizing and acknowledging that. And that's why they're as big as they are today, or it's one of the reasons. But in our segment of the market, the mid market firms are just beginning to acknowledge that. And so we're looking to help them with that. Number two is product strategy, right? What products do you launch? We see an overwhelming theme among institutional LPs that they want to invest a lot more in private markets but they want to do, and they want to invest a lot more in the middle market, but they want to do all of that with a smaller number of firms. And so that means for a mid-market sponsor, you have to be able to do more for your LPs. So product roadmap is critical. Product wrappers matters too, right? There's an increasingly diverse pool of LPs out there, whether we're talking about insurance companies or wealth platforms or certain types of international investors. So taking the same investment content and you know, packaging into an insurance rated feeder or a business development company or, you know, an interval fund or any number of other types of novel products is really important. So all those tools of how do you get your name out there? How do you build new products? How do you get those products to market? And then our strategic development team comes to the table and helps to get you in front of that portfolio of 2200 investors globally. And that's all just the top line growth and stabilization part. I think you had a question, so I'll pause for a sec.
Shiv: No, yeah, I think more just in agreement. We meet so many PE investors just because we're partnering with them and then also on this podcast. And one of the things that really stands out to me is that a lot of PE firms end up sounding the same. And it's really hard, especially for the people that they want to invest into to figure out what really separates this one firm from another firm and on their own go to market or their website or how they position themselves or stand out from other investors in a particular vertical. There's just not enough work being done in that area. So I definitely agree and I wish more PE firms invested time into that because that's just as important as raising money from LPs because they're kind of interconnected. Like if you can get more deal flow, then you're going to or you can position yourself better. You're more likely to win better deals. And as you win better deals and you can raise more money from LPs and kind of the fund and return the fund.
Bradford: And what we see over and over is firms who have done the hard work to really differentiate the way that they invest, but have not yet done the hard work to explain that to the market.
Shiv: Totally.
Bradford: And so that's where we want to be. We don't want to be with the firms who haven't figured out how to differentiate the way they invest. Those firms will leave to the side, but helping them to tell that story and position it. And that comes to the next point, which is talent management. And some of the areas where we over and over see firms already investing, is in how to build out their origination capabilities to really expand and specialize that top of funnel and how they build out their value creation resources. As I think, you know, better than anybody, given the name of this podcast. And so we see a tremendous amount of competition there where we typically end up spending a lot of time is also helping think about how they build out the kind of business element of it, especially investor relations and business development. mean, the easiest, the easiest piece of advice we can give. And the highest ROI investment that people can make at this stage of the life cycle is just hiring a couple IR people. So we've got 15 portfolio companies. Of those 15, I think there are five who don't as of yet have a dedicated investor relations or business development professional. And they have, you know, senior people on the team who are focusing on it, but they're wearing multiple hats. So having that specialization is really important. In addition to that fact, everybody always wants to hold onto their team. Compensation incentives is a huge area we're focused on, but not how do we get people for less. I don't think anybody's ever asked us that question. It's what do we have to do to hold on to this great team? And yes, thinking in terms of base and bonus, but also in terms of carry allocations, financing for GP commit, long-term incentives, thinking about how they broaden out the internal shareholder base over time. And so that's a huge area of focus and in many circumstances, helping people out with senior level talent identification. Not on the investment side, again, we're working with firms that we believe know how to invest and that's one area we don't really look to touch, but everything about how they run the business we do. And so that's talent management. Margin improvement, I would say is a little bit more at the margin, so to speak. These are very profitable business models, but especially as people launch new product types, we help them think about how does revenue work with different product types. And in certain circumstances, helping people think about how to use outsourcing or technology to run the business more efficiently. And then the last piece is M&A and financing at the corporate level. You know, we talked about kind of consolidation of private markets and the increasing pace of control activity. You know, some of the firms that we’re working with are looking to do acquisitions themselves. Luckily, our day job is doing M&A and private markets. And so that's one area where we can bring a lot to people in terms of both helping them to identify opportunities, helping them to understand how to value those opportunities and ultimately how to structure and execute a deal. You know, financing at the corporate level is to some extent important. Mostly that's more thinking about, you know, how do you put in place a revolver, another level of corporate facility just to manage things more efficiently because most firms typically don't. And in many cases, there are opportunities to think about how to better finance their funds. And then when a deal has run its course, you know, when a firm has reached the stage in their life cycle where they might be thinking about identifying a control acquirer. That's certainly something we can help with as well. We're never going to push a firm to do that. That's a decision that they have to make. But if they do make that decision, then that's somewhere that we can be supportive and help to drive a great outcome for our LPs.
Shiv: As we're coming up on time here, there's just one area that I wanted to jump in because you touched on some of it here is what do you think PE firms should be thinking about as they're improving their own operations and how they run the firm in and of itself? Like what are some best practices? We talked about the positioning and the marketing side, but any other areas where you see from a just operational perspective that PE firms should be doing a better job so that they're running a more profitable entity or business, if you will.
Bradford: From a profitability perspective, again, I mean, there are things we can do to help at the margin, but it's a very different business model. If you use, and I'll talk about the high end, if you have a firm that can have up to 50% operating margins and we're investing without leverage, if you help them to find another five points of margin, you've increased the enterprise value of that business by 10% and you've increased the equity value of our investment by 10%. If we were investing in widget companies with a 10% operating margin and we're, you know, investing with one-to-one debt to equity, if you find that firm 5% operating margin, you've grown the enterprise value by 50% and you've grown the value of our equity investment by I think 125%. So there's just not the same return for finding elements of margin improvement. And we're investing in firms earlier in their growth trajectory. And so the best thing we can do is to help them to grow. I would say, the one thing where we've worked with firms, of course, we think have done a great job of this, but the one place where we think we've seen people stub their toe and the place that gives LPs concern sometimes is product diversification can really help to do more for LPs and to stabilize a business, but it has to be done in a way that's thoughtful. And so where we've seen success with product diversification is people taking something that they know better than the rest of the market and finding another way to play that competency. You know, for example, taking a sector you know well and finding other ways to operate in it. I think where people start to get into trouble is where they try to identify new competencies and say, I'm great at X and now I'm going to become great at Y. That's much harder to do. It's much harder to tell that story to LPs. And that's where LPs start to get concerned that you are getting distracted or diluting your focus or deteriorating the quality of what you're delivering to investors. So I think one of the things we spend a lot of time on with people is A, what does thoughtful product diversification look like? And B, how does that impact your talent model? You know, product diversification is really important, but it can create a lot of issues. You know, how do you staff those businesses? How do you form the investment committees? How do you ultimately provide incentives across the business so that you don't create cultural strain, you still keep people focused on their day job. And so that's from a talent perspective, something we spend a lot of time helping people think through is you've got a great, thoughtful product diversification roadmap. How does that map your talent roadmap and how does that help to drive success and synergy and not drive LP confusion or internal strain?
Shiv: On the talent side, is there like a formula that you look at that is more successful for private equity investors where a certain proportion of the firm is more on the deal side versus the operations side or value creation side?
Bradford: You know, yes, but it depends on business model, right? So, you know, if you look at a mid-market private equity firm, they're going to have a very different staffing model from, you know, a unitranche credit business. You know, private equity is going to be much more about having great relationships and identifying great companies and being able to really lean in to help those companies to grow from a value creation perspective. Credit is much more about underwriting to make sure you don't lose money, but also diversification. And what diversification means is more volume. And to support volume, you need to have a much more regimented staffing model at every stage of the deal process. And so the right formula depends upon what your business model is. But I would say more and more that what we see across the market is specialization, and especially specialization in terms of the origination or business development function, binding deals, feeding the top of the funnel, and the value creation function. And not just having value creation being specialized, but having specialized verticals within your value creation capability. And where that becomes especially valuable is as firms migrate from being a single product firm into being a multi-product firm, because those dedicated business development and value creation functions can then be shared resources to support multiple product lines. And that's a successful roadmap that we've seen over and over again.
Shiv: Yeah, that's great. I wish we had more time. I have a lot more questions, but this was fascinating.
Bradford: We can do it again.
Shiv: Yeah, we could definitely do a part two, but before we close off, Brad, what's the best way that PE firms that want to connect with you or learn more about what you do, how can they get in touch?
Bradford: Oh geez. Well, we got a website, we got LinkedIn, info at BonaccordCapital.com. We always answer. You know, if you can look us up on LinkedIn, you know how to get a hold of us. So yeah, any great, you know, high growth aspirational firm who's looking to make their business better and can leverage capital and operating expertise to do that, we always want to have a conversation.
Shiv: That's great. Yeah. And we'll be sure to include that and all the links in the show notes. With that said, Brad, thanks for coming on and sharing your expertise. It's a different type of episode. And one of the reasons why I really loved it is that I think a lot of the PE firms that listen to this can take a lot away in terms of how they run their day to day and their operations and their, and their firms. So appreciate you doing this.
Bradford: Thanks so much, Shiv. This is awesome. Have a great day.
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