I prepared the below as a means to articulate how I think about competitive differentiation — each of the below firms have their own brand of transactions which is clear / distinct, where (i) financial intermediaries see and immediately say, “that’s a [pick-your-firm] kinda deal”, (ii) limited partners are able to underwrite and defend that differentiation to investment committees and (iii) management teams self select for that business plan. As one may venture to start their own firm, being able to be more than a “nice guy / gal” is going to enable your product offering to be memorable for busy investors. As I write this, I remain in awe of Royalty Pharma and the juggernaut that they’ve built
That’s not to say others (NOT on this list can’t have outsized returns) but I believe each of these firm’s have (for better or worse) embedded repeatable values into their culture, internal processes and external branding. Here are some items I generally identify w/ firms w/ competitive advantage
(i) No Key Man: NOT associated w/ a single “rainmaker” (i.e., Navab Capital)
(ii) Focused: They don’t get “hometowned” by industry insiders as they ARE the industry insiders (i.e., they are among the first calls / exclusive fireside chats)
(iii) No Education Required: Everyone in the room knows when industry lingo is utilized
(iv) Relationships: They know everyone in their sector, the good players, the bad actors, the also runs, etc.
Firms NOT on the list could still achieve outsized returns BUT that MAY be achieved by moving up the risk spectrum on
(i) Character: Willingness to do business w/ people that industry insiders might NOT touch w/ a 10 ft pole
(ii) Risk: Underwriting or making light of a risk that industry insiders are inherently wary of / underwrite for
(iii) Structure: Assuming more leverage then the typical transaction
There are three buckets that I group competitive advantage / differentiation into — (i) style, (ii) sector and (iii) product
(i) Style Specialist:
- Large Scale OpCo Distress for Control: Apollo
- Large Scale Asset Distress: Lone Star Funds and Varde
- Large Cap Complex / Operationally Intensive: KPS and Platinum
- Mid Cap Complex / Operationally Intensive: Monomoy / Middleground (Monomoy Spinout)
- Sourcing Intensive: TA Associates and Summit Partners
- DeNovo Specialist: GTCR
- LT Value: Brookfield
- Activism: Elliott
(ii) Sector Specialist:
- Tech: Silver Lake, Vista and Thoma Bravo
- FIG: Stone Point
- Energy: Quantum, NGP and EnCap
- Roark: Franchising
- Chemicals: Rhone and SK Capital
- Consumer: LGP and L Catterton
- Media: Providence Equity
(iii) Product Specialist:
- GP Interest: Dyal, Petershill and Blackstone
- Secondary: Lexington and Coller Capital
- Structured Liquidity: Whitehorse Liquidity
- Direct Lending: Ares, Antares, Golub and Owl Rock
- Family Businesses: BDT
- Litigation Finance: Burford, Gerchen Keller and Longford
- Tax Assets: Parallaxes (some day — this is aspirational)
Here is a case study of a firm w/ Sector Expertise — Roark Capital
- Roark is an Atlanta-based firm with approx. $12bn in AUM
- Firm founded in 2001 w/ Fund I raised in 2005 ($413mm)
- Neal Aronson (Founder) was ex-Odyssey Partners, Oak Hill and Drexel
- Roark focuses on consumer and business service companies, with a specialization in franchised and multi-unit business models in the restaurant, retail, consumer services, and business services sectors
- Since inception, Roark has acquired 74 franchise/multi-unit brands which generate approx. $37bn in system revenues from 36K locations located in 81 countries
- Performance:
- Pre-fund transactions realized approx. 40% IRR / 3.5x MOIC
- Fund I ($413mm — 2005 Vintage): NA
- Fund II ($1.0bn — 2008 Vintage): 22.1% IRR / 1.67x MOIC (Pitchbook)
- Fund III ($1.5bn — 2012 Vintage): 14.7% Net IRR / 1.7x Net MOIC (Preqin)
- Fund IV ($2.5bn — 2016 Vintage): 2.9% Net IRR / 1.05x Net MOIC (Preqin)
- Fund V ($5.0bn — 2018 Vintage): NA
Ultimately, as I think about the future of Parallaxes, I view our firm strategy as the following:
(i) Domain Expertise: We operate in the nexus between deal and tax professionals. Deal guys hate tax personnel, tax guys rarely (some do) speak English
In time, we will further this by bringing in-house experts from the legal and tax world
(ii) Duration: Having a 21 year closed ended vehicle enables us to be LT centric and hold-to-maturity many of these assets (many of which have 15 year lives)
In time, we will seek to raise permanent capital vehicles to reduce the need to ever sell anything
(iii) Opportunity Set: Inherently, the opportunity lends itself to smaller transaction sizes (approx. $15mm apiece)
Thanks to Darren Xu for his kind comments / feedback.
