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Tweaking the “Generalist” Definition
September 4, 2008
Private equity investors are typically split between the generalist and the specialist camps. One side is marked by opportunistic funds that will back a company in nearly any sector or field, while the other is niche-driven, relying on industry contacts and sector familiarity to both source transactions and spot market dislocations in a particular space. Increasingly, however, there is a category of investor that might fit somewhere in between, as a number of so-called generalists have worked to build up their qualifications in various industries.
Riverside Co., for instance, has long been known as a sector-agnostic investor. Its portfolio currently houses vocational schools, an automotive accessories retailer, a publishing software maker, an environmental consulting firm, a packaged-foods company and a hospice care provider. It would be difficult to find a more disparate set of investments in any one portfolio.
The benefit to this, according to firm co-founder Stewart Kohl, is that Riverside can bring specific expertise across multiple categories. Not to mention, as any generalist would cite, investing along a spectrum of industries allows for some flexibility and more room to either avoid or capitalize on a particular sector’s ups and downs.
That doesn’t mean, however, that Kohl is oblivious to the draw of a more intense industry concentration. Riverside, moving somewhat against its generalist grain, recently embarked on an initiative to establish a dedicated group focused exclusively on the healthcare space. The effort, marked by the recruitment of former MultiPlan president and co-CEO Harvey Sigelbaum and MBF Healthcare Partners vet Joseph Ibrahim, is a first for the firm.
Riverside had invested in healthcare prior to these appointments, but with a dedicated effort, Kohl says, comes the ability “to dissect and understand opportunities” that normally would have escaped the firm’s grasp. Moreover, once the flag of specialization goes up, banks and other sellers tend to take notice, a factor that usually attracts more dealflow.
Other investors have taken a similar tack. Linsalata Capital’s Eric Bacon, a senior managing director, tells Mergers & Acquisitions the Ohio firm in recent years has built up its capabilities in a number of various sectors. “We’ve been generalists. That approach has led us into building products, consumer products, catalogs, apparel, et cetera. But it’s hard to compete if you’re short on experience, especially today.”
For that reason, he continues, “We believe you have to be multi-sector specialists.”
Like Riverside, Linsalata has also made an effort to create a name in healthcare. According to Bacon, that initiative has been roughly two years in the making, as Linsalata principals met with experts, investment banks and consultants, such as Marwood Group. They attended conferences and dove into industry literature and studies. The firm has also lined up potential operating partners.
Linsalata still hasn’t cinched a deal in the sector, but Bacon estimates that since the firm first embarked on the initiative, healthcare now represents roughly 15% of its deal flow. He believes its only a matter of time at this point.
It was a similar approach the firm took in ramping up its efforts in food space, an initiative that in August yielded its first deal when Linsalata acquired Hospitality Mints.
As most dealmakers know, true expertise comes in stages. Kohl notes, though, that it can build off of itself. As dealflow escalates, it means investors are looking at more companies in the space, essentially seeing what works and what doesn’t. Then, as soon as dealflow translates into actual investments, “You have a management team to serve as your guide and guru,” Kohl says. Not to mention access dealmakers then get to outside directors, who bring even more industry expertise. “So with every deal you close, it only improves the gene pool for a particular sector,” Kohl adds.
Some sectors also lend themselves to specialization. Healthcare and energy are two obvious areas, considering the impact regulators can have on the industries, and tech is another one given the pace of change facing businesses in the sector. It’s why these areas in particular seem to attract specialist shops, such as Roundtable Healthcare Partners, First Reserve Corp. or Silver Lake. The trick for generalists, however, is to compete against these groups, while building expertise without exposing LP capital to any unnecessary risks.
“In healthcare, you can wake up in the morning, brush your teeth, pick up the [Wall Street] Journal, and realize that the rules have changed overnight,” Kohl cites. “So you have to crawl before you can walk. That means taking on lower risk investments to start off, and then using that base to grow and expand from there.”
Bacon adds that the focus for investors is not, what can go right, but rather “figuring out what could go wrong.” Just to be safe, he notes that Linsalata won’t take “too big of a bite” on its first dalliance into a new sector. Rather, the firm will likely start off with smaller investments in a given sector, and then take on bigger deals as experience grows.
It sounds obvious, but it’s likely that some of the mega firms wish they could take back some of the huge bets made in the semiconductor space. The $17.6 billion acquisition of Freescale, for instance, represented a debut effort in the sector for a number of investors involved in the consortium.
Even as firms aim to grow out their expertise, both Kohl and Bacon insist that the generalist is not dead. Kohl cites, “The world in general is moving more and more toward specialization. It’s not just true in private equity, but we’re seeing investment banks, lenders and consultants all develop various specialties. It’s the way of the world today. But it’s not instead of taking a generalist approach; it’s in addition to. We’re still going pursue deals in a number of different sectors.”
True to his word, in August, alone, Riverside acquired an education company, a manufacturer, and a weight-loss center.
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