Private equity has long appealed to investors seeking the potential for outsized returns compared to public markets, albeit with a longer time horizon and higher risk profile.
But within private equity, making minority equity investments (acquiring a 10-49% stake in a private company), has been less of a focus … to the potential detriment of investors and private businesses alike.
Consider this, within the middle market, less than 15% of private equity transactions today involve minority-structured investments, while many business owners, given fluctuating market valuations and today’s overall economic uncertainty, favor minority recapitalizations to outright sales.
In addition, minority equity investments have attractive qualities, such as liquidation preferences, that mitigate operating risk and can provide additional risk management, relative to traditional buyout investments.
And with downward pressure on valuations across select markets, businesses that previously considered a private equity acquisition may now be interested in seeking minority recaps and other partial liquidity events. That presents opportunities for investors to partner with family-owned and founder-led businesses in growing and defensive industries. By doing so, both the management and investment teams have significant economic interest in the growth of the business and can pool resources for strategic opportunities.
That is exactly what the Cresset Partners Private Equity Opportunities Fund is designed to do. It exemplifies one of Cresset’s core philosophies: “Families Investing in Families.”
We recently connected with Chris Boehm, Executive Managing Director, Private Capital with Cresset Partners, to learn more about the appeal of making minority equity investments, what the market for this type of investing looks like today, and what investors need to know to get started.
Chris, tell us more about the Cresset Partners Private Equity Opportunities Fund.
Cresset Partners Private Equity Opportunities Fund (“CPEO” or the “Fund”) is a vehicle established for investors to create a diversified portfolio of direct, structured long-term private equity investments across a range of defensive industries. CPEO partners primarily with growing founder-led and family-owned companies, providing flexible and patient capital to help those businesses create substantial value. By acquiring minority interests through preferred equity instruments with both upside potential and downside risk mitigation, we strive to generate attractive risk-adjusted returns for its investors.
How does it differ from the many other private equity funds in the market?
CPEO is differentiated in three primary ways. First, the Fund’s focus on structured preferred minority investments with relatively low leverage is unique within the broader private equity market, where the vast majority of private equity sponsors focus exclusively on majority control acquisitions often utilizing significant leverage. The Fund’s approach creates a compelling alternative for business owners who are seeking capital but aren’t prepared to sell full control of their company and prefer less risk and more financial flexibility to support ongoing growth. At the same time, CPEO’s investors benefit from the access this creates to unique opportunities with structures, terms and governance arrangements that mitigate risk.
Second, with a long-term investor base comprised of family offices and other individual investors, CPEO is able to work with companies to provide more patient capital that is well-aligned with majority owners aiming to create sustainable value over a longer time horizon than the typical 3-5 year private equity holding period. This further differentiates the Fund with potential partners, while aiming to provide investors with attractive returns.
Third, CPEO is able to leverage Cresset’s vast ecosystem to source differentiated opportunities and bring unique value to its partner businesses. Through Cresset’s relationships with more than 2,000 entrepreneurs, business owners and family office clients, representing over $40 billion in assets under management, the Fund has access to proprietary deal flow and to a broad network of aligned experts and referral partners to improve due diligence, add executive talent and identify other value creation initiatives. In a competitive market, this ecosystem provides a distinct advantage in sourcing opportunities while focusing on long-term returns.
What sectors or types of companies are most attractive to you?
Consistent with its strategy of targeting attractive long-term risk-adjusted returns, CPEO focuses on market sectors with favorable macro-growth fundamentals and relatively low cyclicality, including healthcare, food and beverage, financial services, and specialty manufacturing. Within these markets, the Fund seeks to partner with lower middle market and middle market businesses with diversified customer bases, sufficient existing scale and infrastructure to sustain operational execution and mitigate risk, and many long-term value creation levers and organic and inorganic growth opportunities available. This orientation allows for a long runway striving to grow revenue and cash flow, make ongoing cash distributions to owners and eventually take advantage of a wider range of exit alternatives than may be available to larger enterprises.
How is the current market / economic environment conducive to the Fund’s strategy?
We are seeing significant uncertainty in markets and across the broader economy, which we believe will continue for an extended period. Markets are going through a re-calibration as financing sources reduce leverage levels and tighten terms, transaction volumes moderate and overall valuations slowly rationalize. In this environment, we are finding that many business owners are re-evaluating their long-term goals and are more open to a minority partnership with an investor like CPEO that can provide partial liquidity and growth capital and valuable strategic insight and guidance. The access that this is creating to unique opportunities with high-quality companies, coupled with the Fund’s focus on defensive and recession-resilient industries and structured preferred equity versus common equity investments that inherently mitigate some of the risk, is conducive to building a successful portfolio for CPEO’s investors in this market and economic environment.
What type of investor has invested in this fund?
Patient families and investors that are looking to build a long-term private equity portfolio to seek capital and incremental returns, in exchange for illiquidity and a higher risk profile, have invested in CPEO. We believe these investors found CPEO’s niche focus as part of their broader portfolios represents a complementary solution. Investors should of course diversify across different types of strategies and private equity managers and public funds to optimize for their particular goals and objectives, but we believe the Fund’s targeted risk-adjusted return profile and investment horizon could be applicable to investors with sufficient capital to invest prudently in private markets. This is particularly true for families who have generated their wealth through entrepreneurship and business ownership and would find appeal in aligning with other founder-led and family-owned companies to achieve their long-term growth objectives.
Learn more about investing in the Cresset Partners Private Equity Opportunities Fund.
The fund is considered highly speculative, illiquid, and should only be considered by investors who can bear such risk for an indefinite period of time and can afford a complete loss of investment. The investment is not suitable for all investors. There is no guarantee that any income will be generated, or distributions will be made. There are restrictions on liquidating and transferring interests in the fund. There is no secondary market for the investor’s interest in the fund and none is expected to develop. There can be no assurance that investments will be available for investment by the Fund or that available investments will meet the Fund’s investment criteria.
Unspecified Investments; Availability of Suitable Investments. The Fund may be unable to find a sufficient number of attractive opportunities to meet its investment objectives. There can be no assurance that investment opportunities will be available for the Fund or that available investment opportunities will meet the Fund’s investment criteria. There can be no assurance that the Fund will be presented with an adequate number of new investment opportunities. Members will not have an opportunity to evaluate for themselves the relevant economic, financial and other information regarding the investments to be made by the Fund and, accordingly, will be dependent upon the judgment and ability of the Managing Member and the Management Company to identify, structure and implement investments consistent with the Fund’s investment objectives and policies.
Strategic Arrangement Risks. Instead of making Investments directly, the Fund may make investments through Strategic Arrangements. Such Investments may involve risks not present in Investments made directly by the Fund. When investing through Strategic Arrangements or through other entities with third parties, the Fund could have limited governance rights. In these cases, the Fund would rely on the efforts of third party management, shareholders or board of directors for oversight of the investment, and these third parties may have other interests that conflict with the interests of the Fund. Furthermore, there can be no assurance that any rights obtained by the Fund in a Strategic Arrangement will provide sufficient protection of the Fund’s interests.
Investments made with Co-Sponsors involve risks and potential conflicts of interest not present in investments without a Co-Sponsor, including related to the following:
the Co-Sponsor has economic or other interests that are inconsistent with the interests of the Fund, including interests relating to the financing, management, operations, leasing or sale of the assets in the Strategic Arrangement;
tax, legal and other regulatory requirements applicable to the Co-Sponsor cause it to want to take actions that are contrary to the interests of the Fund;
the Co-Sponsor has joint or predominant control of the Strategic Arrangement even though its economic stake in the Strategic Arrangement is significantly less than that of the Fund;
under the applicable Strategic Arrangement, neither the Fund nor the Co-Sponsor unilaterally controls the Strategic Arrangement, in which case deadlocks may occur. Such deadlocks could adversely impact the operations and profitability of the Strategic Arrangement, including as a result of the inability of the Strategic Arrangement to act quickly in connection with a potential acquisition or disposition;
in the case of a governance impasse under the Strategic Arrangement or other circumstance that results in an acquisition or disposition, the Fund may be forced to sell its interest in the Strategic Arrangement and its asset(s), or buy the Co-Sponsor’s share of such assets, at a time when it would not otherwise be in the Fund’s best interest to do so;
if the Co-Sponsor charges fees or carried interest to the Strategic Arrangement, the Co-Sponsor could have an incentive to hold assets longer or otherwise behave to maximize fees and carried interest paid, even when doing so is not in the best interests of the Fund; and
the Co-Sponsor may have authority to remove any managers of the Strategic Arrangement that are affiliated with the Fund. If such removal were to occur, the Fund would be joint venture partners with a third party manager, in which case it could be significantly more difficult for the Fund to implement its investment objective with respect to any of its Investments held through such joint ventures
Co-Investments. The Managing Member, its affiliates, any prior or subsequent funds or investment vehicles sponsored by the Managing Member or its affiliates (e.g., the Co-Investment Vehicles), and other prospective partners may be given the opportunity to co-invest with the Fund when and on such terms as the Managing Member deems appropriate. Co-investment opportunities may not be determined through arm’s-length negotiations with the Fund. The Fund will not be obligated to provide co-investment opportunities (or provide any concessions granted to any other investor upon becoming a Member) to any investor by reason of the fact that such opportunity was made available to any other investor.
Certain Risks Relating to Investments in Underlying Funds
Less Established Companies. Certain Investments may be in less established companies or early stage companies. Such Investments may involve greater risks than are generally associated with investments in more established companies. Such companies may have shorter operating histories on which to judge future performance and may not have significant or any operating revenues. Such companies also may have a lower capitalization and fewer resources (including cash) and be more vulnerable to failure, resulting in the loss of the Company’s entire Investment.
Credit and Interest Rate Risks of Debt Securities. Debt portfolios are subject to credit and interest rate risk. “Credit risk” refers to the likelihood that an issuer will default in the payment of principal and/or interest on an instrument. Financial strength and solvency of an issuer are the primary factors influencing credit risk. In addition, subordination, lack or inadequacy of collateral or credit enhancement for a debt instrument may affect its credit risk. Credit risk may change over the life of an instrument and securities which are rated by rating agencies are often reviewed and may be subject to downgrade.
Activities of Underlying Fund Managers and Control of Investments. Neither the Managing Member nor Cresset will have control over the day-to-day operations of any manager of an Underlying Fund (each, an “Underlying Fund Manager”) and may not have an opportunity to evaluate the specific investments made by such Underlying Fund Managers, or the terms of such investments. As a result, there can be no assurance that every Underlying Fund Manager will invest on the basis expected by the Managing Member or Cresset.
Multiple Levels of Fees and Expenses. The Fund expects to make one or more Investments in Underlying Funds. Such Underlying Funds may involve carried interests, promotes and other fees payable to their sponsors. Such fees and compensation would be in addition to the Carried Interest and the Management Fee assessed at the Fund level. In that regard, the Fund will be subject to multiple levels of fees and expenses. The Fund will bear these fees and expenses regardless of its profitability, and such fees and expenses will reduce the amounts otherwise available for distribution to the Members.
This is not intended to be a complete list of the Fund’s features, benefits, risks and disclosures. Please refer to the Fund’s Offering Materials for more information.