Investor Spotlight: Is Genstar Capital the next private equity powerhouse?

August 3, 2018 View comment (1)

Predicting the future is a difficult thing, as private equity investors know all too well. But if the recent past is any indication, Genstar Capital could be on the verge of assuming a starring role on the industry's stage.

First, there's the fundraising. Genstar closed its latest flagship buyout fund on $3.95 billion last year, which represented a nearly 100% increase from its previous effort, a $2.1 billion pool from 2015. That vehicle was in turn more than 100% larger than its predecessor. If Genstar keeps doubling the size of its funds—which is admittedly a tall proposition—it won't be long before those vehicles are among the largest in private equity.

And then there are the deals. Genstar completed 24 investments during 1Q, according to PitchBook data, more than any other PE firm in the US. That continues a recent flurry of activity: Genstar has executed nearly 150 transactions since the start of 2016, more than in the previous nine years combined:
 
 


What kinds of deals are driving this rapid rise? Who are the firm's key decision-makers? And where did Genstar come from? Let's take a closer look.

Firm History

While Genstar's recent profile is that of a shop on the rise, the firm has actually been around for 30 years.

It traces its roots to Genstar Corporation, a supplier of cement and other building materials that branched into the waste disposal and financial services industries via a series of acquisitions in the 1980s. The original Genstar sold to Imasco for about $1.7 billion in 1986; two years later, former executives Angus MacNaughton, Ross Turner, Richard Paterson and John West founded a new private equity firm with the same name. The next year, in 1989, Genstar Capital raised $100 million for its first fund.

And for the next 15 years, the firm plugged away, investing in the industrial sector at a relatively small scale. Then, in 2004, Genstar raised $475 million for its fourth flagship fund, more than doubling the firm's total AUM and signifying a shift in fundraising ambitions. Three years later, Genstar tripled the size of its previous vehicle for its Fund V, a $1.55 billion effort that closed in 2007.

That was a significant year in private equity for many reasons, with fundraising and deal totals both booming on the eve of the financial crisis. For Genstar, it appeared it might prove a fundraising highpoint. Four years later, in 2011, reports emerged that the firm was struggling to raise a targeted $1.5 billion for its new pool, and the vehicle eventually closed with a little more than $910 million in commitments. But Genstar has since bounced back in a big way, with impressive returns generating major inflows of LP dollars:

 

Investment Strategy

Today, Genstar invests primarily in the North American middle market, targeting companies in the financial services, healthcare, industrial technology and software sectors. The firm is a true proponent of buy-and-build that's not afraid to make plentiful add-ons, as evidenced by its number of completed transactions during 1Q.

Those add-ons are a key part of the firm's value creation, as it scours the market for attractively priced ways to improve its existing platforms. Here's a look at the platform companies that Genstar has used to make the most add-on investments since the start of 2008:

 

Notable Dealmakers

Jean-Pierre Conte, Chairman and Managing Director

As the firm's highest ranking member, Conte is responsible for acquisitions, divestitures and overseeing portfolio companies in the healthcare and industrial technology sectors, among others. Before joining Genstar in 1995, he was a principal at The NTC Group, a private equity firm that focused on the industrial tech sector. Conte is also something of a society figure: He and his family's second home in Napa Valley has been featured in lifestyle magazine Traditional Home, and his affinity for luxurious family travel has been profiled in The Globe and Mail.

Ryan Clark, President and Managing Director

Clark joined Genstar in 2004 after earning his MBA at Harvard. Before that, he'd worked for three years as an associate at Hellman & Friedman, another PE firm based in the Bay Area, and in the M&A and restructuring division at Morgan Stanley. He's represented Genstar in several investments, including deals to back insurance businesses Alera Group, Insurity and Palomar Specialty Insurance.

Rob Rutledge, Managing Director

Rutledge has longstanding connections at Genstar, having worked at the firm as an associate from 2003 to 2005 before departing to earn his MBA and returning in 2007 as a senior associate. Now a managing director, he's worked deals with several companies in the industrial tech sector, including Infinite Electronics, a holding company that provides management and back office support for makers of wired and wireless connectivity products, and Boyd, a materials science company focused on thermal management and sealing.

Tony Salewski, Managing Director

Another alumnus of Hellman & Friedman, Salewski joined Genstar in 2007 after earning his MBA and working as chief of staff at Barclays Global Investors, where he helped the executive committee plan strategic initiatives. He's represented Genstar on a series of investments in the financial services sector, including deals with companies like Altegris, Ascensus and Strategic Insight that provide data and guidance to investors.

Eli Weiss, Managing Director

Weiss specializes in the software sector, with current investments at Genstar that include staffing software developer Bullhorn and Stack Sports, which makes various offerings aimed at sports organizations. Like Clark and Rutledge, Weiss formerly worked at Hellman & Friedman before joining the firm in 2008. He's been an MD at Genstar since 2015, when he was promoted to the position at the same time as Salewski and Rutledge.

Katie Solomon, Managing Director of talent management

Solomon is in charge of identifying and hiring executives to run Genstar's portfolio companies. She has plenty of experience in the space, working as a vice president of human capital and investor relations at Vector Capital before coming aboard at Genstar in 2011. She's also a former consultant at Bain & Company. Solomon was promoted to MD in 2017.

Industry/Geography

Dating back to the start of 2002, Genstar has completed 90 deals each in the B2B and financial services sectors and another 73 in the IT space, per PitchBook data, with that financial services dealmaking occurring at a proportion notably higher than the industry average. On the flip side, Genstar hardly invests at all in the B2C and energy spheres:

 

Within the B2B sector, Genstar is particularly active in the consulting services space, while the insurance industry accounts for well over 70% of its deals within financial services, per the PitchBook Platform. When it comes to IT, fully half of the firm's investments since the start of 2000 have involved either business software, application software or financial software.

Geographically speaking, Genstar operates almost entirely within American borders: More than 90% of its new investments since the start of 2002 have taken place in the US, with Europe accounting for another 4.8% and Canada for 4.1%. The West Coast and the Mid-Atlantic region each account for about 20% of that US activity, but Genstar displays no strong geographic preference when it comes to American companies. California, though, has been home to nearly 15% of recent Genstar portfolio companies.
 

Fundraising

As covered above, Genstar's recent fundraising history has been a tale of up and to the right. The firm's latest close occurred in March 2017, when it wrapped up Genstar Capital Partners VIII with $3.95 billion in total cash. That included $3.1 billion in standard LP commitments, plus $650 million in overage capacity from certain LPs and more than $200 million of Genstar's own money.

Less than two years prior, in August 2015, the firm closed its seventh flagship effort on $2 billion, topping a target of $1.5 billion. Unlike the firm's latest fund, that total didn't include an unspecified amount of additional contributions from Genstar's personal coffers.

Fewer than 15 years ago, Genstar's total AUM was less than $500 million. Now, the firm can raise eight times that amount for a single fund.

Key Buyouts

The largest deal on Genstar's recent ledger was announced last October, when the firm bought Tekni-Plex, a manufacturer of healthcare and packaging products, in a secondary buyout reportedly worth $1.5 billion. American Securities had previously backed the company since 2013.

Last year brought a trio of other noteworthy deals for the firm, including two more SBOs. Also last October, Genstar acquired corporate governance specialist Institutional Shareholder Services at a valuation of $720 million from Vestar Capital Partners. Last March, the firm purchased Power Products, a supplier of various aftermarket electrical parts, which had been backed by investors including Sentinel Capital Partners, reportedly for nearly $500 million. And the same month, Genstar bought Bracket, a provider of clinical trial services operating in more than 90 countries, from Parthenon Capital Partners.

Go back a little further, and you'll find deals that provided the basis for many of the firm's recent add-ons. In 2015, Genstar bought wealth management business Mercer Advisors from Lovell Minnick Partners. In the years since, firm and company have partnered on 13 add-ons, per PitchBook data, including several already in 2018.

Another example from the same year was Genstar's takeover of Ascensus in an SBO, which was conducted in tandem with Aquiline Capital Partners, reportedly for at least $800 million. Like Mercer Advisors, Ascensus is in the financial services space, in this case providing services related to saving for college and retirement. After conducting 10 add-ons with Genstar's backing, reports have emerged this year indicating the company could be up for sale.

More recently, Genstar announced the completion of two takeovers during the first days of August. The firm gained control of BBB Industries, a provider of aftermarket parts for the US automotive market, and Drillinginfo, the provider of a SaaS platform targeted at the oil & gas industry. Insight Venture Partners will keep a minority stake in Drillinginfo. 

Key Exits

Just as recent years have brought a serious rise in Genstar's investment activity, so too have they seen a spate of significant exits.

In November 2016, for instance, Genstar completed the sale of insurance broker Acrisure in a $2.9 billion management-led buyout, exiting a business the firm had backed for three years. In those intervening years, Genstar and Acrisure had teamed on several add-ons, making the platform a prime example of the firm's buy-and-build technique.

Earlier in 2016, Genstar sold ERT, a provider of data collection services for clinical drug trials, to Nordic Capital for $1.8 billion. That represented a serious increase in value in the four years of the firm's ownership, the result in part of several add-on acquisitions: Genstar originally took ERT private in 2012 in a $400 million transaction.

Last year, meanwhile, Genstar sold Tecomet, a manufacturer of medical and aerospace products, to Charlesbank Capital Partners. The firm had held its stake in the business for nearly four years.

While Genstar has yet to complete an exit this year, some major ones are on the way. On the final Friday of June, the firm agreed to offload the marine and mobile division of portfolio company Power Products to Brunswick for a return of $910 million. The aforementioned reports of a possible sale of Ascensus indicated the financial savings specialist could go for more than $2 billion. And on July 31, Genstar announced an agreement to sell Accruent, a developer of resource management software, to Fortive for $2 billion, setting up a significant sale of a company the firm has backed for a little more than two years.
 

Check out our previous Investor Spotlights on ABRY Partners, Providence Equity Partners, Audax Group, Vista Equity Partners, Ardian, Thoma Bravo and Silver Lake.

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