Steward Quarterly Highlights 3rd Quarter 2021

Reopening continues to fuel expectations of an earnings recovery, evidenced by public market multiples and the boom in IPO issuances. This backlog stems from decades of private capital enabling companies to remain private longer. The world’s largest institutional investors have demonstrated a growing commitment to private equity, creating a virtuous capital flow with the power to transform companies and fuel recovery.

Private equity deal upsizing continues. As a byproduct of success, private equity allocators have witnessed growing fund sizes and subsequent deal sizes. The ethos is to go big and global or diversify via smaller GPs. The battle looming on the horizon of the private equity universe is the race for talent between burgeoning incumbents and new competitors forming as teams spin out. 

Commitments to private funds by investors are on pace for a record-breaking 2021 to exceed $1.3 trillion, according to JP Morgan, when annualizing August 2021 year-to-date across private equity, infrastructure, private credit and real estate private funds. The 2019 peak of $1.2 trillion dipped by 10% in 2020 before regaining momentum at its year-end. The PE trademark of proactively managed ownership has served LPs well in mitigating agency risk as well as making it one of the highest performing asset classes at over 14% annually (2011-2020 Burgiss/JP Morgan).

 The battle for talent. After a year of reduced hiring, the contest for talent has resumed. Unfortunately, timing is colliding with accelerating financial industry resignations. We are witnessing a flattening of available talent starting to cause considerable strain and ample choices for great dealmakers between deploying as intrapreneurs, innovators inside large organizations, and the entrepreneurs, writing a new script in the industry, spinning out with Fund I.

Resignations are the result of a growing expectations gap with employees, many of whom are in search of a mission and a purpose. Leaders are taking a fresh look at the talent equation and finding many new channels ripe for talent identification. This is coincident with an increasingly open dialogue around retention to ensure inclusion and to increase trust and team alignment.

For the private equity industry to continue the double-digit growth trajectory of the last decade, talent expansion must occur in lockstep. The nature of the business transformation inherent with successful strategies is a boots-on-the-ground engagement between boards, change agents and management. In the most sought-after control-focused private strategies, further capacity available for institutional investors will be constrained by the talent pool of dealmakers we are currently developing.

Aligning with values. An organization’s ability to retain and grow its talent is rooted in fairness and safety. The past 24 months drove deep fissures in security around health, environment and social justice. During the most recent quarter, we saw ever-changing policies related to the flexibility of working arrangements.

The pandemic afforded many the time to reconsider their consumer and employment footprints. Companies are having to re-underwrite employee engagement through a new lens as we slowly emerge from the pandemic. Diversity, social equity, carbon footprint and community engagement are at the top of the list of the values that help align customer loyalty as well as the employee-employer relationship. 

Re-underwriting the American Dream. Uncertainties around fairness and access to opportunity are being addressed by risk-taking founders stepping out into the next wave. This includes inaugural fund managers in the Steward pipeline that are re-underwriting the next version of the American Dream. Bringing valuable playbooks, fresh ideas, talent and capital to companies in the less efficient smaller end of the private markets, allows the smaller private equity strategies to be among the first movers, after the PPP program, to will help to harness the recovery’s momentum. These efforts are poised to restore U.S. innovative leadership and earnings growth as we attempt to break out of the “no man’s land” of the middle ground and reverse the decline of our ranking of social mobility. The U.S. is currently 27th out of the top 82 countries, measured by the World Economic Forum, and critically has been losing ground.

Concentrated wealth and a lack of mobility between generations highlight the need for new solutions. Steward is proud to be part of sector-specific bespoke solutions to ensure institutional allocators have efficient opportunities to access the innovative U.S. Middle Market, an area often under-represented in portfolios due to the lack of staff which allows investment teams to underwrite smaller funds. With more than 200,000 U.S. companies with revenue less than $1 billion, it is one of the broadest investment universes globally. The notable resource constraints to garner a runway for breakout growth and transformation contribute to the attractive valuations but herein lies a primary restrain to a founders’ mobility achieved through growth capital and expertise.

Below we feature four sectors that rose to face the challenges brought on by the pandemic. We are seeing the innovation windows wide open around the altered consumer and stakeholder needs. The U.S. Middle Market plays an important role in providing growth capital and playbooks for the acceleration of these trends.

While valuations in the U.S. Middle Market are among the most attractive in the U.S. equity landscape, winning deals is fiercely competitive. Sellers are often founders that are acutely particular about who will take over executive leadership. If we look at private equity firms launched in the last decade that have grown to funds III or IV, exceeding a billion in assets, team members have deep sub-sector operating experience that can relate to the founders’ concerns. One case in point is the success story of Luminate Capital, led by Hollie Haynes, whose partners have held executive leadership roles in their target universe of SaaS businesses.

Digital payments. Customer interfaces for investment management and financial payments moved completely remote accompanied by increased functionality screening for fraud to facilitate seamless transactions. This increased connectivity and reliability instilled greater confidence in technology supported by artificial intelligence. Among Middle Market investors, Motive Partners’ Rob Heyvaert and Reverence Capital’s Milton Berlinski are underwriting innovation for the next decade.

Education. The education industry, formerly thought to require indoor gatherings, is undergoing a revolution as we see virtual campuses expand their footprints to a global student audience facilitating online learning via digital curricula and assessment tools. The door to innovation and technology in education has been flung wide open. Private and public collaborations are pivoting via the innovative vision of teams such as Vistria’s partners Marty Nesbitt and Kip Kirkpatrick.

Healthcare. Opportunities in eldercare are on the minds of astute investors such as 1843 Capital’s Tracy Chadwell, who is wrestling with the greatest challenges of our aging population that include improved care protocols, medical research and services to support independent living with novel transportation alternatives.

Consumer health and wellness. Increasingly health-conscious consumers are turning from cola to kombucha. Yet many branded consumer companies are still not willing to spend on R&D, opting instead to purchase smaller innovators as they start to achieve scale in a limited number of channels, before leaping in to provide global distribution. Tom Formolo, Jocelyn Stanley and Ed Lhee of New Harbor Capital are investing in growth-oriented wellness businesses including softer and more easily digestible medicines and supplements and natural food ingredients to meet the needs of increasingly informed consumers.

Melanie brings a wealth of perspective and insight gained during her 20-year career in transforming and advising businesses.  Melanie is the Founder of 2nd Gen Partners, an independent sponsor that accelerates the growth of agribusinesses, healthcare services and consumer wellness companies.

 She worked on SK Capital Partners’ multinational carve-out to form chemical manufacturer, Archroma, and was Chief Transformation Officer for Burlington Stores. She also brings rigorous professional training and experience from Goldman Sachs and Morgan Lewis. Melanie received her J.D. from the University of Virginia School of Law and a B.A. from Rutgers University. She currently serves on the board of Virtua Health Foundation.

In September, SEO (Seizing Every Opportunity, formerly Sponsors for Educational Opportunity,) hosted productive LP-GP meetings in advance of their annual Spring Alternative Investment Conference, SEO AICON. Congratulations to their team for seamless execution.

PEWIN celebrated its 2021 annual meeting with many notable speakers and recognitions.  Congratulations to this year’s award recipients Dana Johns, Ancala Partners, Lightspeed Ventures, Cambridge University Endowment Fund, CalPERS, Asia Alternatives and 1315 Capital.

Our gratitude goes out to Private Equity International (PEI) for hosting Partner Connect East at New York’s Harvard Club in October that brings together many private market leaders.

Global Fund Women Week 2021 showcased many more than 100 Women in Finance, hailing from across the globe. The organizers collaborated to bring together an international round-the-clock event. Read and listen to Steward’s Sheryl Mejia contributing to the dialogue. Steward is proud to be featured in the FundWomen directory.

We are thankful for Beth Falk’s incomparable leadership in driving so many wonderful events during the pandemic and re-opening. We’ll see you at the Women’s Private Capital Summit live in New York on November 18th-19th at a Convene location. 

The Women’s Association of Venture and Equity (WAVE) team is hosting its 2021 Women in Alternative Investments Career Forum on October 14th and 15th. We are honored to be participating in this blockbuster event.

Bain. Private Equity’s Wild First Half Ride. The mid-year report found that the industry continued to supersize in 2021 and is on track to post its best year by far. It’s risky to extrapolate performance across the next six months based on the year’s first half; however, if it bears out, the industry will have tripled in size since 2011.

Pitchbook.  GP Stakes Deployment Opportunities. GP stakes fundraising activity continues unabated despite so many large firms apparently having already sold a minority stake.

Master’s in Business. Christine Hurtsellers on the Business of Trust (Podcast) Christine Hurtsellers, CEO of Voya Investment Management, offers wisdom and insight on the business of advisory and building trust. 

The Medium. A Probabilistic View of Private Equity Returns — An Allocator’s Perspective. Chris Keller provides his perspective on what to expect in the private equity industry over the coming decade.

Robert Wood Johnson. Changing the Narrative for the American Dream. The American Dream contradicts present-day reality in the United States. 

Bloomberg Law. Blackstone, Ares are Turning into Banks.Increasingly, private equity firms looking to finance big leveraged buyouts are cutting out Wall Street banks and borrowing money from each other or from direct lenders.

RFK Human Rights. The Future of Work is People-Centered.Contextualizing the difficult career decisions necessitated by COVID-19.

Goldman. Outlook for Global Growth: It’s Complicated. In places like the U.S., where activity has returned to early 2020 levels but remains below the pre-pandemic trend, the recovery story remains tenuous.

Andreesen Horowitz a16z. The Big Question. Experts on the Future of Expertise. How is expertise being redefined in the modern era? Are we witnessing a golden age of expertise or a crisis of expertise?

Bain’s Dry Powder. Could Private Equity Accelerate DEI? An industry that has historically lagged on diversity may be poised to take the lead. 

Steward Asset Management is an anchor investor to private equity teams approaching their first institutional launch.  We utilize strategic partnerships to build diversified portfolios of private equity and opportunistic strategies. Our lens focuses on strategies that address innovation and disruption in the healthcare, consumer, industrial and technology sectors in the US Middle Market. 

In the attractive small fund universe, funds under $1 billion, Steward’s anchor partnership approach unlocks additional return potential by seeking to generate GP participation. Steward serves as a catalyst for founders while providing support and guidance. These features are unique to the Steward program and include a focus on alignment and diversity.

Headquartered in New York City, Steward’s competitive advantages include a deep pipeline of talent, proprietary assessment tools, experience negotiating terms and extensive relationships within the emerging manager investor community. The team has an accomplished track record of deploying capital to smaller and diverse asset managers. 

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