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Steward Quarterly Highlights 4th Quarter 2020

Steward Quarterly Highlights 4th Quarter 2020

Summary
Themes This Quarter
Staying the Course in 2020 — We witnessed a pandemic, an impeachment trial, a bear market, a recession, a bull market, a racial justice movement, and a contentious presidential election. Thanks to investors, advocates, and our real and virtual communities, we have remained focused throughout the year. We celebrate your engagement, the underpinning of our partnership. 
“So often in life, things that you regard as an impediment turn out to be great, good fortune.”
— Ruth Bader Ginsburg, Former Associate Justice of the Supreme Court of the United States
‘Moments of Lift’ for the next decade are evident from our front-row seat to growth opportunities in the US middle market. Our work with high conviction asset management teams in Steward’s pipeline demonstrates a funnel of capital aimed at generational opportunities. Although remote due diligence tempered the pace of investment in first-time small buyout funds in 2020, we saw an uptick in allocation to smaller funds overall. Pitchbook reports that funds under $1 billion received more than 25% of US private equity fundraising in 2020, an increase from less than 20% in 2019. As travel resumes, we expect first-time funds to fill the demand for US middle-market opportunities. They will provide a gateway to the more than 200,000 private companies that we believe will serve as an engine of economic lift, a “wheels up” on the recovery.  
We borrow ‘Moment of Lift’ from Melinda Gates’ recent book title. In it, she discusses her global work on gender roles and societal health. We thank both Melinda and Bill Gates for their leadership in 2020, whose generational goals are not lost in the noise of economic and political disruption. 
Transitioning from a Poker Game to a Chess Game —Emerging managers in our pipeline possess many qualities that provide them with a competitive edge. First among them is a proven track record of execution that reinforces a bank of knowledge and repeatable playbook. Execution is the single greatest market differentiator, an essential skill in the portfolio management process and portfolio company engagement. Great companies out-execute their competition and have the vigor to see business plans to completion.  
 The industry-specific knowledge of middle-market investors guided deployment in 2020. Many companies benefited from this expertise to reimagine the client experience, reorient supply chains, recapture revenues, and rapidly assess the competitive landscape. This expertise turns what may have been a more opaque poker game into a visible field of engagement, more akin to a chess game, with less risk and lower stakes on the way to value creation. 
Sector Outlook
Industrials offer value opportunities at the core of the production and consumption economy, where businesses with long-term contractual relationships can benefit from dependencies in the value chain. Valuations will favor those who can meaningfully forecast demand and maintain pricing with differentiated products. In 2020, we noticed the gap between the strong investor demand for industrial sector funds and the paucity of funds coming to market.  
Health Care adjusted to the rapid decline in face-to-face visits giving way to technology solutions and virtual MDs. The rise in behavioral health, the backlog of delayed elective surgery, procedures, and telemedicine are among the drivers of value creation and a reimagined customer experience in the coming decade.  
Business Services companies offering tech-enabled improvements in compliance, workforce management, and education continue to receive premium valuations. Domestic and global expansion opportunities provide multiple ways to win. Outsourcing is expected to provide a meaningful tailwind for 2021 as companies seek balance sheet optimization. 
The Technology landscape provides a watershed of winners and losers following decades of disruption. Categories such as big data, robotics, and automation are penetrating old economy segments and boosting efficiency.  
Real Estate survival is bifurcated between those assets forced to shut down and those that must stay open. Once burgeoning office buildings, malls, and hotels became vacant mausoleums of steel and granite. Investors knowingly kicked the can on rent and mortgage forbearance into 2021, creating an unstable credit risk profile as well as generational opportunities. 
“Someone told me when I started that you begin on the hill and all is sunny and you can see forever. Then you start going down the hill and it gets darker. Pretty soon you can’t see anything. Then some light comes in and it start getting brighter as you ascend up the other side out of the valley.
Our lives are filled with these peaks and valleys. I try (not always succeed) but try to be grateful for all the struggles that I have had building the business. I know twice as much as I did before I started.”
— Tracy Chadwell, Founder, 1843 Capital
Authentic Engagement - In 2020, we had the opportunity to hear from some of the largest global allocators about important implementation opportunities, long-term goals, and the authenticity they expect from their managers. It helped us point our arrow to clear return drivers and risk mitigants within our Anchor Strategy that align with economic growth, responsible entrepreneurship, inclusive teams, fiduciary duty, and sustainable practices. These factors encompass what we believe are sound business practices for 2021 and beyond. 
Firm News
We applaud the recent accomplishment of Steward’s Advisory Board Member, Alhadi Alwazir. His leadership brought together a breakthrough partnership to broaden access to vital specialty generic drugs across Africa. Access the story.
Our effort in extending the strong work of ILPA (Institutional Limited Partner Association) was reflected recently in our legal underwriting priorities with emerging firms. If this governance is of interest, please reach out to us to schedule a discussion.  
Thank You
Thank you to AIF Global leaders Melissa Waller and Brant Maller for hosting the virtual Women’s Investor Forum in early October 2020.
We were proud to be a sponsor of the recent WAVE Virtual Career Forum. This organization opened up new communication channels with an innovative event platform to connect college students with industry mentors. 
Finally, the Steward team celebrates the Teacher Retirement System of Texas and the Employees Retirement System of Texas for continuing their annual tradition of bringing emerging managers and allocators together virtually on January 26th, 2021. Registration is now open.
What We Are Reading
Private Equity International, Four Key Trends in the MidMarket. Despite the pandemic, limited partner appetite for emerging managers does not appear to have dissipated; 89 percent of institutional investors surveyed said they would back a debut private equity or venture capital fund. 
Deloitte, Middle Market M&A Outlook. With mid-year M&A activity down more than 60% since January 2020, creative capital strategies are being deployed. 
Bloomberg, Private Equity Legends No Longer Living Up to their Hype. A study published by the US National Bureau of Economic Research used data on over 2.200 funds and found that first-time funds returned on average 1.93x MOIC (multiple of invested capital), which matches some of the most successful large buyout firms, the ‘legends.’  
Tracy Chadwell, Entreprenista. Emotional intelligence for raising capital and building relationships. 
CFA Institute, Asset Owners Series. Interviews that bring you up close and personal with more than 30 CIOs. 
David Barrett, Addressing the Diversity Gap. Actionable recruiting techniques to increase diversity. 
About Steward
Based in New York, Steward builds portfolios of small buyout, growth equity, and opportunistic strategies to invest in the Middle Market. Through strategic partnerships with emerging and diverse managers, we seek to share in their success on the path to launching fund I. A value orientation focuses our lens on innovation and disruption in the healthcare, consumer, industrial, fintech, and technology sectors. Additionally, on a limited basis, we expand our scope to complementary opportunistic and special situations strategies.  
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