E437: Doug Beyer on Raising Capital, LP Psychology & GP Stakes

How I Invest with David Weisburd

David Weisburd interviews Douglas Beyer, founder of Roaring Brook Holdings, about bridging the capital gap for emerging private market managers. They explore how GP seeding and

Key takeaways

• Roaring Brook Holdings provides anchor capital, flexible working capital, and value-add services to help emerging managers solve cold-start problems and prove execution capability before seeking broader LP commitments.
• LPs increasingly demand significant GP skin-in-the-game and prefer funds with early portfolio assets to eliminate blind pool risk, making anchor investors paramount for fundraising momentum.

Main topics

• GP staking and seeding for emerging managers
• LP psychology and fundraising dynamics

Notable quotes

LPs are what allow general partners and their teams to exist. They give them huge sums of capital.

Conclusion

The episode provides a practical blueprint for emerging managers to na

Transcript preview

Speaker 2 (0:00) Doug, you left a very prestigious role at a family office in order to found Roaring Brook, a GP seating firm. Why did you do that? Speaker 1 (0:09) I was fortunate to having joined my firm, my prior firm at inception, and was given the responsibility to help build the platform and the global portfolio from scratch. And throughout my career, I've backed several dozen emerging firms, and I've sat on both sides of the table. I've been a GP building a firm, and I've seen the economics associated with being a GP. And then I've underwritten and allocated capital to several dozen emerging firms. And through that shared experience of being on both sides of the table, I saw a clear gap in the market. There was an availability of capital for more mature firms, but there was a lack of capital for emerging firms. So we launched Roaring Brook Holdings to solve that problem, provide... anchor LP capital, working capital, flexible solution to help launch new businesses or provide growth capital to existing firms that are trying to get across that Rubicon. Speaker 2 (1:04) Said another way, you're at a family office and you kept on seeing this problem pop up and eventually you're like, I got to solve this problem. How would you explain why there's a dearth of solutions for earlier stage firms versus the GP staking market, which has now ballooned to 70 billion plus asset class? Speaker 1 (1:21) If you look at the proper GP stakers, they're focused on larger middle market firms or blue chip or trophy assets. For smaller firms, they're nascent. They're not as well known. There's just not as much of a capital availability to service their needs. So in the marketplace, there are investors that focus on smaller firms, but not in the way of being an owner of those businesses. And if you're going to invest in the funds, you would also like to be an owner. of the actual asset management franchise and participate in the long-term cash flows and franchise value of the business. Speaker 2 (1:57) Use that term franchise value. To play devil's advocate, someone might say, well, there's no real franchise value in a new firm. You have to get to fund four, fund five, fund six in order for the company to have any intrinsic value. Why is that wrong? Speaker 1 (2:12) In the early years, the smaller firms are typically not as profitable as a fully scaled asset management business. But Speaker 2 (2:18) early Speaker 1 (2:19) on, just because they're small, it doesn't mean they can't be profitable. They can have a lean and efficient team. They can have institutional infrastructure. that's required in order to onboard institutional capital, but they can also be profitable as a business. But as they get to fund two, three and beyond, that's when the asymmetry really starts to come through in terms of the profitability of the business. The franchise itself has a brand recognition. They have LPs across all asset owner types. And from a strategy perspective, they have recognition for doing something exceptionally well. Speaker 2 (2:54) Let's talk about your buy box. What vintage are you looking to invest into and what kind of investment firm are you looking to back? Speaker 1 (3:01) At Roaring Brook, we typically have three types of solutions. First, we solve the cold start problem, provide seed and anchor capital and flexible working capital to help entrepreneurs launch a new business. That could be DeNovo New Build or Fund 1, 2, or 3. The second bucket would be acceleration capital. We provide growth capital to help a firm that exists. They have a great franchise already. They're trying to launch a new product or strategy. They need a new anchor or seeder to launch that new fund, or they need management company capital to help fuel that growth, to hire the team and onboard the resources to continue to build the institutional platform. Speaker 2 (3:43) Let's say you're a venture capital firm. You're on your third vintage, and now you want to start a credit fund for whatever reason. And you go to Roaring Brook to partner on that. How expensive are we talking about from a franchise standpoint? Speaker 1 (3:58) People are the most expensive aspects of these businesses. They drive the decision-making, the outcomes, the process, the portfolio management, and then ultimately they try and dispose of the assets. It could be several million dollars at least to launch a new program. where you have to hire a new portfolio manager or CIO, in your example, for the credit strategy. They need to hire deputies and a team to service that strategy. On top of that, if the firm doesn't have institutional capital relationships for the credit business, they need to hire a fundraiser that has institutional relationships to attract capital on behalf of the PM, or at least get them in the room with the right institutional allocators. it could be at least several million dollars to launch a new product or strategy. And Speaker 2 (4:48) then also the GP commit. Speaker 1 (4:51) Oh, the GP commit can be very significant. In today's environment, LPs are looking for significant skin in the game. They want their GPs to have significant alignment. But for each firm and individual, it's a little bit different. If you're on Fund 10, LPs are going to expect a much more significant GP commitment. If you're earlier on in the journey, it really is a percentage of your liquid net worth or what seems to be a reasonable amount of money for the strategy, the risk, and the illiquidity of the fund. Speaker 2 (5:20) One of the reasons I wanted to get you on the podcast is you have a very unique vantage point that you're seeing franchises start and grow on a consistent basis. You're seeing hundreds of simulations of this. What are managers getting wrong today? Speaker 1 (5:32) People have always thought LPs means limited partner. That's not accurate. It's inaccurate. LPs are what allow general partners and their teams to exist. They give them huge sums of capital. They pay them fees. And if they're lucky, They get a performance fee when they hit a hurdle. And they then can generate significant wealth for them, their teammates, and their family. You need to always have an open line of communication with your limited partners. Transparency is key. You have to be able to share the good, the bad, and the ugly with your capital partners. They want to be informed. They don't like surprises. Sharing information early is important, but you don't want to overshare to the extent you're going to overcomplicate and confuse people. It's building the relationship and rapport. And some of the LPs, they might want co-invest, understanding when to reach out to them. Do they need a memo? Do they have a direct investment team that can underwrite the co-invest? How do you interact with that direct investment team? But it all goes back to communication. That's the most common pitfall we have seen as firms are up and running, communication. You need transparency. You want people to be on the same side as you. You don't want to surprise them and pull the rug out from underneath them. Speaker 2 (6:50) Said another way, the best way to learn how to interact with LPs is to ask. Speaker 1 (6:56) Exactly. You're launching a new firm. It's hard. This is really challenging. Oftentimes, the most active emerging manager investors have been investing in small firms for a long, long time. They're here to help you. They're here to help empower you. They want you to attract other high-quality LPs. So why not ask for help? And that's part of being a good founder and entrepreneur. having good awareness and being open-minded to feedback. This episode is presented by Juniper Square, the operations partner for private markets. Speaker 2 (7:30) There's this new buzzword in the GP staking world, GP solutions. Does that exist in the emerging manager space as well? I Speaker 1 (7:39) believe it does. We've had the good fortune of sitting down with some of the founders of the very large GP stakes platforms, and we try to borrow the best of what they have done for the large middle market and trophy asset firms and tailor fit that to smaller businesses. Where we provide at Roaring Brook, Anchor LP Capital, Flexible Working Capital, and solutions to add value across the GP's evolution. So instead of having a 40-person team focused on procurement, we like to think about adding value across capital, network, and value-add services and resources. So it's taking the best of the later stage GP stakes players and... tailor-fitting that to smaller firms earlier in their life cycle. Speaker 2 (8:31) Maybe double click on what it means to have GP solutions. Does that just mean that you're not just buying a stake? And how does that differ than just buying a stake? So Speaker 1 (8:41) when you're seeding a firm, you're predominantly providing anchor LP capital to help solve the cold start problem and get to a material first close to allow the GP and the team to say, hey, we're in business. We have a material anchor. We're helping catalyze. the business, and you give confidence to the marketplace that you're going to be a going concern. You can then start to do some deals and put that into the fund and obviate that blind pool risk that a lot of LPs are trying to avoid, especially in today's. environment. So for a seeder, you're typically providing material anchor capital and in exchange, you can have fee concessions, but you're really taking that stake in exchange for providing material LP capital. You're not actually consummating a transaction where you're acquiring a stake in the business compared to later stage. GP stakes for more mature asset management firms. Speaker 2 (9:37) Double click on that. What does your typical deal look like? Speaker 1 (9:40) We try to meet the GPs where they are and provide a solution that allows them to catalyze and launch their firm or continue to accelerate growth. It will typically be a mix of LP capital and working capital or direct equity capital if it's an acceleration type deal. And then we provide a variety of value add services to help the GPs not only launch but scale in an efficient matter. We just try to give them leverage across the evolution of launching and scaling their business. Speaker 2 (10:12) You said something really interesting. You said in today's market, LPs don't want to invest into blind pool funds. So you help negate that by offering capital to start the fund. Talk to