FS Investments, the 500-staffer private-investment firm based mostly at its sleek campus in Philadelphia’s Navy Yard, was founded by Philadelphia lawyer Michael Forman, Campus Apartments boss David Adelman and partners to become a kind of Vanguard Group for private investments in 2007. This summer, it has doubled in size by merging with pension adviser-turned-money manager Portfolio Advisors in Darien, Connecticut.
The combined firms now invest $75 billion in other people’s money, mostly from rich people and institutions, given longstanding federal limits on who may invest in private firms and funds, which typically disclose less information than companies with publicly traded stocks.
But FS wants to also target a population of increasingly affluent middle class investors. For its FS MVP Private Markets Fund, the newly combined group has raised $600 million from initial investors and hopes to collect billions more. FS has set up the fund so it can solicit a minimum $50,000, from those who earn as little as $200,000 a year, and already have at least $1.1 million invested with the firm (or net worth of $2.2 million).
What are the private-investment managers buying in this year of high interest rates, biotech hangover, and slowing construction?
As of March 31, according to its annual filing, one-quarter of the fund is invested in private equity shares of small companies — medical specialists, a lawn service, machinery makers — and in other funds that make similar investments. About half as much financed loans to similar-sized companies — another medical practice, a construction company, a small-plane service.
More than half the fund was invested in large private-equity funds managed by some of the same high-fee firms that invest for pension funds: Accel, Insight, KKR, New Mountain, Platinum, Silver Lake, Thoma Bravo.
Most of the rest was invested in Vanguard Federal Money Market funds, which returned 4.76% as interest rates on federal bonds rose over the previous year — very close to FS MVP’s overall return of 4.74%.
Since inception in July 2021, the fund is up 23.5%, far ahead of the S&P 500. The FS MVP returns were reported before discounting fees, which total up to 3.5% in upfront “loads” for those who invest at least the minimum $50,000 but less than $1 million.
Portfolio manager Brooks Lindberg, one of two veteran Portfolio Advisors managing directors to join Forman and two of his FS colleagues on the combined firms’ top management team, agreed to take The Inquirer’s questions during a recent visit to the home office. Some answers have been edited for brevity and clarity.
Q: What is the opportunity here? What do you sell that we can’t buy from Vanguard or Schwab?
A: This fund is really about investing in mid-sized private companies, the bread and butter of the economy. That’s in contrast to publicly traded investments or to the large private equity firms — they may be investing in very large, often global enterprises. We target middle-market companies that are not as easily investable. The economy has evolved in a way that many companies may never sell shares and go public. The opportunities to go public have diminished. We are looking to capitalize on special opportunities.
Q: For example?
A: There are many. Look at Mellott Co. That’s an industrial rock-crushing business, headquartered in Warfordsburg, (Pennsylvania). It’s a hundred-year-old, family-controlled company that we and others (including an arm of PNC) backed to support their growth, and it’s been a terrific investment for the fund. We were able to co-invest in the company (funding its purchase of other companies, while also cutting costs), and in less than two years’ time, they have doubled their earnings.
Another interesting one: Wood Technologies, (an Indiana woodworking firm) sponsored by One Equity Partners, a private equity manager specializing in midsized companies. They are combining paper products, sawmill automation, and related companies, looking to create a ton of growth.
A lot of these middle-sized companies have lower valuations than public companies — yet also less (borrowing). Rising rates makes a hard environment for companies that have borrowed a lot of money; the companies we are interested in use a lot less debt. Combined with the relationships we built with private equity firms over 30 years, it creates opportunities. We have access, and when we see (investments) that fit the strategy, we can move quickly.
Q: A lot of your fund is invested in other funds, rather than directly in private companies. Does that make it a ‘fund-of-funds’ with layers of fees?
A: This is decidedly not a fund of funds. We make direct investments in the securities of midsized companies, as an equity or credit investor, (later selling) to larger private equity firms or strategic buyers.
Historically, this type of middle-market strategy (which includes investing in new equipment) has delivered meaningfully better performance than … investing in larger companies.
And that does include interests in “secondaries,” funds that were previously invested, then sold again (for example, by a state pension fund). But we are not buying at the initial price. We look at what an owner of those funds is willing to sell, we look at the securities in that portfolio, and we compare to what it would be worth to buy them individually.
That way, we can purchase assets at a discount to current value. Because we are in a point in the market cycle where (some earlier investors in those other private funds) become slightly overextended and need to rebalance. If you can buy assets at a discount, that’s a good situation to build value.
Q: As you get bigger, will it get harder to make money from small investments in midsized companies?
A: There are so many good private companies. If we raised billions and billions, we would still be a drop in the ocean. That can happen to public-stock investors, size (becomes) limiting as to what they can buy (and still make a profit.)
A lot of these deals, we are coming in alongside other firms, some of which are also our clients. And as we grow, we will be able to make larger investments in those companies.
The idea is, let’s take what we would do for a very large public pension fund and make it accessible in its fully institutional form to the individual investor.
So we are bringing this solution to a broader audience. It’s not for every single person. But a lot more people qualify now.
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