When private equity veteran Elizabeth Weymouth founded Grafine Partners in 2019, she had two primary goals: provide sophisticated investors with direct access to unique sources of alpha and partner with proven dealmakers spinning out of high-profile private equity firms.
Now with its debut fund up and running (and targeting, according to regulatory filings, up to $500 million), Weymouth’s firm has become something of a beacon in the private markets landscape, supporting emerging GPs to establish institutional-quality private equity firms while also operating as a merchant bank, finding customized one-off investments.
As of this past summer, New York-based Grafine had screened more than 275 potential investments, spanning both new private equity platform opportunities and unique direct investments. It’s been a challenging environment, Weymouth concedes, but there’s an upside in getting aligned with the right people and finding the right direct investments.
“We are seeing a steady flow of interesting opportunities for a number of different investment strategies across industries and deal types,” Weymouth says.
But she’s not so much concerned about sectors and niches as she is about identifying key elements to emerging manager success, including strength of a given team and “their ability to take advantage of current market dislocations.”
While a partner at Riverstone Holdings, Weymouth played a vital role in growing the private equity powerhouse’s real assets business into an independent, $30 billion-plus investment platform following its spin out from Carlyle. Prior to that decade-long stint, she was a managing director and head of investments for the U.S. Northeast region at JP Morgan Private Bank.
A native of the New Orleans area, Weymouth earned a B.A. from the University of Virginia and an M.B.A. from UVA’s Darden Graduate School of Business, where for three years (2016-2019) she served as chair of the board.
The below exchange was conducted via a series of e-mails.
How are emerging managers positioning themselves for the other side of the market tumult?
Weymouth: There’s an interesting dichotomy in private markets right now. After a years-long, record-setting private equity fundraising boom, recent market volatility and uncertainty has led many LPs to be more cautious as they allocate capital. So, times like these reconfirm the need to think differently about generating alpha.
Specifically, we are seeing a significant number of emerging managers who are differentiating themselves with fresh perspectives and new ways of investing in private markets. These emerging managers have teams comprised of veteran investors, who have invested across multiple market cycles and fought through previous investment storms. They are not hesitating, despite uncertainty, and instead focusing on finding exciting investment opportunities that are likely to emerge during cycles like this.
Valuations have fallen, and businesses are still looking for capital. This provides a compelling entry point for new investors, who can capitalize on the correction in the markets and find more promising return profiles for new investments. Further, these emerging managers have the benefit of starting fresh. They don’t have large, legacy portfolios that may be severely damaged from having been hit by a global pandemic followed by a severe markets’ collapse.
Regarding this trend of investment talent leaving high-profile private equity firms – why is this happening?
Weymouth: There has been a clear trend forming as the private equity industry continues to grow – high caliber investors are spinning out of the larger and well-established private equity firms to form businesses of their own. The pandemic and the “great resignation” only strengthened this trend and created a seismic shift in the private equity world, where dealmakers at large private equity firms were reflecting on their careers and increasingly choosing to leave. Those with strong entrepreneurial drives started to recognize that the organizations they had helped to grow had become increasingly “traditional” and that they were no longer the right fit. These proven yet “still hungry” investment professionals now had track records to call their own and the confidence or maturity to spin out on their own.
Post-pandemic, we may see a further uptick in investment talent leaving to set up new shops, as performance for several of these larger GPs face a significant correction in the market and the prospect of carry diminishes.
How are industry members maintaining and building relationships these days – is it still a mix of in person and Zoom calls?
Weymouth: Successful emerging managers are building relationships every way they can. However, as we emerge from the pandemic, the struggle to find strong pockets of capital has become much more pronounced. At the height of the Covid-19 crisis, most LPs focused on getting a handle on their existing portfolios instead of combing the market for new relationships. As a result, we saw a flight to familiarity with LPs focusing on re-ups with existing managers, since conducting due diligence on familiar names proved to be much easier to do virtually than for newer groups.
This reticence to commit to new managers seems to have softened a bit as we are learning to live with the virus as a permanent part of our lives. We anticipate the interest for emerging managers will pick up, as in-person meetings and travel continue to ramp up.
At the end of the day, this is a people business and relationships matter. Whether in person or over Zoom, crucial elements of any successful business relationship needs to be established—communication, trust, credibility and integrity.
How is the current environment shaping the investment approach for first time funds?
Weymouth: We see opportunities for a number of different investment strategies, but the key elements to success include talent of the investment team, proof of past successes, and an ability to take advantage of current market dislocations.
In general, we have found that the best indicators of future performance are having a relevant track record and knowing how to navigate choppy waters. It is crucial to validate that an emerging team’s track record is in an area that is still relevant in the future and that these investment professionals have lived through multiple economic cycles. There are always going to be hot and cold industries, but knowing how to pick the best deals across a certain sector with a complex macro backdrop — that is what LPs pay attention to when trusting an emerging manager with capital.
Why is it important to invest with women and minorities? Why is this important to you?
Weymouth: I am a firm believer that having a diverse team brings a broader set of insights and is a key to success. Differences in how we experience the world, process information, and solve problems … these diversities of thought and skills are critical. They add significant strength to a team. There is no doubt that progress is being made in promoting diversity in the workplace, but the private equity industry has lagged other sectors in achieving this balance, particularly in senior roles. Yes, there is a growing awareness in the industry that diversity, equity, and inclusion need to be strategic priorities, but closing these gaps takes commitment. Whatever progress that has been made so far has not happened by accident. Organizations have had to make intentional shifts and set goals to allow diversity to take place.
As it relates to gender diversity over the course of my own career, I often found myself the only woman in a conference room, and this became increasingly apparent as I rose in rank. While creating Grafine, one of my missions was to devote a great deal of energy to advance women in business, and I am determined to create a platform that contributes to this goal. I am proud to say that to date, two-thirds of our employees are female, and Grafine recently was certified as a Women’s Business Enterprise by WBENC.
What advice do you have for managers setting out on a first fundraise?
Weymouth: It’s no secret that the fundraising environment is challenging right now, and that the situation could persist as current market conditions continue. Fundraises, for even the most established of private equity firms, are taking longer and often missing targets. It is essential that new managers are being thoughtful and intentional in how they are approaching the market. Preparation and foundation are key. Having a strong track record is mandatory, but so is having a couple investments in the ground that LPs can diligence.
There needs to be a disciplined go-to-market strategy, one that targets investors in your network to ensure early support once fundraising officially launches. Relationship building is critical for gathering momentum post-pandemic and new firms should look to build relationships with LPs who will be good partners beyond just capital and be there for fund II and fund III.
Lastly, don’t underestimate the power of having the right support around you.
The startup pains are real. And the process of building a new business can be extremely distracting. With the right support in place, investment teams can have the independence to focus on deals and successfully launch a debut fund.