Grafine Partners is off to a roaring start investing in the next generation of emerging private equity managers.
The firm closed its inaugural strategy, Grafine Capital I, and parallel vehicles with $600 million in capital commitments last year with a focus on targeting the next generation of leaders to source distinctive private investment opportunities. The seed strategy has made investments in three firms, with two more expected, and those managers have closed on 27 deals thus far.
Interest in the fund, which surpassed its goal of $500 million, was humbling for Grafine Founder and Managing Partner Elizabeth Weymouth, who launched the firm in 2019 in “probably the worst fundraising market in history.”
“So yes, we were humbled, but also really thrilled at the reception that LPs had,” she said, noting that the client base represents three significant institutional investors at commitments of over $100 million each and a supplementary mix of endowments, family offices and other institutions.
“One of the key characteristics of Grafine’s LPs is that they are very sophisticated when it comes to private investments. This is a group that understood the value of backing new managers and cultivating true outperformers,” she added.
Grafine is in business today because Weymouth saw a “white space for more sophisticated investors to access this unique, off-market, high-alpha deal flow,” while also tapping into a pair of trends in the private equity space, the first of which being that big firms are getting bigger and becoming the “enemy of returns,” or at least seeing them reverting to the mean.
“We saw an interest from sophisticated investors who wanted to diversify away from just investing in mega-funds with something more niche and opportunistic,” said Weymouth. These investors want more access to their managers and a closer relationship and connection with the underlying assets that they own. They also want to help discover and support teams of business operators and assist them in growing their companies.
Grafine took this interest and paired it with another evolution in the private equity space that was yielding alpha by tapping into a specific group — first-time funds — which have outperformed Funds IV or later in every single vintage year for the past 20 years, Weymouth said, citing data from Preqin.
“Today, more than half of the private equity firms out there are over 20 years old, which means the senior dealmakers working underneath those founders have 10 to 15 or more years of investing experience, often focused on a certain sector with a track record that is verifiable,” she said. “And as these firms get bigger, for one reason or another, many people spin out, and when they form their own firms, they typically seek support from experienced business builders to help them deal with a myriad of issues.”
Those issues include being unable to find capital to finance the deals in their pipeline, or at least sourcing it quickly, and not having the experience of building an institutional-quality firm from the ground up, according to Weymouth, who noted that what these firms have going for them is that the founders are arguably “de-risked” because they have often spent decades in private equity before launching their own platform.
“We are looking for the rockstar private investor that we can co-invest with at the beginning and help build their business in a more institutionalized, professional and systematic way,” she said.
New York-based Grafine’s sourcing has also grown steadily, with over 860 potential new managers seen and inbounds continuing to grow as the firm’s strategy becomes more widely sought after, Weymouth said, adding that the opportunities have come from her and the team’s extensive networks, word-of-mouth, firms in which they’ve invested, investment banks and other intermediaries — including its own lawyers.
“We are becoming an attractive partner for dealmakers spinning out of larger firms and creating their own independent shops. We are creating a bit of an ecosystem.”
Helping to foster that ecosystem is the team Weymouth assembled at Grafine, which she believes is more distinctive than some of the other firms focused on emerging managers.
“Our goal is to bring investors closer to the deal. As a result of that, about half of our team has direct private equity experience and substantial track records of over 20 to 30 years and the other half has experience in business strategy, operations or capital formation in building up multi-billion dollar asset management firms,” she said.
“All of these people, of course, are helping to build and grow Grafine, but they can also be a SWAT team of sorts for the firms we support, helping them strategize and deal with issues that come from being a new business,” she added.
Grafine’s primary focus at this time is on lower middle market and middle market buyout strategies where the team believes there is significant alpha to be had and the team likes managers with a sector-specific deep expertise with a track record of doing deals of at least 10-15 years.
“When we diligence a team, we recreate their track record and we talk to the CEOs and management teams of the portfolio companies that they were involved with and we ensure that their strategy going forward mirrors the one that brought them the success in the past,” Weymouth said.
The firm targets managers with an anticipated minimum size of around $300 million up to about $750 million for their first-time fund, with significant co-investment, “equal or more to those, so we’re really underwriting verticals, as we call them, that are around $600 million to $1.5 billion worth of deal flow per vertical, which our investors like very much,” Weymouth added.
“Then when we construct the portfolio, we ensure that no two verticals do the same thing or compete with each other,” she continued. “We have a few macro themes, a few sectors that we might avoid but our real focus is on the talent and the people involved. Then we build a diverse portfolio of managers so that we can have a risk-adjusted return that is maximized for investors while giving them access at inception to the next generation of private equity leaders.”
Grafine’s name is a testament to its own place in the next generation of managers, a platform that as Weymouth conceived of it, she felt needed to be both sturdy and high quality. That line of thinking led her to materials and graphene, an allotrope of carbon whose characteristics include the strongest and most transparent material in the world, with multiple applications and “super high quality.”
“I completely fell in love with this name because it’s everything that I think that we should be putting out there in the world as a new investment firm, and of course it’s taken … Graphene Capital,” she said. “And I call my Danish mother for advice and she said ‘Don’t be ridiculous, just take the P-H-E-N-E off and put F-I-N-(E) because that’s pronounced similarly in Danish.”
Grafine reflects sturdiness and has a “feminine element” to it, which places it among the attributes that encompass what the firm is attempting to do now as well as in the future, according to Weymouth.
“I’m excited to have created a different model that solves a few problems that were brewing, that were creating friction and some misalignment in the traditional PE fund structure,” she said.