Whenever Paul Carbone visited a potential investment site as a direct investor leading Pritzker Private Capital, he always made it a point to see the restrooms.
“It’s indicative of how they treat their people,” says Carbone, who in April became co-founder and president of a new venture, Pritzker Alternative Strategies (PAS), and chair of its investment committee.
Carbone uses a similar approach when evaluating possible investments for PAS. With Tony Pritzker as chairman of the board, PAS allocates Pritzker family capital to lower- and middle-market private equity funds focused on growth and value investment strategies across the United States and Europe.
“When you look for and assess a manager, you want to understand the team. I always take a tour of the office. I try to understand the culture of the team: How is it being led? How does it develop its people? How do they train and develop the next generation of leaders?” he says. “I’m not necessarily going to visit the restroom, but I’m understanding how they source, develop and incentivize their talent, because that’s ultimately what you’re backing.”
PAS builds on the advantages of family capital — “it’s permanent and proprietary, it’s imbued with the family’s values, it creates flexibility,” Carbone says — in the private markets.
“I’m a big believer that the private markets are a place where families can develop and create premium returns,” Carbone says, notwithstanding the strong performance of the public markets in the past few years. “I think this differentiated capital can be applied in a passive strategy, much like we’ve demonstrated, it can be applied in a direct active strategy in the private equity market.”
The PAS strategy is based on the Pritzker brand, expertise in alternative investing, networks and relationships developed over decades, and the perspectives of being both a general partner and a limited partner.
“We thought we could deliver family capital in a different way, with different expertise, building on our brand and our networks and relationships — and support top-tier managers in the market in our desired strategy,” he says. “And that’s proving to be correct. We’re seeing terrific managers in differentiated spaces of the market and bringing GP and LP perspectives to our investing and our partnership with these people. And I think that’s being received very well by GPs.”
Winning the talent game to win the financial game
Finding those terrific managers and making connections with them is key to the success of PAS.
“Over the years, I have learned that this is a human capital business, not just a financial business,” Carbone says. “That is the essence of this business: It’s not just track record, but it’s having the experience and judgment to assess and back great talent.”
With a team of seven full-time professionals and multiple senior advisors, PAS is well equipped to evaluate up-and-coming managers. The firm brought on Shanna Otto from Promus as chief operating officer and Pantheon’s Jack Farr to help execute its investment strategy. Experienced private markets investors and family advisors Mike Batal, Phil Durst and Quan Mac have joined as senior advisors.
“There are thousands of these managers, and some of the most interesting opportunities are with emerging managers, who are new to the scene,” Carbone says. “It takes human capital to go find those managers, evaluate them with a sophisticated lens, to prioritize and compare opportunities — and then, importantly, get access to these managers, because the market is very bifurcated today. What we’re trying to do is present ourselves to the GPs as a disciplined, structured, knowledgeable family capital investor.”
The goal of PAS is to build a diversified portfolio focused on three areas: growth-oriented funds geared toward industries such as software, healthcare or tech services; value-oriented funds aimed at complex investing and corporate carve-outs; and private equity strategies that give access to excellent managers who don’t fit neatly into any box. PAS has already identified and executed several fund commitments according to this strategy.
“We’re trying to invest in who we view as the best of the best managers and capture both the limited partner opportunities and the alpha products they might generate — but to do that on a diversified basis,” Carbone says. “If you can back a great manager who can then back great companies — and then have real influence in turning and changing the trajectory of those businesses — you can create some really special opportunities as an investor and as a business builder.”
Finding the best of the best managers is particularly important in the market segment PAS is aiming for, Carbone says.
“The data suggests premium returns have been generated by the early vintage funds of managers and in the lower middle market: smaller funds that go after smaller companies,” says Carbone. “But there’s much bigger dispersion of returns in those markets. So manager selection is absolutely essential.”
An LP with GP experience
Carbone views his role as a limited partner via PAS’ investments through the lens of a general partner from his time leading Pritzker Private Capital.
“I ask different questions, I think, because of how I’ve experienced the world as a direct GP investor,” Carbone says. “We know what it takes, we know the obstacles, we know what, as a GP, we were looking for from our LP partners and how the LPs could be helpful to us.”
This may include offering advice where appropriate — though Carbone says PAS is careful not to lose sight of the fact that they are the limited partner.
“I’ve been in that chair, and I understand the challenges that GP has as that GP builds his or her business,” he says. “But I’m not trying to run funds. I want to go find great managers, provide them value-add and support. They run the business: I’m a limited partner, they’re the general.”
One area where they may be able to help is connecting fund managers with talent for their portfolio companies.
“We want to be more than just money — we want to provide multiple solutions in support of our GPs,” Carbone says. “Because this is a talent business.”
The hope is that the distinct perspective PAS brings will help them win the talent aspect of this business.
“When you’re dealing with these smaller, really talented emerging managers, the competition is pretty intense,” Carbone says. “Not only are these highly sought-after funds, but they’re smaller, so there is limited capacity. And we’re not the only ones that understand what a top-tier manager is. You have to make sure they understand that you’re a long-term supportive investor and that you’ll be a valued limited partner to them.”