AltAssets profiles Catalyst Investors

AltAssets profiles Catalyst Investors
Created: May 22, 2015

NY’s Catalyst embraces its ‘growth equity’ niche as it prepares to invest latest fund
By Helen Burggraf

Catalyst Investors was founded in 2000 in New York by three ex-bankers keen, in managing partner Brian Rich’s words, to “start our own thing”.
But it was years before their particular type of private equity investing had a name, he says.

“Five years ago, if someone were to say, ‘okay, explain what you do’ in terms of how you invest, the concept of ‘growth equity’ didn’t exist,” he recalls.

“Now, though, it does.”

Not only has this made life somewhat simpler for Rich – and his fellow Catalyst Investors co-founders Chris Shipman and Ryan McNally – when they are asked to explain their investment strategy, but it has also given the company a unique selling point among its limited partner clients, he points out.

“Like anyone putting together a portfolio, LPs seek diversity in their alternative investment basket,” he explains.

“In a portfolio of venture capital investments, late stage venture capital investments, buy-outs and so on, growth equity is seen as a diversifying element.”
Rich shared his thoughts on growth equity and other investment topics with AltAssets recently, as he and his Catalyst Investors colleagues celebrated the closure of the firm’s fourth fund at $377m, $27m above its target. It was significantly more than the $213m the firm raised for its third fund in 2012, which at that point was its largest to date.

Thus far, they say they’ve made one investment from the new pot, a $50m stake in an Virginia-based cell-phone tower business called IWG II Holdings.

It is, Rich says, one of America’s largest privately held cell-phone tower companies, and a growth business in an otherwise relatively mature telecoms sector.

‘In between late VC and LBO’

Cambridge Associates, an investment consultancy which has made a speciality of studying the growth equity sector, defines growth equity investing as a private investment strategy that “fits between late stage venture capital and leveraged buyouts”.

Growth equity portfolio companies, it says, tend to be “founder-owned, and have typically had no prior institutional investment”, and are generally characterised by having a “proven business model”, as defined by “substantial organic revenue growth, i.e., more than 10% and ideally 20% per year”; and “positive, or soon-to-be-positive, EBITDA”.

The growth equity investments themselves, meanwhile, are typically minority stakes “that use little if any leverage”, with such safeguards for investors of ranking higher in terms of seniority than common equity, according to Cambridge Associates.

Dot-com survivors

Many in the private equity industry today will struggle to think about the year that Rich and his colleagues founded Catalyst – 2000 – without remembering, in some cases painfully, the very sharp correction that occurred in the tech market around that time, as the so-called Dot-com Bubble burst.

The crash began on March 11 of that year. Within less than a month, almost a trillion dollars worth of stock value had been wiped off the NASDAQ.

“Fortunately for us, we didn’t really buy into the whole dot-com thing, so our track record, even in the beginning, was quite good, during what was otherwise a fairly bleak period for the venture capital/private equity industry,” Rich says, recalling those days.

Before they founded the company, Rich and Shipman had been working in the New York office of what was then known as Toronto-Dominion Bank (now TD Bank), while McNally, a friend of theirs, was an ex-Bear Stearnsman who had recently taken a job with a boutique bank known as Daniels & Associates, which a few years later got bought out by Royal Bank of Canada.

At Toronto-Dominion, Rich had founded and managed TD Capital (USA), an entity that made the Canadian bank’s US-based equity, mezzanine and limited partnership investments between 1995 and 1999. Shipman had been a vice president and director, responsible for the sourcing, negotiation and structuring of direct private equity investments.

“We were [quite interested in the technology sector], actually, as our backgrounds were in the telecoms, media and technology area, but we started investing as early as 2000 in what would today be known as software-as-a-service (SaaS),” Rich says, noting that this particular part of the dot-com industry was largely unaffected by the dot-com bubble bursting.

“One of our first investments was in this area, a UK company called MessageLabs, which proved to be a terrific investment for us. We sold it in 2008, to Symantec, for $700m.

“It wasn’t called software-as-a-service in those days, but that’s what it did.”

These days, there are again some concerns in the private equity world about an incipient tech bubble. Such worries are typically accompanied by much grumbling about the price desirable companies of all types are able to command, in a market that’s had access to cheap money for around six years now.

Rich admits the market’s priceyness is an undeniable problem, at least to a certain extent, but adds that the nature of the types of companies Catalyst targets, and the size of the deals it’s looking to make – in the $10m to $60m range, with the SaaS investments typically coming in at the lower end of this – means that it’s operating “a little below the radar” of the mainstream buyout funds and investment banks.

“They are more likely to buy the companies out of our portfolio, after we’ve helped them to reach a decent size,” he says, than to compete with Catalyst for the companies it typically has its eye on.

“I agree that things are frothy, but a little less so for us than for some of the guys that are doing the bigger transactions.”

While Rich doesn’t need much persuading to talk about certain of the companies in Catalyst’s portfolio, getting him to discuss any details of those who’ve invested in any of the Catalyst funds is another matter. Which is to say that he won’t name a single one.

“Primarily they’re American,” he says. “In Fund III, we had Canadian investors as well, but in Fund IV, they were mainly American again.

“But remember that these are institutions, so the beneficiaries of our good performance can be global.”

Asked for a breakdown of the investors in Fund IV by type, Rich says pension funds account for almost half, or 49 per cent, of the money invested, followed by insurance companies, with a 26 per cent share. Family offices and high-net-worth individuals represent another 15 per cent, while funds-of-funds contributed 8 per cent and Catalyst itself, as the fund’s general partner, two per cent.

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