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Cultural values

From its base in San Francisco, Genstar Capital has gradually expanded its 'verticals' and stable of operating experts while keeping a tight cap on fund size (and negotiating a 25 percent carry).

Many private equity firms marking their twentieth year in existence would likely spend a lot of time talking about their ever-growing workforce, the expanding list of sectors and industries in their portfolio and their newest overseas offices. However, expanding through geography is less important to Genstar Capital chairman and managing director Jean-Pierre Conte than maintaining the slow but steady growth strategy that has so far paid off well for the midmarket firm.

“We've maintained one office,” Conte says referring to the firm's San Francisco headquarters. “One office means one culture, and culture means everything in running a private equity firm.”

Culture is a word Conte uses a lot in talking about Genstar, which was founded in 1988 by three former senior executives of investment firm Genstar Corporation. After starting at Chase Bank and serving as a principal at private equity firm NTC Group, Conte joined Genstar in 1995 and was tasked with restructuring and finding a new direction for a firm that had completed one fund seven years earlier and whose investment strategy was all over the map.

A year later Genstar completed its second fund on $115 million. A third closing at $221 million followed in 2001, in 2004 a fourth fund raised $505 million and in 2007 Genstar completed its most recent fund, Genstar Capital V, at $1.6 billion. Conte says that despite the increasingly large fund sizes, the firm has maintained a more measured pace of growth than its competitors.

“What most people do is say, ‘We can raise X, so let's just go ahead and do it and figure it out later’,” he says, referring to matching resources to capital under management. “That has not been our approach. We've taken a more measured pace of growth and built the capacity first and then raised the capital.”

Maintaining focus
The two main planks that support Conte's strategy are focus and expertise. With $3 billion in capital committed, Genstar invests in companies with $50 million to $1 billion in revenue that have a history of profitability, and maintains a narrow focus on a smaller group of sectors and companies that play to its strengths.

The firm structures investments in a number of ways, including control-oriented leveraged buyouts of corporate divisions, privately held businesses and public companies, as well as minority investments, ownership restructurings and strategic partnerships. It also prefers situations where a business division is non-core to the parent company or lacks the necessary capital, a business operates in a high-growth industry with minimal new-market risk, or a business can benefit from Genstar's capital and operational experience.

Executive experience
Back in 1995, industrial-sector deals represented 60 percent of the firm's investment activities. That “vertical” is now down to 20 percent of the firm's deals. Life sciences, which wasn't even on Genstar's radar twelve years ago, now accounts for 60 percent of investments. Over the years the firm has expanded its focus to insurance services, health care services and software and business services. Key to this expansion has been building a stable of operating experts.

“Focus doesn't mean doing one deal or just reading an analyst report, it means really having a firm grasp of a sector, meeting a lot of the players in that industry and also having a stable of both active and retired executives who are with us in what we call the Genstar community,” Conte says. “These people are putting money to work with us in deals, sitting on boards, looking at new investments and helping with due diligence.”

The cultivation of this executive stable is part of the other foundation for Genstar's growth: working with and retaining the best management teams possible, whether they are already at the companies being acquired or, as is more often the case, they have to be brought on board. “When you are buying orphan divisions of big companies [great management talent] are usually not there, you typically often have to bring them in,” Conte said.

There are three operating partners at Genstar overseeing the portfolio. Conte estimates these experts spend more than 50 percent of their time exclusively with Genstar.

Former Abbot Laboratories executive vice president Paul Clark is now responsible for expanding Genstar's life sciences practice and serves on multiple boards for the firm. Clark has over thirty years of experience in the pharmaceutical and biotechnology industry, and was most recently director, chief operating officer and president of biotech company ICOS until its sale to Eli Lilly last year.

In life sciences, Genstar has invested in firms such as PRA International and Harlan Sprague Dawley. OnCure Medical Corp. and Catalent Pharma Solutions are part of its health services portfolio, while Panolam Industries International and Woods Equipment Co. are two of Genstar's best-performing industrial investments.

On the industrial front Genstar is assisted by Edmund Carpenter, who served as president and chief operating officer for high-tech manufacturer ITT Corp. from 1981 to 1988, and currently resides on boards including Campbell Soup, Dana Corp. and Altra Industrial Motion. The third operating partner is Perry Odak, former president and chief executive officer of organic food chain Wild Oats Markets, who is helping grow Genstar's consumer and industrial technology practice.

The firm also has nearly twenty strategic advisory board members who devote less of their time to Genstar but carry out similar duties as the operating partners, including former Human Genome Sciences President Melvin Booth, former Kaiser Aluminum chairman George Haymaker and former Siebel Systems executive vice president David Schmaier.

“Every one of these executives in our community is exclusive to us and they have money in the game with us,” Conte said. “They're investing actively with us in every deal, so our community isn't just 20 people in San Francisco, it's 40 to 50 people when you add in everyone else.”

Hardwired for software
A more recent expansion for Genstar has been into the software sector.

The location of many software operations near Genstar's office was seen as an advantage, as was the fact that the end of 15 percent to 20 percent annual growth rates meant many companies would have to restructure and operate in a lower-growth environment.

“A lot of companies don't know how to do this,” Conte said. “But we do. And what we needed to do was build our network and our knowledge capacity so we could go out and understand and interact in this new verticle.”

So rather than just, as Conte puts it, “retool a private equity guy”, the firm relied on operators like managing director Mark Hanson, a senior vice president for Siebel Systems, and former Accenture chief executive officer George Shaheen. Since then Genstar has committed more than $200 million to companies such as 21st Services, Travel- Click and ConvergeOne in just the last three years.

Respect for operators
Conte places great importance on the culture of his firm.

“One of the tenets of our culture is an unyielding respect for operational talent, which sounds trite and great, but a lot of private equity firms have a tough time understanding the value that operating executives bring to these situations,” he says. “Most private equity firms think they generate all the returns. The reality is that private equity has the capital, picks the areas to invest and finds the vehicle, but at the end of the day the people affecting change on a daily annual basis are these operating executives.”

Anyone who wants to know what deals best represent Genstar's operational strategy and culture can tour the firm's offices, where public areas and conference rooms are named after the most successful investments. One of the names they'll find is NEN Life Sciences, an orphaned division which Genstar acquired in 1997 from Du Pont with capital from its second fund.

NEN had $95 million in revenues and made specialty products for cell and DNA analysis, but despite having a strong franchise and superior market share it was a classic undermanaged company, according to Conte, that suffered from a lack of leadership and investment. Although NEN had a new generation of products ready to go, they couldn't get to market due to cuts in the marketing department.

In order to restore the company's growth and leverage its strengths, Genstar brought on a new chief operating officer: John Zabriskie, former chairman of Upjohn Co. and executive vice president of Merck and Co. Zabriskie, who as Conte notes went from a $7 billion company to a $100 million entity when he took over NEN, oversaw a new focus on higher-growth markets, partnerships with companies like Affymetrix and Kodak and acquisitions of Receptor Biology and Advanced Bioconcept.

After taking the company from negative 5 percent growth to roughly 20 percent, Genstar sold NEN to PerkinElmer in 2000. Referring to the company's place of recognition in the Genstar office, Conte says, “people ask why that is called the ‘NEN room’? Because we made 20 times our money in three years, that is why.”

Year founded:

1988

Sector focus:

Life sciences, healthcare services, industrial technology,

Capital under management:

software services and business services

$3 billion

Key personnel:

Total employees: 30

Jean-Pierre Conte, Chairman and Managing Director

Robert Weltman, Managing Director

Offces:

Darren Gold, Managing Director

San Francisco

Mark Hanson, Managing Director

Funds:

Edmund Carpenter, Operating Partner

Genstar Capital I (1988) – $107 million

Perry Odak, Operating Partner

Genstar Capital II (1996) – $115 million

Paul Clark, Operating Partner

Genstar Capital III (2001) – $221 million

Genstar Capital IV (2004) – $505 million

Transactions to date:

Genstar Capital V (2007) – $1.6 billion

59 (33 platform, 26 add-ons)