Balentine Likes Lower-Middle-Market Buyout Funds

This article was originally featured on With Intelligence.

Balentine is interested in lower-middle-market buyout funds, with a sector focus on mainline businesses, defense, heavy industry and aerospace.

The $9bn AuA multi-family office sees additional returns in the fragmented lower-middle-market, head of private markets Ben Webb told With Intelligence.

He prefers managers that are able to stay nimble, pay under-market valuations and bring their operational expertise to bear.

Balentine, which reported $5.5bn in AuM on its latest ADV, has identified four major investment themes that it plays across asset classes: decarbonization and electrification, the medical revolution, machine learning and artificial intelligence, and the growth of the Sunbelt region.

Subthemes, including a world that is becoming less safe and reshoring, drive interest in defense, heavy industry and aerospace.

“Those subthemes really support the meat and potatoes of the American economy, whether that’s pipe replacement or drone creation,” head of private capital and family office Mark Bell said.

The AI theme has also led Balentine to look at cybersecurity.

“For every ounce of AI, you’re going to need an ounce of cybersecurity,” Webb said.

Most of Balentine’s geographic exposure is to the US, though some of the firm’s larger managers have global investments, mostly in Asia and Europe.

Balentine’s private equity allocations cover growth and venture capital as well as buyout. The firm also invests in real assets, private credit and an opportunistic sleeve that can include distressed strategies. Its current opportunistic focus is in sports.

The firm makes most of its alternatives allocations through pooled vehicles for which it does not charge management or performance fees. They range in size from $5m to $43m, with the average around $25m.

Each vehicle covers a different asset class, with tilts towards Balentine’s primary investment themes.

Balentine generally launches two or three vehicles per year. Each fund typically includes 5-6 managers, along with direct deals and co-investments.

High-conviction, diversified funds tend to get a 20-25% allocation, while more niche or riskier funds might be around 10% of a fund. Co-investments and direct deals range from 2-5% per opportunity.

Webb aims to have 2-3 of each type of fund in the vehicles. About half the managers are usually continuing relationships.

“We would much rather re-underwrite and stay with a manager,” Webb said, “but if a manager starts to drift or the performance isn’t there, we have no problem not re-underwriting them.”

He prefers funds in the $1-$3bn range but noted that it can be difficult to find smaller funds with a long track record because managers tend to hold larger raises as time goes on, which can impact the underlying strategy. There are also sectors and strategies that might call for a larger fund.

Balentine has a strong bias towards traditional drawdown structures with a specific, defined timeline.

Even for direct deals, the firm looks to partner with an expert, be that a manager, fundless sponsor, or entrepreneur with expertise.

“Whenever we go direct or co-invest, we have to believe it can outperform that same exposure in a diversified fund,” Bell said.

For example, in aerospace and defense, the investment team believes the sector may offer attractive return potential above 15%, based on its analysis of the underlying investment opportunities and associated risks.

Balentine will sometimes allocate to a manager directly in a particular client’s portfolio on an opportunistic basis.

Additionally, it is always able to invest in each asset class regardless of which vehicles are new in a given year.

“At any time, we have all four asset classes working. We try to identify the fund lineup early on, but we always leave that capacity,” Webb said.

Balentine tends to avoid investing directly in fund I or fund II, preferring to get that exposure through a manager-of-managers.

Webb and Bell like managers with long track records and sector specialists with strong deal flow and a repeatable sourcing engine and value creation plan.

“We really are looking for very specialized, niche private capital managers, and co-investments and direct opportunities, that families that are investing their kids’ and grandkids’ money want to take advantage of,” Bell said.

In conducting searches, the private capital team starts with a mandate, then builds a funnel of managers, including those in their network, their clients’ networks and other managers who are currently fundraising.

Desk research narrows the field to about 20 managers, at which point the team starts introductory phone calls that whittle the list to about five for Bell or Webb to review.

Due diligence focuses on the manager’s team, track record and repeatability of the strategy.

Once the private capital team is in agreement, the manager is presented to the investment committee.

Balentine’s clients are mostly first-generation wealth creators and their families, with some large institutional clients as well.

The firm targets a 20% allocation for clients who are interested in the illiquidity premium from alternatives; 60-75% of clients have some allocation to alts.

_{Balentine LLC ("Balentine") is an investment adviser registered with the U.S. Securities and Exchange Commission. This information has been prepared by Balentine LLC ("Balentine") and is intended for informational purposes only. This information should not be construed as investment, legal, and/or tax advice.}

_{This is not an offer to sell, or a solicitation of an offer to purchase and fund managed by the Adviser. Such an offer will be made only by an Offering Memorandum, a copy of which is available to qualifying potential investors upon request.}