The next generation of private equity managers forms an increasingly important segment of Federated Hermes’ $6 billion global private equity business, said Elias Korosis, global investment partner at the firm in London.
With a private equity team operating out of London, New York and Singapore as part of the Private Markets unit of Pittsburgh-headquartered Federated Hermes, Korosis said the team has completed some 300 deals directly, of which almost 100 have been with next generation managers.
“When people that are experienced in private equity who jump from the big shops to create their own organizations, we are one of the few in the industry that are happy to work with such younger structures, and maybe even do their first deal together, side-by-side, as they get going,” he told Alternatives Watch in a recent interview. “In terms of the number of deals and the depth of experience, I don’t think there’s as many that have as deep experience in that segment. This next generation private equity segment is very much of interest to us.”
Core focus
Observing the prevailing market landscape, Korosis noted how the start-up and next generation segment of Europe’s €1 trillion ($1.1 trillion) private equity industry has been gathering momentum lately, having traditionally lagged its North American counterpart.
“The U.S. has had an independent sponsor universe — those who are not connected to a fund management machine, but do it deal-by-deal — for quite some time,” he noted. “Europe has followed, and there is an active market, though it’s nowhere near the scale of the U.S., in terms of independent sponsors and next generation managers coming through. But it is active — we’ve done deals in both IT services and healthcare technology, and we’re now looking at companies in the environmental space.”
Growth capital is a key area of focus for Federated Hermes’ private equity arm, with newer, next generation managers a core part of its strategy. Since joining the firm in 2011, Korosis has helped shape its growth equity franchise, which is now three generations of the strategy deep.
“Fundamentally, we are lower mid-market and growth capital-oriented,” Korosis explained of the firm’s position within the broader private equity landscape. “When we started our current strategy, we basically reshaped a strategy of partnership investing in private equity, on a thematic basis. That strategy was essentially about taking global exposure and private equity, going from the large buyout segment more towards the mid-market.”
He continued: “We don’t do much in venture almost at all; essentially we have relationships that are formed in the venture stage that feed growth-stage flow, and we still do a little bit opportunistically in the large end of the buyout side.”
Korosis — who has almost 25 years’ experience across a range of public and private capital markets — was recently voted chair-elect of InvestEurope, the trade association representing private equity, venture capital and infrastructure in the region, having served as vice-chair of InvestEurope’s LP Council.
He began his career at Salomon Smith Barney, where he was an M&A analyst focusing on buy-side and sell-side mandates in consumer, healthcare and environmental business. This led to more than seven years at the rebranded Citigroup, most recently as senior V.P., strategy and M&A, before joining Bridgewater Associates in 2009 where he covered a wide range of macro topics.
Make or break
Delving deeper into the ripening opportunity set within the start-up sphere, Korosis suggested Hermes’ position as a long-standing, high-profile participant in the European private equity ecosystem can help boost institutional fundraising among fledgling funds “especially if we are one of the early names on their cap table” — though he highlighted the importance track record and manager pedigree during those critical early stages.
“We’re happy to partner with them as early as their first deal, but typically, it’s nice to have seen them have done a few deals before, as a unit, and help them raise their first institutional fund,” said Korosis, who is also portfolio manager of Hermes’ GPE Environmental Innovation Fund, a specialist growth equity and venture capital strategy focused on sustainable growth.
This approach also chimes with the firm’s close emphasis on strategic alignment. “We are essentially deal-first private equity investors, and we’re very much led by the deal sourcing,” he said.
“When you’re investing in fund six or seven, with an established manager that has a fundraising machine that works, no single deal of that fund six or fund seven is will be truly meaningful to the life of that manager. In contrast, the first few deals that a new manager is doing will be ‘make or break’ moments,” Korosis added. “So you’re exceptionally aligned with people for getting that deal to perform. A lot of what we like about being positioned with these managers is the alignment is exceptionally strong. Being very much aligned on the deal is important, and, if we participate in the fund, we get a bit of extra exposure there.”
Another burgeoning area of focus for Federated Hermes centers around newly adopted strategies managed by new teams within a well-established platform. Comparing it to the current trend of large multi-strategy hedge fund firms hiring established talent from rivals to run new strategies, Korosis explained this typically involves a more niche, smaller part of the private equity market, often in an untapped sector or region.
“If it is completely new, and it’s not just a rebranding of an older strategy, we will consider that an emerging manager, broadly speaking, though we call it a platform extension,” he said.
One live example is an established special situations or value-driven private equity investor launching a more environmental-oriented team and a fund, which would be their fund one in that strategy, Korosis said. Here, Hermes did a deal with a brand-name firm, backing the first fund in that strategy, with Korosis explaining how the broader organization offered some comfort around management and organization.
“That’s not exactly a pure independent sponsor play. But it is a next-gen exercise from the point of view that it’s still a new team that needs to come together, and they have a lot to prove.”
Rising demand
Looking ahead, Korosis is optimistic on the broader market outlook. While sharp interest rate rises over the past few years have impacted the capital structure of deals, with leveraged buyout players capitalizing on cheap debt, industry participants have become more measured in their approach, particularly around the debt component within deals.
“Generally speaking, the market is still healthy. We had some extremely high deal flow and transactions happening in what was a crazy valuation environment during 2021, where we were more sellers into the market than buyers into the market,” he noted. “That created a high watermark for the number of deals and capital deployed. Now deal flow is back to roughly the highest of the pre-COVID years. By focusing on partnership investing and investor syndicates, we could be involved in a smaller, younger structure, but also participate in the some of the larger deals with several parties.”
Korosis concluded with a look at the deal flow, which he described as being still quite healthy in long term trend territory.
“It’s still quite sizable, and there’s more equity now in the mix than debt, so equity investors like us are receiving a lot of calls, and we are looking at a lot of situations,” he observed. “The more equity demand there is, the busier we get, and there certainly is a lot of equity demand in the typical deal mix at the moment.”