Last two weeks were focused on different parts of the LP investment process (pitch, recommendation report), now we are reaching the close (investment memo + compliance report). There are three parts to the close with Pension funds: investment memo, legal disclosures (no outstanding material law suits), and a compliance report (environmental and social considerations).
Date: December 22, 2020
The investment memo is mostly a summary of what we had learned in part 2.
- Summary: Invest $100M for Insight to pursue an investment strategy of structured minority equity and debt investments in software companies in North America and international markets
- Strategic Allocation within the Private Investment Fund: Fits the target allocation for CRPTF’s Private Investment Fund. Exposure to Corporate Finance strategies was 84% in September 30, 2020. Exposure to mezzanine funds was under 7% (below CRPTF’s target of 8%).
- Investment strategy and opportunities: Venture growth, buyout and take-private transactions targeting gross return multiples of 1.5x. Software valuations have grown 4–8 times. Software transactions happening at 20x EBITDA may be capitalized with debt multiples of 7x and equity multiples of 13x. Targeting similar companies to those targeted by Flagship fund.
- Firm and Management Team: Founded in 1995. Currently has 6 MDs.
- Track Record: Flagship funds- Gross IRR of 25%, TVM of 2.3x. Loss ratio has dropped from 22% to 8%.
- Key Strengths: Sector-focus showing strong returns (which demonstrates domain expertise and strong sourcing capabilities). Fee structure of less than 2%. New strategy leverages Insight’s existing operations.
- Major Risks and Mitigants: New strategy for the firm, they may not have expertise to execute the strategy. No team dedicated to the fund. Conflicts of interest with existing flagship fund.
CRPTF looks at lawsuits over the past 20 years and any open cases against Insight. Also looks at claims regarding: fiduciary, E&O insurance policies, or fidelity policies +internal investigations.
Organizational commitments to social issues:
- Matching donations to charities focused on alleviating social causes.
- Global voting holiday allowing employees to vote.
- Purchasing supplies from minority led/owned vendors.
Denotes the diversity stats that LPs are increasingly looking for. Note, the number of women in the management level and senior leadership has decreased in the past two years. Minorities include those of Asian and Hispanic ethnicity.
Senior leadership: 9% women. 15.6% minorities.
Management level: 29% women. 22% minorities.
Professional level: 42% women. 32% minorities.
Company-wide: 64% women. 26.9% minorities.
For context, 52% of NYC’s population is female, while 32.1% of the population identifies as only white (non-hispanic/latino).
Charitable giving, internships/scholarships and procurement are discussed as how they help both the wider community and diversity initiatives.
Further questions should be asked about how they integrate these into day-to-day operations.
This is the only part of the entire investment process with a rubric and a final grade.
Note that firearms are a major part of the ESG questionnaire (making up 5 questions out of a total of 11). This being the case, scoring is most affected by ESG policy.
Considering NYC has 40,000 handgun permits for 8.149M people (0.49% of population) and that Insight focuses on SaaS it is doubtful that members of Insight have even considered matters related to firearms as part of their work.
- Investment memo is generally a summary of the recommendation report
- Legal disclosures: make sure if you are subject to a lawsuit, it is nothing material.
- For the compliance review: discuss how you actively help promote diversity (women + minorities) even if your workforce is lacking representation. In the case of CRPTF, minorities seemed to include all those that are non-white.
- ESG seems to be the only part of the firm that was graded with a clear criteria. Familiarize yourself with an LP’s ESG guidelines and adapt based on that.