Struggling with investment strategies in today’s tumultuous market? Discover how the pros stay agile, creative, and profitable even during cash flow negative periods.
In this episode, John Dickie, Partner at HighVista Strategies, opens up about navigating the lower middle market during financial downturns and seizing unique opportunities that many overlook.
You’ll discover…
• The hidden opportunities in tough markets that can turn challenges into advantages.
• Creative investment strategies and the flexibility needed to thrive.
• The factors that make smaller companies attractive investment targets.
• How direct investments and secondary markets play into a balanced portfolio.
• John Dickie’s journey from government bond trading to high-stakes private equity.
Mentioned in this episode:
https://www.highvistastrategies.com/
https://www.linkedin.com/in/john-dickie-792a411
Transcript
Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability and national practice leader for mergers and acquisitions for Liberty Company Insurance Brokers. Welcome to M&A Masters, where I speak with the leading experts in mergers and acquisitions, and we’re all about one thing here. That’s a clean exit for owners, founders and their investors.
Today, I’m joined by John Dickie, a partner at HighVista Strategies, where he co-leads the firm’s lower middle market focused private equity strategy. John, it’s great to have you here. Welcome to the podcast.
John Dickie: Thanks so much for having me.
Patrick: Now before we get into HighVista Strategies, and one of the big strategies that’s coming up there, let’s start with you. What brought you to this point in your career?
John: Yeah, no, great. Thanks. So for me, honestly, it was during my college years that I really started to grow interested in business and finance in general. And of course, when you’re a young student, I didn’t really have a great feel for the differences between, say, sales and trading versus investment banking versus private equity or or asset management. And I just sort of felt like I had to get in the game somehow and start to figure it all out.
I went to Middlebury College in Vermont, and before my senior year in college, I was really lucky in that I got an internship, a summer internship, down in New York City at Credit Suisse, First Boston, in the government bond trading desk. I worked for an amazing guy, and I really loved the stimulation of that world, but just didn’t love the sales and trading elements of it.
And so I was really fortunate, actually, that I was able to move over internally at CSFB and get a full time position coming out of school in the investment banking program. And that was in the 2000 timeframe. And you may remember, that was when Credit Suisse, First Boston was merging with DLJ.
DLJ had a terrific private equity franchise, and so I was really fortunate that after a couple years of investment banking, I was able to move over yet again, laterally into that DLJ merchant banking fund where I spent a couple of years. And that was 2003. So over 20 years ago now, and that’s where I got my start, in private equity, and really fell in love with the asset class.
Now, having grown up in Boston, I was too big of a Red Sox fan to stay in New York much longer, and so my wife and I made a decision to move back to the Boston area for business school. I joined another direct middle market private equity firm, a fantastic firm called Berkshire Partners, at the end of school.
And then ultimately made the decision to jump from the GP side of the business to the LP side of the business and joined our current firm about 14 years ago. And really, I’ve been super fortunate to work with such a great team for the last 14 years.
Patrick: So then put that pin there that you’ve been with HighVista Strategies now for 14 years. It goes beyond that. So let’s talk about HighVista Strategies. And you know specifically because it’s got a number of capabilities, but specifically with regard to the private equity program that you co-lead.
John: Sure. Maybe just a quick second on the firm in general, and then I’ll dive into the private equity business specifically. So HighVista Strategies, we’re a partner-owned alternative asset management firm based in Boston. We have one office here in Boston in the John Hancock Tower. We have 75 total employees. We manage about $10 billion of assets for our clients, and that’s really across five different businesses.
We have a private equity business, which we’ll spend a bunch of time talking about today. We also, though, have a venture capital business, private credit business. We have a business that’s focused on investing in biotechnology. And then we also have a multi-asset endowment style fund for certain clients that want a one stop solution.
You know, our goal ultimately is to invest in inefficient markets where we feel like we can generate alpha and also where there are areas that are just a little bit harder for our clients to do on their own. So lower middle market private equity would be an example of that. But as it relates to our private equity program, specifically to your question, we are trying to invest our capital and our client’s capital, in family and founder owned businesses in the US.
These are small companies. They’re generally about 2 million to 15 million or so of EBITDA, typically when we enter. So very much, you know, lower middle market private equity or small cap private equity. And we’re getting our clients exposure to these types of companies in multiple different ways. Part of our capital will commit capital to other funds as an LP. We will also invest directly into companies, often called co-investing.
And then we do have the ability to also do secondary purchases as well. Everything from GP led situations, CVs, multi asset CVs or more traditional LP state purchases. So we really do manage a hybrid portfolio. Many of our clients, they’re very active investing in the markets, and private equity included. And a lot of them have very robust direct programs.
However, many of them have exposure really more towards the middle market, or really, frankly, the larger end of the market. Bigger funds, ones that have been around a long time, that are really well known, that are really proven. Our job first and foremost is to generate returns for our clients, but you know, it is also about discovery and really trying to help them navigate areas that are a little bit harder for them to do on their own.
We’ll look at everything from one off investments alongside independent sponsors. And there’s hundreds and hundreds of independent sponsors that are looking to raise capital for specific investments. We will also anchor first time funds, newer firms, emerging managers, groups that have spun out of more established franchises, who are looking to hang their own shingle.
So ultimately, we’re really trying to be a river guide for our clients, helping them get exposure to this vast landscape of smaller funds and smaller companies, where we feel that anyone can generate really good returns.
Patrick: There’s always a tendency, as you’ve been experienced doing this, and you mentioned this, so this world is growing, and there’s a temptation there in lower middle market private equity to over time, just go up market. You guys are exercising discipline to remain in that two to 15 million EBITDA range. Let’s talk about that, just because I think there’s a place where you guys can make a difference, and those opportunities don’t go away. So why the focus there and explain how you managed to fight that temptation to go up market?
John: As a firm, we started investing in private equity in the mid 1990s. We raised our first private equity fund in 2000. So we have been at this for over 25 years. And I think just in our observation over now, a pretty long period of time, we’ve just observed so many firms scale up over time, naturally, but the returns just don’t quite follow.
And, in a lot of ways, size really is the enemy of returns in this asset class. Some of that, I think, is just the sort of simple reality of that it’s just easier to double a $5 million EBITDA business than it is to double a $50 million EBITDA business. But I think there’s also some things structurally that contribute to that observation.
We really love the supply/demand imbalance of the lower middle market, the smaller end of the market. There are hundreds and hundreds of 1000s of smaller family and founder owned businesses in the United States that we could potentially invest in. So it’s very target rich. One way we like to frame it is, you’ve got public companies, very large private companies, and then smaller private companies.
We all know the public markets have been shrinking by number of company. So there are 1000s of public companies, but that number’s been coming down. There are many very large private companies. Certainly as companies are staying private longer, you have a lot of very big private companies.
But I would probably bucket that into like, 10s of 1000s of very large private companies. In the smaller end of the market, you literally have hundreds of 1000s of small private companies. So it’s very target rich. The flip side of that equation, or the other side of that coin, I should really say, is there’s less capital. We all talk about the dry powder that’s getting raised in private equity, and it is significant, and it is growing, and there’s lots of it.
But the reality is, the vast majority of that dry powder is, we estimate about 85 to 90% of it is in the hands of larger private equity funds. Funds that are about 750 million in size or greater. So we like to participate in that smaller band, where there’s about 10 to 15% of the total capital, but way, way more companies, hundreds of 1000s.
So you have this dynamic where it’s more companies, less capital. That leads to lower valuations. That also typically leads to less need for leverage, which is really important, and ultimately, that sort of formula has led to just better returns over a long period of time. And so to your original question, we’ve just, because of all those dynamics, stayed really focused on staying in this part of the market, because we think that’s where the best returns are.
Patrick: And we could talk about it later. But there’s also a lot less risk, because when you’re making a $10 to $20 million bet versus a, you know, $200 million bet, there’s a lot less downside to fear about. But before we get into that, you’re in that market where there are lots of targets, or a lot of businesses, okay, they’ve got to go somewhere eventually.
Well, the other thing is, and that makes you have a lot of other competitors, like HighVista Strategies that are coming into that market. I could just imagine, 20 years ago, there weren’t as many PE funds or independent sponsors as there are today. So you’ve got to bring something to the table that’s a little bit more. Particularly because you’re appealing to owners and founders. This is first institutional capital, usually.
John: It is, yeah. Virtually always.
Patrick: So let’s talk about that. You know, what is HighVista Strategies bringing to the table to the lower middle market, other than your preference to go there? And then we could talk about the launch of fund 10, which is something that HighVista Strategies just recently announced. So why don’t you get into that.
John: As you said, we’re looking to invest our client’s capital into family and founder owned business in the US. These are companies just a level set that are eager to have strategic partners to help their businesses grow typically. They’re looking to do M&A, they’re looking to expand geographically. They’re looking to diversify their customer base. Or perhaps they’re even just looking for help with a generational transition of some kind.
As we’ve discussed, we get exposure through multiple different ways. We’ll make the fund commitments where we’re really partnering with GP sponsors to help us drive those deals and lead those efforts and work with the management teams. We’ll make direct investments alongside of them. We also could do the secondary purchase we’ve talked about.
So we’ve got lots of options and lots of choices for how to allocate capital and dollars into this part of the ecosystem. We think that hybrid approach is very valuable for us, so that we can kind of go where the opportunities are. We also think it’s a little bit unique.
But beyond that, where I’d like to think we’re adding some value is as a business, since we’ve done this for over 25 years, you’re starting on the primary side of what we do, the fund allocation side, we’ve just got a pretty good feel at this point of what will ultimately make a good manager. What’s the makeup for success? Are they specialized? Are they good at sourcing investments? Do they have the ability to add value, post close? Do they have a track record of success?
A track record of success working together, importantly. Are they thoughtful about economics and how those are shared, and how the organization is designed? So there’s so many variables that go into it, and we’ve just learned a lot of lessons through the years. Made mistakes, had some good outcomes, and that whole package has kind of led us to be able to sort of evaluate managers for that portion of our portfolio.
Then we get the opportunity to invest in a lot of companies directly alongside our partners, and I think over time again, we’ve learned a lot about what makes a good business. And so, on behalf of our clients, I think we’ve got a good ability to suss that out.
So what’s the quality of the business, the business model? Are there recurring revenues? Is there a good, diversified customer base? Does the company have attractive margins? What’s the size of the market? Is it fragmented? Are there M&A opportunities? There are so many variables that we are assessing every day, every week, and when you think about it, the top of our funnel is quite, quite wide.
So to put that into context, we have the opportunity to allocate capital to about 250 plus or minus funds per year, and we’re trying to pick the very best, maybe seven or 10. Meanwhile, we have the opportunity to invest in about 300 plus or minus companies per year, co-investments, and we’re trying to pick the best plus or minus 10 of those 300. So we can be incredibly choosy with where we allocate our capital.
And remember, everything we’re doing is in the smaller end of the market. So one of the ways to create value is we are creating inventory for middle market private equity funds. That’s one way to describe what we do. Some companies make widgets. We actually manufacture inventory for middle market private equity funds.
That’s a little bit of a tagline that we use. Because over now, a very long period of time, when we look at the exits that we’ve had, the vast, vast majority of them are where companies that we and our sponsor partners have owned are being sold up the food chain to larger private equity funds.
And so because of that we’ve been fortunate in that we just sort of have a feel for what larger private equity firms want to buy. The types of companies they really want to own. And I think that pattern recognition has helped us over time. The last thing I would say is our team has been together a really long time. We talked about the tenure of the business.
The current senior leadership of the PE team here at High Vista has been overseeing this program for anywhere from 14 to 18 years together. And I think the consistency of that team has just helped. I mean, when we’re sitting around the room, we can just look at each other in the eyes and know what each other are thinking.
And I think that’s been really helpful. And then we have purpose built the team with people that spent the first parts of their career on the direct GP side. And I touched briefly up front on my background.
Some of my other partners in the business also spent early parts of their career on the direct GP side. And I just think that’s been helpful training for not only about evaluating companies, but also evaluating managers that we might allocate capital to, since we’ve lived on that side of the business.
Patrick: Well that’s great for the I can imagine, just with the ecosystem is, you always need to have a bigger fish that’s out there for the market, because at your level, I wouldn’t say they’re entry level, but those level where those companies need to be fixed, not completely turnaround, but you need to get them up in a higher plan in a higher level.
And then the middle market doesn’t want to come down there and reshuffle and reset those. They’d like to get more of a finished product that can then move on to the next iteration of scale.
So I think that that’s very valuable. Would you say, or give me a percentage of the direct investments or the companies that you’re targeting, are they owners, founders looking for an exit? Or are the majority of them looking to just level up and they’re outside of their skill set?
John: Certainly it’s a combination, but I would say the majority, we’ll put it that way, are groups that are families or founders that love their business and want to keep going. Think they have something special, but just need help. That could be capital, in their view. Just the need for capital to go do some acquisitions, or to build a new facility, or what have you.
But in most cases, it’s really they want strategic help. They’ve built a business over 20 years or so. They’ve gotten it to, you know, 5 million of EBITDA, which is phenomenally successful, but they see so much more they can do. But they just haven’t done those things. They haven’t built broad boards. They haven’t gone through a systems upgrade.
They haven’t done acquisitions. There’s just so many things that they could really benefit from a financial sponsor sitting along their side who’s done that over and over to help them out. So most of the time it’s that.
But of course, we run into situations where somebody’s built a business and for whatever reason they’re ready to retire. Family members or whoever else isn’t wanting to take that business over. And so it can, at times, be a situation where someone’s really looking to get on their glide path.
Patrick: And as we’re going forward now, I mean, obviously not every investment is a home run. There is risk involved in these things. So there are no guarantees. You’re in the lower middle market where things may not be as buttoned down as companies are getting ready for IPO, for example. I mean, clearly there’s a different sophistication level that’s required.
But how do you assess risk with your experience now, in the lower middle market, as you come across this. Because you’ve got owners and founders, you’ve got teams out there, and they’re coming together. How do you do that?
John: Yeah, well, so if you start on the premise that all of our investments, we’re going to be alongside a sponsor, and sometimes we’re allocated their funds, sometimes we’re investing directly in the company, but we’re going to work in parallel with a sponsor. And yeah, that could be an independent sponsor.
That could be a first time fund, second time fund, more emerging manager, etc. Despite the fact that we invest in a lot of merging managers, and we will do everything you know, including those one off sponsor deals I talked about, we do not invest alongside first time investors. That’s a really important distinction.
All of our GP partners have been in the business a really long time and have a track record of success. Now, that track record might be, or is often, frankly, from another firm where they got trained and they got groomed and they worked on a lot of different transactions, and we need to sort of extract that track record. We need to piece it together.
We need to call a bunch of executives they worked with in the past and get behind that and make sure that these individuals really were adding value and working with those companies. But that’s what we like to do. We like to roll up our sleeves and recreate track records and figure out where and how value was created, to make sure that we’re investing alongside a sponsor who really knows how to source diligence and create value post-close.
That’s the manager half of what we do. The other half of it is the fundamental company analysis, where, and it ties back a little bit to some of the comments I made before. It’s that pattern recognition of what makes a great business, not only at entry, but what is something that could get created to really attract the middle market buyers down the road.
And there’s a whole, as you would imagine, laundry list of things we look for that help us think about how to mitigate risk and assess quality. Everything from making sure the customers are diversified and there’s not too much concentration. Making sure business has, you know, fits really nicely in whatever kind of value chain they sit in such that they have good margins or they have pricing power. Making sure the valuation feels appropriate.
Making sure the leverage levels aren’t out of whack or too much for that business. Making sure the management team is appropriate and fit for purpose for that business of the board, same thing. So it’s a real combination of our team assessing a manager that we’re going to partner with, assessing a business that we’re going to invest in.
And you put that into a blender across many different metrics, and hopefully you come out with a partner you’re excited about, and a business that really has the opportunity to go on that journey from about 5 million of EBITDA to 20 or 25 million of EBITDA. If you do that right, you’ll get really rewarded for that. And of course, we won’t be perfect.
We made plenty of mistakes. We will continue to make mistakes, unfortunately. But we’ve observed that in this part of the market, the opportunity for outsized returns is really quite significant, and can more than make up for certain mistakes.
Patrick: Well mergers and acquisitions is all about, you can’t do it without humans. And so with humans, you’re going to have that. And one of the things, we didn’t talk about this before, so excuse me if we’re going a little bit off script here, but when you listed your real thorough list of your things you’re looking at, where do operations come in? Is HighVista Strategies bringing in operational support? Or is that something where there’s a network thing outside? Talk about that a little bit.
John: Yeah. Ultimately, at the company level, we are really leaning on our GP sponsors to drive the operational agenda, and that’s part of our upfront assessment, is just the quality of our partners to do that very successfully and do that well. We’re really in our model, leaning on our partners to do that at the company level.
Of course, when you say operations, I can’t help but think about our amazing team that we have internally at HighVista who drives the operations of our business and does a lot of important things for our clients. Everything from client service to finance, IT, legal, tax, etc. And there’s a huge element to being an alternative asset management firm that’s being driven by our operations team.
And so, the word operations, obviously in my mind, those are two different things. We’re working with the company, but also our own operations at our firm, which we have 30 to 40 people managing that.
Patrick: So you’ve got two big keywords there, experience and resources.
John: You need both. Yeah.
Patrick: That adds tremendous value. A couple times you’ve mentioned some strategies for companies as they want to grow from lower middle market to middle market and become more attractive. Is a process of, add ons and mergers and acquisitions, which 10, 20, years ago, the view of mergers and acquisitions was, well, the owner surrendered. They capitulated.
They couldn’t do it themselves, and now they’re just giving up. And they think of mergers as some hostile takeover. It’s actually just a natural function of business. And one of the things that’s happened is the insurance industry has come in and taken a lot of risk out of some of these transactional events that happen in the lifespan of a company.
And it’s not only reduced risk, it’s facilitated faster, smoother, happier transactions throughout the process. The process they use is a product called rep and warranty insurance. But don’t take my word for it on rep and warranty. John, good, bad or indifferent, what’s been your experience with rep and warranty insurance?
John: I mean, I would say really good. I think it’s been a fantastic product now, over a long period of time. And in our observation, very important for the industry. We see it used very often. I think, as you know, reps and warranties can often be some of the more difficult things to negotiate.
Buyers want certain protections, and sellers don’t want to leave too much money in escrows, and worry about whether or not they’re going to get that money down the road. And so, what we’ve observed is that rep and warranty insurance can really speed up the legal negotiation process, which is important when you’re trying to get something done. But also just give both parties more peace of mind. So yeah, it’s been a great product.
Patrick: That’s what’s great about now, is that the sign of a maturing market for insurance is we’re innovating some new products, and while rep and warranty insurance has been ideal for transactions at the higher level, above $30 million of purchase price, okay, there hasn’t been an affordable solution that’s workable in the lower middle market. The million to $30 million purchase price transactions.
Now there’s a new product out there. It’s called TLPE, transaction liability private enterprise, and it is built to insure transactions that are priced as low as a million dollars in purchase price, up to 30 million at a rate of $15,000 in premium per million in limits that are purchased. It’s not based on the size of the deal, it’s based on the limits purchased, just like rep and warranty.
There’s no underwriting fee. It could be processed within a matter of days. I think that’s a great accelerant and enhancement now for the lower middle market, because there have been just a lot of add ons that are under $20 million that would really like having a product like that, and now there’s something out there.
So we’re very proud of that. And now as we look forward into the rest of this year, into 2025 John, what trends do you see going forward, either lower middle market or HighVista Strategies in particular?
John: Yeah, sure. Maybe just to level set. Our view is that this really is a quite interesting time to be investing. Obviously, the industry in general has been going through a bit of a reset over the past couple of years, with the rise of interest rates and the M&A markets have been slow. Exits have been slow, distributions have been slow.
And what’s interesting is that the industry as a whole, it is, and has been for the last couple years, cash flow negative. Meaning more capital calls are coming than distributions are being returned. And that doesn’t actually happen all that often. We’ve seen some interesting data.
Looked at some charts over the last 25 years or so, going back to about 2000 you can see that it does come in cycles, but it hasn’t happened all that often. So periods where the industry has been cash flow negative were 2000, 2001, the great financial crisis, 2008, 2009 again, briefly during covid, and then very much so today. So you know that makes sense, right? I mean, those are cycles that we all can remember, and those are periods of time where it was very hard to sell a company, just like it’s very hard to sell a company today.
Now, generally speaking, and you can use the benefit of hindsight looking back at those periods. But when it’s a tough time to sell a company, it’s usually a pretty good time to buy a business. However, it often does take creativity. And so that’s where we get excited, and we get excited about the options that we have in front of us, or the tools in our toolkit.
As we’ve talked about, we can make the primary fund commitments. And we’re looking, we talked about lower middle market or small cap private equity, we’re looking to allocate the funds that are anywhere from about 100 million to 500 maybe 750 million in fund size, and there are tons of those right now to raise money.
And it’s a hard fundraising environment. It’s a really hard fundraising environment. So the opportunity for our capital to really help those GP partners get to their targets and really build their businesses and go out and do what they want to do, there’s a great opportunity for us to do that and be supportive to worthy GPs.
We can also, though, channel our capital to direct investments. We’ve talked about it, two to 15 million of EBITDA, that’s generally translating into companies that are below about 100 million or 150 million in enterprise value. So small companies, and it’s a little bit easier to get those deals done than the really big deals, because you don’t need as much leverage, but it’s still hard.
You still have to be creative. But we’re just seeing a lot of different opportunities. I touched on the about 300 per year that we get to see from everybody from independent sponsors through to our existing managers. So there’s lots we can choose from there. And then there’s the world of secondaries, which is enormous.
And it’s a market like we’re in right now, where distributions have been slow, you have really an entire industry that’s looking to manufacture liquidity. So you have GPs, who are trying to get companies sold, and if they can’t do it in a regular way, they’re looking to the GP led type situations. Maybe it’s a single asset continuation vehicle.
Maybe it’s a multi asset continuation vehicle. Maybe it’s a full GP restructuring. That’s something we could participate in. Any one of those. Or you have LPs that are looking to manufacture liquidity. Whether it’s a family office or individual or an institution of some kind, they’re looking to maybe sell some of their portfolio to build some cash back up and then go redeploy into some new commitments, or new direct investments.
Any one of those things could be very interesting to us. So we feel very fortunate that today, not only can we look across the lower middle market and try to get access to great family and founder owned businesses, but we’ve got multiple ways we can do that, and we don’t have to be overly prescriptive. If the best opportunities are with fund commitments, we can do that.
If we’re seeing phenomenal opportunities with direct company investments, we could do that. Maybe there’s a period of time where secondary is the best use of our capital, and so we can try to be pretty flexible within that. And that makes it a lot of fun, but also I think interesting in an environment like this, where we all have to be creative to get investments done.
Patrick: Think creativity, flexibility, innovations. You’ve got a great formula for coming up with solutions for folks in need. So I think that’s fantastic. Now, John Dickie from HighVista Strategies, how can our audience members find you?
John: Yeah, well, thanks for the time. I mean, our website spells it all out. That’s highvista.com. Pretty straightforward there. Or you can look me up on LinkedIn. I’m on LinkedIn. You can message me. I’ll get back to you. And I would love to engage in conversation.
Patrick: Well thanks again. John Dickie, it was a real pleasure speaking with you today.
John: Thanks. Thanks so much. Appreciate the time. Great to be on with you.
