While the growth of the private equity industry is phenomenal, the introduction of differentiated private equity advisory firms has slowly been developing. One such example of this type of firm is Franklin Park, located in West Philadelphia. Franklin Park has been around for over 15 years, currently has over $13.3 billion under management, and has global representation in both Dublin and Hong Kong.
In general, private equity firms invest in public companies to revamp operations and generate more positive cash flows. These companies are taken private so that they have less restrictions on restructuring management and cutting costs before selling the company to another firm or going public again. After scanning over hundreds of proposals, PE firms will invest in a select group of companies that they have the capital or financing abilities for.
Private equity advisory firms are similar to regular private equity firms in that both have a great focus on investment and operational due diligence. They differ in the structure of their investing. Private equity firms focus on finding attractive investments with the capital and leverage they have access to. On the other hand, Franklin Park is more similar to an asset management firm in that they look for investments that specifically suit their clients’ level of risk tolerance. The first step in operations for a PE advisory firm is obtaining clients. For Franklin Park, the majority of the clients are institutional investors such as public pension funds for cities, states, and counties as well as major University endowments. From there, they determine what percentage of a client’s portfolio can be allocated to private equity investments as opposed to domestic equity (stock market), non-us equity, fixed income, real estate, etc.
Franklin Park’s portfolio is balanced between funds that suit either university endowments or institutional pension plans. Their asset allocation strategy for their clients is largely dependent on risk tolerance and liquidity demands, as would be the case with a typical wealth management firm. The national average of institutional investors’ asset allocation towards private equity is about 5-10%. That portion is higher for Franklin Park because a group of their clients, the university endowments such as Drexel University, have higher risk appetites leading to upwards of 20-30% in private equity.
When Franklin Park finds an attractive investment opportunity, they pre-select which clients would be best suited for the fund as opposed to seeking new clients and investors for funding of certain projects. Because the time horizon of institutional investors are different, private equity advisory firms focus on the longer term asset class with exit strategies of 10-12 years as opposed to the typical 3-5 years in the private equity industry. The specific sector of investments is all inclusive, but there is less focus on current environments and instead a greater emphasis on finding companies well-positioned for long-term growth.
In short, private equity advisory firms strive to limit the amount of investing capital and tend to avoid dry powder capital because as a firm, they aren’t asset gathering. Rather, they are a provider of consulting and investment management services. As a result, they also play a more backseat role with the private equity and venture capital organizations they invest in.