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The KCP Group 2021 Year-End Private Equity Letter.

Dear Clients and Friends,

Happy Holiday Season. I am excited to be writing you this letter in 2021. It is hard to believe how far we’ve come over the last 12 months. And, while we cannot take a victory lap on the COVID-19 pandemic yet, we hope that this holiday season is spent together with family in-person, rather than over a zoom call.

I recently read a book titled, The Master: The Long Run and Beautiful Game of Roger Federer. I’ll admit, I am a Federer fan. I grew up watching the Wimbledon fortnight at home during the summer. I have vivid memories of Federer beating Mark Philippousis for his first Wimbledon title and the heartbreaking defeat to Rafael Nadal when trying to win his sixth straight. I think the RF logo is both simple yet remarkably powerful. Federer is a well-loved champion who rarely plays a match without the crowd in his favor, even if his opponent is the host country’s favored son. He has been described as a maestro whose tennis is balletic and beautful, exemplified by his trademark one-handed backhand. Yet, even with his majestic game and 20 Grand Slam titles, author Christopher Clary wrote:

“One habit that separates Federer from most other elite athletes I have encountered is that he will ask you about you first and not in the perfunctory manner: inquiring about your own journey to this particular place, your own perceptions of the tournament, the country, the people. “The reason Roger is so interesting is because he’s so interested,” Paul Annacone, his former coach, once told me.”

On the surface, the quote lacks obvious depth, making it easy to skim over and quickly forget. Nevertheless, the quote caught my eye. How is one of the greatest tennis players in history, whose time is limited by training, tournaments, sponsorship commitments, and family, able to actively engage and be present in his interactions? Tom Morgan, The KCP Group’s internal polymath and Director of Communications and Content, has written extensively this year about the the intense competition for our attention. We have all learned an incredible amount from Tom. One of those lessons that Tom succintly put out is, “the simplest form of wisdom is knowing what information is important.” This year, besides passing by at an incredibly fast pace, offered our collective attention spans and information-insatiable minds countless opportunities to be interested. But we believe we also identified trends that are also important.

To name a few trends that our team at The KCP Group has spent time on:

    • The metaverse (inclusive of the future of digital commerce, NFTs & gaming), the explosion of the collectibles market (sneakers, art, trading cards),
    • Fulfilled by Amazon (FBA) businesses,
    • Blockchain and crypto infrastructure,
    • ESG (especially renewable energy),
    • Cyber security in the new digital age.

This list is not exhaustive. But the punchline is simple, in addition to all of the other things in our lives that demand our time, there are new and exciting trends that arise and advance at lightning speed. It’s hard to keep up. We cannot do it alone; we are fortunate to have invested alongside incredible managers that are helping us discover and learn about these trends. For example, we are invested in Collectors Universe (The KCP Group’s Valiant Peregrine I portfolio company) that provides authentication and grading services for the collectors industry. Additionally, Liberty City has given us exposure to gaming and NFT companies like Animoca and blockchain infrastructure investments like Lukka.* We continue to review opportunities across these sectors and are always seeking out investing leaders that have a unique lens for investing in up-and-coming trends.

We also maintain a strong pipeline of bread-and-butter, lower middle market private equity pipeline opportunities. Earlier in the year, we invested in Seaside Equity Partners Fund I, which is off to a strong start. Most recently, we made a commitment to Interlock Equity Fund I. In 2022, our pipeline is robust with several funds that fit squarely into our private equity process criteria that focuses on:

    • Emerging fund managers raising less than $500 million, targeting recent spin-outs from high performing firms
    • Firms that proactively and proprietarily source investment opportunities
    • Conservative use of leverage
    • Internal operating resources
    • Diligently work to control purchase price

My encouragement and challenge to each of you going into 2022 (none more so than myself) is to be like Roger. Be interested. Make an effort to learn about topics that sound a bit out of the ordinary. Emil Woods, Founder & Partner at Liberty City Ventures, has made the comment that there are two words he does not allow his kids to use, “interesting” and “weird.” His reasoning is simple. People often use those words to cognitively deflect from an unknown, complex, or uncomfortable concept. Instead, he asks them to put in the effort to develop a general understanding, and then make a judgment on the subject. In my opinion, his lesson is a good reminder that being interested in something is far different than finding something interesting. One connotes action. One way to combat the continuous gravitational pull on our attention spans is to be an active and eager learner. The more we learn, the more fulfilling conversations we have, the more we truly understand what information is important.

An old proverb says:

“Fate whispers to the warrior, ‘you cannot withstand the storm.’ The warrior whispers back, ‘I am the storm.’”

The quote is often overused as a boastful retort, but a more subtle message is clear. The warrior was actively listening and the warrior was prepared. Let’s be active and interested listeners in 2022 so when opportunity presents itself we are ready. We always want to hear what you’re curious and excited about too, so never hesitate to drop us a line.

Thank you all for your continued trust and support. We are honored to call all of you clients and friends.

Best and Happy Holidays,

Josh Burgan, CFA®, Vice President

Past performance is not indicative of future results.

Private equity funds are not appropriate for all investors. Investors should be aware that private equity funds may contain speculative investment practices that can lead to a loss of the entire Investment. Private equity funds may invest in entities in which no secondary market exists and, as such, may be highly illiquid. Private Equity funds may not be required to provide periodic pricing or valuation information to investors and often charge high fees that can erode performance. Additionally, they may involve complex tax structures and delays in distributing tax information.

*This is not a recommendation to buy or sell specific securities, there is no assurance that the securities discussed will remain in the portfolio or that securities sold have not been repurchased, the securities discussed do not represent the entire portfolio and may only represent a small portion of the portfolio, and should not assume that the securities discussed were or will be profitable or that recommendations made in the future will be profitable or will equal the performance of the securities discussed.

2022 Pipeline*

  • Potential Re-up Investments
    • Riva Capital VI
  • Bridge 33 III
  • Access Holdings II
  • Lower Middle Market Buyout
    • Greybull Stewardship Fund II
      • Strategy: Greybull was founded by entrepreneurs to focus on growing, smaller-sized founder-owned businesses with less than $5 million in EBITDA.
    • Target Fund Size: $100 million
    • Axial Reade Capital Fund II
      • Strategy: Axial Reade seeks to source differentiated and value-oriented private investment opportunities primarily focused on transportation and logistics, industrials, and business services opportunities in the lower middle market.
    • Target Fund Size: ~$350-$400 million
    • Eagle Merchant Fund I
      • Strategy: Founded in 2013 as an independent sponsor, Eagle Merchant is focused on investing its core sectors (franchise / multi-unit and manufacturing / industrial businesses) within the lower middle market. Geographically focused on the Southeastern US.
    • Target Fund Size: $175 million
    • Astara Capital Fund I
      • Strategy: Astara is a value-oriented and special situations private equity firm investing in industrial, manufacturing, and related service companies in the lower middle market.
    • Target Fund Size: $300 million
    • Growth / Venture Capital
      • DataVest Partners
        • Strategy: DataVest is focused on investing in data-driven, high-growth e-commerce and digital marketing businesses that operate at the confluence of consumer and technology.
      • Target Fund Size: $400 million
      • Alpine VC Fund I
        • Strategy: Alpine is a seed stage focused venture capital firm investing in consumer internet and ‘prosumer’ B2B companies. Alpine utilizes a proprietary data centric sourcing methodology.
      • Target Fund Size: $60 million
      • Signia Ventures Fund IV
        • Strategy: Signia is an early stage venture capital firm focused on remote work, AI/Robotics, Entertainment Commerce, Interactive Entertainment, and Decentralized 2.0 investment opportunities.
      • Target Fund Size: $85 million

*Pipeline investments are listed for informational purposes, not as a recommendation. These investments may or may not become actionable opportunities.

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