Brad Bernstein, Managing Partner at FTV Capital, joins our hosts to discuss the importance of growth equity at a time when many companies are choosing to stay private for longer. He also speaks about FTV Capital’s recent successful fundraising rounds, expansion into Europe and his own professional journey.
Listen to the full podcast here.
Full Episode Transcript
[00:02] Host:
Welcome to Private Markets 360, your insider’s guide to the world of private investments. Today we’re joined by Brad Bernstein, managing partner at FTV Capital, where he’s been a growth equity investor for over 20 years, leading investments in the enterprise technology and financial technology space. With over 30 years of experience in the industry, Brad brings a wealth of knowledge across venture capital, leveraged buyouts and growth equity.
Brad, welcome to Private Markets 360 and congratulations on a year where you’ve announced $4 billion in new funds raised, a billion dollars in exits last year, and $1.6 billion in new deals. You must be pretty excited.
[00:39] Brad Bernstein:
I’m very excited and I’m excited to be here with you. Thanks for having me.
[00:43] Host 2:
Awesome news, Brad, especially in what has proven to be a difficult environment to both fundraise and exit investments. Sounds like FTV Capital has really kicked it out of the park. So congratulations.
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[1:03] Host 2:
Could you share a little bit about your background, your journey into private equity and growth equity, specifically in just areas of focus?
[1:14] Brad Bernstein:
Sure. So I actually was a liberal arts grad out of Tufts University and studied international relations and minored in Chinese actually, and decided to go to Wall Street and learn about finance and business and ended up at Merrill Lynch. Interestingly, I was sort of pushed into the merchant banking group, which was the late 80s/90s version of what we would think of as sponsor coverage today. And really it was at the peak of the Drexel Burnham high yield leverage buyout market. So I got really thrown into the deep end of the pool and got exposure to a lot of very complex and exciting transactions. And within one year, that market completely imploded and the market was transformed. But it was a fabulous experience in terms of learning about the risks of leverage and understanding how financial engineering can go right and go wrong, and really built the foundation there over those first two years.
Then I decided to try something completely different. And so I went to join a firm with a long legacy in venture capital called Patricoff and Co Ventures and really saw some growth deals, saw some venture deals, worked with some really impressive long-tenured partners, and was planning to go to business school when someone I had met leaving Merrill called me up and said, hey, we’re looking for an associate at this firm, Oak Hill Capital. Would you be interested? And I thought, hey, if I went to business school, this is the job I would have wanted. Why don’t I go see what this is about? And I ended up joining Oak Hill, spent 10 years there, made the journey from associate to partner and really focused on business and financial services at Oak Hill, more on the buyout side over my tenure there.
And then in 2002, I was leading a transaction where we were buying an outsourcing company that served the financial services market. And I was recommended to a new emerging firm in San Francisco called FTV that targeted investments that were relevant to financial services customers because of their unique network there. And we brought them in as a co-investor and I got to experience the value add of this unique model where they had this incredible network of operating executives across the financial services landscape. And as I like to say, the experience of working with them on the due diligence and then seeing their value add supporting the company after we closed really gave me a sense of value add envy. I thought, wow, wouldn’t it be amazing to have that in your arsenal as an investor?
And interestingly, they liked the way I had negotiated that deal. And one night over cocktails said, hey, would you be interested in opening our New York office for us? We’re planning our expansion. We need someone in New York. And by the way, who knows, maybe you could be the managing partner one day. I thought, huh, that would be exciting. And so decided to join in 2003. And so I’m coming up on my 22 years of being here and it’s been a fantastic experience.
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[04:52] Host:
And not only that, an experience of growth, not just personally and professionally, but also growth of the firm. And I think that leads to a pretty interesting conversation on your recent deal activity, your success in fundraising, and a conversation about the current deal environment, which I think we can all agree has not been experiencing the same amount of success or even deal volume that maybe FTV has.
So Brad, you recently wrote an op-ed for PNI where you talked about the IPO market not just as being closed, but actually broken. I’d love to have you expand on that and share your perspective on what’s led to this situation, why it poses such a significant threat to American economic progress and the role for private equity in an environment like this.
[05:41] Brad Bernstein:
Well, let me say that I think all of us should always focus on how important vibrant capital markets are for the success of our overall economy. I think that’s something that people lose sight of. And I did write an editorial on this because I was very concerned to see what’s been going on in the IPO market. And as I tried to point out, it is a structural problem.
One of the key issues is that IPOs are really best served by having strong, active, long-only investors that support these IPOs. And the growth of ETF index type investing has so dramatically altered the public market because everybody is focused on indexing, everybody is focused on these low fee market-weighted products. And so the amount of inflows and the amount of capital going into the exact type of investors you need to do the work and analyze these IPOs — support them as long-time mutual fund investors historically did — has really been altered and is not there in the same capacity.
At the same time, you’ve also had major regulatory reform. And that regulatory reform has slowly but surely killed off a lot of the analyst activity. It’s made the cost of being public significantly higher. And so now you’re looking at $7.5 to $10 million of overhead just as an annual number just to support your company’s regulatory risk and exposures. And then of course, just the time and energy that is spent as a CEO or CFO of a public company is a massive commitment of time and energy that I rarely hear executives talking about desiring as part of their journey and what they’re looking forward to.
And so that all has led to a series of structural problems that make it much less attractive for companies below $5 billion to be public. And really the best place to be for IPOs is in the $50 to $100 billion range — the Ubers, maybe a Plaid or a Stripe or a Klarna. Some of the companies that people talk about that are really, really large — that’s where it makes sense. But when you get to some of these smaller companies that can’t really get the exposure and the support for significant liquidity, it’s a much more challenging environment.
And that has happened at the exact same time that a huge growth equity ecosystem has developed — folks like ourselves that are providing liquidity and value-added investors who do minority investing, control investing of all different flavors, which really allows companies to find the capital or the liquidity they need for different types of transactions without accessing the public market. And so what we’re seeing is that companies are staying private much, much longer and they’re finding the financing solutions they need in the private market. And that really is the environment that FTV is finding fantastic for the kind of deployment of capital, exits to other financial buyers and strategic buyers, and for raising our new funds so that we can focus on those opportunities over the next four to five years.
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[09:31] Host 2:
And Brad, like we mentioned in the beginning too, the fact that you were able to fundraise over $4 billion last year, and also that you made about $1.6 billion in new investments and had the billion in exits — do you have any idea what percentage of those may have traditionally gone to the IPO market? Or on the exits that you had, were any actually exited by going IPO?
[10:10] Brad Bernstein:
So none of those went to an IPO. Some of those companies could have ultimately led to an IPO. I would say they’re all more in a size that — I think one of the points I would make is 20 years ago companies were going public with $75 million of revenue. Some of these companies were definitely of that size. But today that’s just not where the market is. Those deals are not going public. No one’s taking companies public in that range.
And I mean it’s hard to believe — I think when Google went public it was a billion-dollar company. Today that would seem really, really small. In fact, interestingly enough, just starting this year, we’ve announced taking a company private in the UK off the AIM Exchange. So we are literally taking a company that is a small cap public company private. And then we also just announced selling one of our public companies for $1.5 billion — this just happened in January. And so these are two perfect examples of companies where just being public isn’t really working for them. In the case of the one we sold in the US, Enfusion is actually being bought by a strategic buyer, another public company that’s larger and has more scale. In the case of the UK company, it was a small cap company where it made sense to go private.
But just stepping back for a second, if you look at the last three years post-2021, what you’re seeing is just a dearth of activity. In fact, the public IPO market has been lower volume than it was after the financial crisis of 2008. So it’s really modest. And you’re also seeing less deal flow because a lot of people so overpaid in the COVID era, during that bubble, that they have locked in valuations that are so high it’s hard for them to transact.
I think one of the hallmarks of FTV is our discipline around valuation at entry, even during those years — that really set us up to be in a position where we could still generate great outcomes for our investors today in the current valuation ranges that we’re seeing, because we didn’t overpay four or five years ago or three years ago. And that’s really come to be a very helpful fact in the kind of results we’re trying to generate.
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[13:04] Host 2:
And I know from my time on the buy side, through market challenges like the financial crisis and some more frothy areas too — it was always ingrained in the underwriting practice to stay true to your underwriting standards regardless of the market, because as you mentioned, you want to have those valuations at entry that make sense for the time when you want to exit, not knowing how the market is really going to be behaving at that point in time.
But what I would like to ask you next is about FTV Capital’s strategy and where FTV employs a distinctive investment strategy focused around four strategic pillars. Can you elaborate on these pillars and discuss how they underpin your investments in companies that have shifted their focus away from the public markets?
[14:14] Brad Bernstein:
Absolutely. So first it’s important to understand we are a sector-focused growth equity investment firm. We focus on B2B enterprise solutions, typically in the financial services and enterprise technology sectors. And I’ll dig in a little bit more to those in a minute.
But the important thing is that when you’re trying to focus on areas that have really, really high complexity and where deep domain expertise matters, you’ve got to think about how do I build my investment firm to maximize the alpha generation in that context. So first of all, it’s useful to understand that financial services is the largest vertical market of any market industry-wise, and that it is also the largest market for enterprise technology solutions. Nobody buys more technology, nobody has been more innovative in deploying the cutting edge of enterprise technology than the financial services industry — which has massive budgets to apply to technology. And of course financial products are so easy to digitize. So those are critical factors.
So with that as a backdrop, our firm was first set up to have sector teams with deep domain expertise. That’s the first pillar of our firm — having people who study and think about every aspect of asset management, wealth management, insurance, payments, banking, capital markets, specialty finance, and then on the enterprise tech side, thinking about every application and every service required to be excellent at sales, marketing, HR, data analytics, compliance, risk management, cybersecurity and so forth. And so that is our first and foremost foundation — making sure we have a team that is fantastic at understanding those markets.
The second, which I referenced in terms of what excited me 20 plus years ago, is our global partner network. The firm was founded with 20 strategic investors where C-level executives from those 20 institutions came into our advisory board to guide us on what they needed and what they were seeing as pain points and opportunities at each of their financial services companies. We took that idea and we’ve scaled it and institutionalized it, where today our global partner network is 600 executives across 150-plus Fortune 1000 enterprises. And we have a dedicated business development team that’s constantly mining and engaging with that network to make sure we understand their opportunities, their needs, and having a dialogue with our deal teams so that we’re really thinking about what’s going on in the market, in the trenches. We’re not trying to sit in our ivory tower and say what do we think they need — we’re trying to really listen to the market.
The third is our ProSourcer, which is our proprietary software system for sourcing deals. We believe it is imperative to be proactively out finding companies, and we have built a system over the last 20-plus years to do that. Our technology platform, ProSourcer, is able to track 3 million companies globally. We then pick the very most interesting 60,000 that are in our CRM and then we have a whole system around how we are following up with them and pulling data from over 25 data sources that we integrate into our data lake. We’re also scraping data from the web more broadly, pulling that all together, and it allows us to see when companies are achieving an inflection point that would be a good catalyst for financing. And we typically are building relationships with these companies years in advance of a transaction actually happening. Just as an example, this take-private we just did in the UK — we met the CEO for the first time in 2017 and we kept a dialogue with him over all this time for this opportunity to come along. So that’s part and parcel to what we do in terms of building these relationships and finding these opportunities and trying to be there when they really need capital.
And of course the final pillar, our fourth pillar, is our value creation team that we call FTV Propel. These are proven, experienced executives who have been there, done that in exactly the kind of companies we’re investing in and are at a point in their careers where they’re really excited to coach and support companies. Basically in each function — whether it’s having a chief technology advisor, a chief revenue advisor, a chief talent advisor, a dedicated recruiting team and so forth — these are folks that are there to really guide each of our portfolio companies to scale effectively and make new mistakes, not mistakes we’ve already learned from in the past. So those are the four critical pillars that really give us an edge and help us generate alpha for our investors.
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[20:06] Host:
And amidst all that evolution, you’ve been evolving the strategy, you’ve been building out these proprietary tools to keep growing, developing and changing with the market. You’re also expanding geographically. So while you’ve had a busy year at FTV, closing out your latest fundraise and all this deal activity, you’ve also expanded into Europe with a new London office. Would love to hear you talk more about the new capital, the London office, how this all plays a role in your investment strategy and continuing to expand FTV’s operations.
[20:39] Brad Bernstein:
Sure. So we had been investing globally for basically those 20 years, back to that first investment I did with FTV where it was a US company, but we had huge operations in India and we’ve had successful investments in the UK over our history as well, where we were just flying back and forth. But as a result of that, we could see that there was a huge amount of potential across Europe and the UK that we were not fully taking advantage of because we didn’t have folks on the ground to meet with companies and build those relationships as consistently as we should be.
And so it was a plan — in fact, going back pre-COVID, we were planning our London office, and then when COVID hit that put a little bit of a crimp in our plan, so we delayed it. But we’ve been working for a long time around the idea of having this London team to really make sure that we are serving that market the best we can.
And I would say it is quite interesting that we are seeing more than ever that European entrepreneurs are desperately excited to bring their companies and their solutions to the US market. In fact, I often hear them saying it’s much easier to open an office in the US and have access to 50 states that all speak the same language and have the same laws, regulations and overall macro environment, versus going from one country in Europe to another country in Europe, where the languages, the cultures, the regulatory environment, the taxes can be quite different and each market has a smaller TAM. Where we’re adding a ton of value for these companies is really helping them build their go-to-market and access the US market, and of course leverage our global partner network to help accelerate that process. And so that’s been a huge opportunity and we’re seeing a lot of deal flow over there as a result of that.
And of course, that also fits into our new funds. So we ended up raising two funds. Fund 8 is a $3.4 billion fund. And then we raised a new fund called FTV Ascend, which is $650 million. And that is being set up to go back and do the kind of deals we’ve done in our history that are smaller growth equity deals that really focused on those bootstrapped entrepreneurs earlier in their maturation. And so between the two funds, we can now serve the market from $20 million all the way up to $300 million in terms of check size. Again, both funds do both minority investing and control growth buyout investing. So we have a very flexible mandate and are seeing opportunities across that whole range as we enter 2025.
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[24:02] Host 2:
That’s a huge range — $20 to $300 million of capital. When you’re looking at growth equity investments, what are you primarily focused on? You mentioned bootstrapped, founder-built. Are there any other fundamentals that you’re looking at? And anything also, as you talk about that vast range, that really differentiates maybe a smaller company from one of the bigger ones based on your experience?
[24:37] Brad Bernstein:
So it might be good to step back and just talk about what growth equity is to us and kind of where we play and where we don’t play. Because I think it can be confusing for your audience to understand where venture ends and where does growth equity start and where do growth buyouts end and where do leveraged buyouts start?
So let me start by saying that for us, first of all, we’re really targeting and have been successfully achieving returns over our total portfolio in excess of three times our capital over a typical five-year hold with extremely low losses. Our losses have been sub-5%. And this varies dramatically from a venture portfolio where you’re typically going to see substantially greater losses and hopefully a couple of companies that have huge outcomes that kind of offset that and generate a great return — but it can be very cyclical. You obviously need a stronger IPO market, a strong M&A market for that end of the market. And then you’ve got the buyout market where they’re using a lot more debt — they’re typically looking at lower growth, very stable businesses, and they’re really generating the returns from leverage and the cash flows.
In our case, our focus is on businesses that are growing really in the 20 to 50% range, where they are on a path to very high profitability and a consistent path of growth, but where we are really trying to generate those returns through maximizing that growth over that five-year hold and not using a lot of leverage — if anything, using modest leverage — and really focusing on how do we scale the execution of the business.
So the key elements we like to focus on are loving those bootstrapped entrepreneurs outside of Silicon Valley, typically finding them in off-the-beaten-path markets. We love when they’re capital efficient. We’re not looking to invest in businesses that have huge amounts of infrastructure or building out retail or other types of real estate — we’re really looking for very high capital efficiency. We really focus on five business models that we believe are the best five business models in the world: recurring software as a service, recurring payments, transaction volume-type businesses, managed services that are typically recurring, long-term contracted services, and insurance premiums that are recurring. And then finally the best business model of them all — assets under management. I’m just kidding. But it’s obviously our business model where you get fees on the assets and get the benefit of the growth in AUM. So those are the five business models that we really target and consider ourselves experts in underwriting.
And we really look for established products where the market is proven, the product is proven, the unit economics are proven, the financial metrics are all very clear — it’s just about scaling them. And then we also look for big enterprise clients, hopefully ones we know through our network, where they validated the business, the product, and can tell us, hey, we looked at all the competitors and we chose this company, and this is why it’s the best. And if we can get that validation from people we trust, it gives us the conviction to make those investments.
Now as you pointed out, it’s a relatively large range of check size. But in terms of the companies we’re investing in, they’re typically going to be in that $15 to $50 million of revenue and they’re going to typically be at a point where they’re looking to get to that $100 to $200 million of revenue. And that’s the journey that we are experts in. And so even though the check size can be different — and sometimes that’s because an entrepreneur just doesn’t want to sell very much, or it could be a situation because the company wants to stage capital over time — there can be a wide range of reasons why. And of course there are scenarios where someone had an investor, but it’s time for that investor to exit and we’re taking them out and we’re going to be the partner for the next chapter. Regardless, the key mission typically stays the same, which is how do we help this company maximize their opportunity and execute effectively at scaling their business. And that’s really what we want to do — with management teams that have large equity stakes and are highly aligned for that journey and for that outcome where we’re all going to have success together.
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[29:48] Host 2:
That was a fantastic explanation and I am astonished that you are able to find so many investments in what I feel like, as you explain, is a very targeted area.
[30:05] Brad BernsteinYeah, it’s a huge ecosystem with a vast number of companies and that really allows us to uncover lots of exciting niche opportunities that are really compelling. And as a result we’ve been able to be very active. In fact, we’ve already invested in our first three companies in Fund 8, the new fund. And we’ve also closed our first investment in Ascend and are about to close our second investment in Ascend. So we’re finding lots of these opportunities.
And one critical thing to just remind your audience of is that there is over $1.6 trillion in NAV from funds pre-2019 that has a seven-year hold and needs to get to a liquidity event. And so as I’ve said, we believe that there is a deal tsunami that needs to unfold here over the next two to three years because all that value has to be unlocked. And if the IPO market isn’t going to solve it, and strategic M&A is also more tepid, then the only solution is growth equity providers like ourselves who can come in and provide those companies the liquidity they need for the next stage of their growth, or for the next chapter of ownership, or for consolidation and M&A in their industry — all of which are opportunities driving capital needs in the current environment.
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[31:52] Host 2:
That is amazing. I love the way that you framed all of that. It’s such a great perspective on the importance of growth equity. So thank you so much for that.
[32:08] Brad Bernstein:
Happy to share it.
[32:10] Host 2:
Thank you for joining us for this episode of Private Markets 360 where we had an insightful discussion with Brad Bernstein, Managing Partner at FTV Capital. Brad shared his extensive journey in private equity and growth equity leadership and provided a deep dive into the current state of the IPO market, illustrating why it poses significant challenges for American economic strength. We also explored FTV Capital’s unique strategy centered around partnering with innovative high-growth companies to help them achieve their ambitious growth objectives, as well as how the firm’s record fundraise and expansion into Europe will enhance their investment capabilities. We appreciate you tuning in and hope you found this discussion enlightening. Don’t forget to subscribe to Private Markets 360 for more expert insights and trends in the world of private investments. Until next time.