As a woman in a male-dominated industry, Mary Hunt says it was because of the help of her mentors and managers’ support that she was able to succeed in the private equity investing world.

Her current role as Principal at RCP Advisors and the director of RCP’s Diversity, Equity, and Inclusion (DE&I) Funds Investment Strategy is her way of helping open the door to other underrepresented people who “don't naturally have that network of support, particularly in the business community.”

As DE&I strategy director, Mary has helped lead RCP’s investment focus toward more diverse GPs and emerging managers through the firm’s new program: Elevate. 

And she’s proven, through RCP’s report on diverse private equity investing, that diverse market managers in lower and middle-market equity investments consistently generated more alpha and performed on par with or better than the broader market.

Diversity “shouldn't be just to satisfy a mandate or a ‘check the box’ situation,” Mary says. “We are seeing significant alpha generated from diversity, therefore, it should have a spot in every portfolio.”

Mary joins Jon in this episode of Fund Flow to talk about how a firm like RCP crafts a DE&I-focused investing strategy. As an experienced LP, Mary also tells all about what LPs want to see when considering working with GPs and her biggest pieces of advice for emerging managers in a changing environment.

💡 Featured Guest 💡

Name: Mary Hunt

What he does: Mary is a principal at RCP Advisors, a private equity investment firm. In her role, Mary is responsible for sourcing, due diligence, and portfolio management of private equity fund investments. She is also the portfolio manager of the firm’s Diversity, Equity, and Inclusion Funds Investment Strategy.

Organization: RCP Advisors

Connect: LinkedIn

🗝️ Key Points 🗝️

Top takeaways from this episode

★    Diverse investments generate more alpha. When it comes to lower or middle-market private equity investments, RCP Advisors found that funds led by diverse managers performed in line or better than the broader market, and with less risk than non-diverse managers.

★     Experience is key. In today’s market, Mary says talent is an important asset for GPs looking for LPs. But having some experience under your belt is necessary. “If you don't have that partner level, soup to nuts experience on several deals to create an attributable track record, do it on your own,” she says. “You've got to develop some relationships with backers who will support independent sponsors.”

★     The emerging manager landscape is changing. More reps and managers are returning to the market than the LP community may have anticipated, leading to a potential shift in investment focus. There will always be a desire for emerging managers since they tend to be stronger performers, Mary says. LPs just have to figure out how to strike the right balance.

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

You're listening to Fund Flow, a podcast for emerging managers, offering insights into the journey of new and aspiring fund managers seeking to have access in a crowded market. Tune in as McGuireWoods's partner and host Jon Finger is joined by guests ranging from first time fund managers to proven emerging managers, experienced LPs poised to back emerging managers, and other key participants in the emerging manager ecosystem. Hear their real world perspectives and gain actionable tips to help inform your strategy and position yourself for a successful fund closing.

Welcome to Fund Flow, a McGuireWoods podcast for emerging managers. I'm Jon Finger, and today I'm very excited to be joined by Mary Hunt, a principal at RCP advisors and portfolio manager of the firm's diversity, equity and inclusion investment strategy. Mary is responsible for sourcing due diligence in portfolio management, as well as a member of the investment committee for RCP Elevate. Mary, thanks so much for joining me today.

Yeah, thanks for having me. I'm excited to be here.

Well, let's start Mary, if you don't mind, and talk a little bit about your road in investing and how it led you to RCP advisors after a lengthy and impressive stint at Allstate Investments.

Sure. I'll go pretty far back here. So after college, I did your typical finance background BA at University of Illinois, and then I did your standard two year investment banking program right out of school, worked in the paper packaging and building products group at JP Morgan in their Chicago office. At that time was sort of the height of the market then. 2006 through 2008, finished my banking program right before Lehmann, trying to figure out where I wanted to go from banking. A lot of the relationships that JP Morgan had at that time were with the real big private equity firms, which is great, but wasn't necessarily going to be a huge change in day to day and responsibilities. So a VP of mine actually introduced me to a role in a hedge fund of funds.

I didn't have any previous knowledge of what the fund of funds world was. And while I ultimately didn't go into hedge fund of funds, I did proactively start looking for private equity fund of funds roles, which is when the Allstate opportunity presented itself. And ultimately really was a great fit. It was a combination of both fund of funds, as well as the opportunity to do direct deals, which both were beneficial for sort of developing my investment acumen.

As soon as I joined Allstate Lehmann hit the start of the GFC, the global financial crisis. So luckily I had joined an insurance company that had a good stable capital base, which was beneficial. I wish I could say I thought about that, but that was purely luck on my part. So I think like everyone, everyone took a short pause in terms of investing right at that moment in time. But pretty quickly we were back doing fund investing as well as direct investing. I think uniquely fund investing is more than what you typically learn as part of your undergrad or investment banking skillset, right? You're really backing people, which I appreciated and liked, but hadn't necessarily thought about that and learning how to read people. You're basically giving them blind pool capital for a period of time and hoping that they invest it per their mandate.

So I think it was really a great learning for me over those years. I did raise my hand when Allstate opened their London office, I moved over to London for a couple of years to help build out that team and office. And it was really there that I really first started investing with emerging managers as that office was tasked with developing a portfolio over in Asia.

Private equity in Asia was really all emerging at that point in time. For the most part, it is still today, but that's probably where I really got my hands wet with emerging managers. And really liked that aspect of the private equity market. I came back from London in 2012, got my MBA, really started doing exactly a lot of emerging managers and first time managers in the States that became a core tenant of our strategy while I was at Allstate, and where we had the best track record, best performance. And I became very focused in on that part of the market because alignment was extremely high, right? As the market has evolved and matured for private equity, as managers move up market, there's less emphasis on doing as good on deals because they've got the AUM, the management fees coming from AUM.

It's really refreshing to have people who are super motivated to be successful and have to be successful in their deal. That's really what attracted me to this end of the market. RCP asked me to join them at the end of last summer. It was a difficult decision. I really enjoyed my time at Allstate and had a really core group of team members, but RCP was always one of the top names in my list of institutional investors in Chicago land, where I'm at and will continue to be. And so the opportunity to join a good team that's growing and to spearhead several initiatives associated with emerging managers was really attractive.

That's great. Thank you. What has your experience been over the 15 years in private equity that led you to want to take a position and be really bought into a focus on diversity, equity and inclusion?

Yeah, well, firstly, as a woman in private equity, to get where I've been, I've had to have really great support around me, right? It's not overly easy. I've had fantastic managers, bosses, mentors along the way. A lot of people took chances on me, and while you still need to prove yourself, it's those chances that really open up the door and have given me the experience that I've needed to move forward. I want to do that for others, right? Particularly others that don't naturally have that network of support, particularly in the business community.

Then I think naturally private equity is very uniquely positioned to affect change in the workplace more quickly than what we've been able to do in the public market. And if we do it right, there should be a rippling effect that will more quickly benefit communities and societies and ensure that it's longer lasting. But to make sure that this happens, it's very important to pick winners, right? So that we can prove that the return profile for these diverse opportunities are on par if not better than the broader market. And to me, taking someone who's experienced in private equity and focusing in on diversity is something that I was really excited to do, because I think we are well positioned at RCP to ensure that we can generate alpha here.

One of the words we always hear talked about as it relates to emerging managers is differentiation. And I think that's an incredible word. Describe to RCP in many ways, but importantly, RCP has a fantastic report, very detailed out about diversity within private equity, both on the underlying portfolio company and then as it relates to fund managers. What is the history of that report? And talk a little bit about what went into its production.

Yeah, firstly let me take a step back. So one of the huge attributes RCP has and truly a differentiation for us in the marketplace is our GPscout database. So we've got 20 years worth of data of every single transaction that we see that comes in the door. We track that transaction in terms of performance, all sorts of metrics, whether it is growth profile, margin profile, then we pull it up to the fund level and have tons of information on track records of the individual managers of the funds. So before I joined RCP, I was always calling them up and referencing deals with RCP, trying to get ahold of their benchmarking for managers. So it was great when I was able to actually join, and having all of that data at our fingertips right when I joined was fantastic. We continued to build it out, but over four or five years ago, RCP started tagging diverse deals that came in through the database.

So we have a huge set of both fund investments, as well as underlying deals that we've tagged as diverse. So we've done a ton of work as it relates to comparing diverse deals versus the broader market and how those have improved over time and how those compare. So lots of computer generated algorithms have gone into this, a lot of man power from our research group, which has been fantastic to work with and really think through how we want to kind of lay things out. But we were really excited to publish this report in February. Really the key takeaways from the report are deals and funds led by diverse managers perform in line, if not better, than the broader, lower middle market.

So I want to be clear, this is the lower middle market from a buyout perspective, that's where RCP plays and that's where our data is. I think uniquely this is done with similar or less dispersion. Lastly, we also call out, there is an increasing number of private equity diverse opportunities now as compared to five, but more importantly over 10 years ago, which we think is a really great time to really be putting resources and capital towards the space, because your ability with a larger pool of opportunities, you have a better capability to generate alpha by selecting those top opportunities to invest with.

So with your focus on diversity, equity and inclusion, how does that investment strategy at RCP overlap with your emerging manager strategy?

It definitely overlaps, that's for sure. A lot of our DEI, or we've called the strategy elevate at RCP, a lot of our elevate opportunities are emerging in nature. Truthfully, it's just a subcategory is sort of how I think about it a lot of times. We've got the ability to invest out of both our emerging manager strategy as well as our elevate strategy. But I would say the vast majority of the opportunities that we are looking at are going to be emerging in nature. And by emerging, we typically define that as funds one or fund two, and then we put a fun size threshold on it. Under 250, we've got the ability to go higher than that. But the vast majority of our deals that we're going to be looking at for elevate are first or second time funds at the lower end of the fundraising range.

What does RCP consider and prioritize when developing the investment strategy for the elevate program?

Yeah, well, RCP was great, right? When I joined, I was hugely impactful as it related to the strategy and got to really help think through all the different aspects of what we want to pursue. To me, one of the most important considerations was the definition of DEI, as well as the structure of the mandate. And like I said before, to me my biggest priority here is to ensure that we're able and positioned best to generate alpha returns. And so the definition of DEI, we spend a lot of time on. We've kept it relatively broad because we want to make sure that we're being inclusive and thoughtful as it relates to diversity and what it means to different constituents. So for us, we've defined it as women, people of color, individuals who affiliate with the LGBTQIA community, veterans, as well as people with disabilities. So very inclusive.

We're focused on senior level GPs that represent 50, the goal is 50% or more of either the economics or the key decision making. And how we thought about that, a lot of people have a hard and fast management company ownership. To me at the lower end of the market, management company ownership isn't very meaningful. As management company ownership often is loss making for the first couple of funds, if not break even. So carried interest to me is more important within private equity at the lower end of the market. But we also wanted to overlay that with key decision making, right? At the investment committee level, who has a voice, who's helping to make these decisions in my mind sort of helps eliminate GPs that are maybe doing something cute at the management company ownership level to qualify, but not really living into the key mission here.

That's great.

But I would say those were the most important things as it relates to how we thought about it. Another takeaway or key element of our strategy is the fact that the underlying strategies of the GPs that we're investing in do not have to be impact focused. Oftentimes they will be, we very much expect that. And they will be purposefully as well as accidentally, right? If you put diverse individuals at the GP level, they're going to utilize their specific network to source opportunities and be more thoughtful as they build out teams and add more diversity at those underlying portfolio levels. But their strategies do not necessarily have to be looking for diverse underlying companies.

Interesting. How has this strategy within elevate evolved over the years in a meaningful way? Or has it largely stayed static? Maybe talk a little bit about that.

Yeah. Well, elevate is a new strategy, specific strategy for RCP. So there hasn't been a lot of time for it to evolve. That said, RCP has a pretty substantial track record of investing with diverse managers. We just did it without a dedicated strategy, right? It went into other portfolios of ours and over time we've developed what looked to be an attractive track record with these managers, which I think has led to this elevate strategy coming to fruition.

That's great. From an LP's perspective, Mary, what are the most common questions you present to GPs who pitch RCP?

Yeah, this is for everyone, right? This isn't for diverse managers or emerging markets. What's your approach to the market and how are you differentiated? Right? Private equity is a very mature industry at this point, gone are the days of just making money from levering up deals. So now you've got to be able to prove to the seller that you're the right buyer, maybe not just on price, right? That used to be the case, but you also have to prove to me that you've got the capabilities to generate really attractive first quarter returns.

And that's hard, right? There's so many private equity firms now, to be able to differentiate yourself is difficult. But finding those key tenants, maybe you have a background in some sort of sub-sector of the market or you've got education that has given you a leg up to be able to talk with scientists of a specific chemical sector that a regular GP who operates as a generalist maybe may not have that acumen is differentiated as it relates to trying to win deals and create value post investment.

When you consider GPs, how much weight do you give to experience versus talent? Recognizing that emerging managers may not always have an abundance of experience. Certainly sometimes they've been in private equity for 20 years and leave to start their own firm. But how do you strike that balance between experience and differentiated talent?

Yeah. Well, I will say you need both, you may not need 20 years of experience, but you definitely need experience. If you don't have the experience, my recommendation is to stay with your current firm and gain it, or if that's not an option become an independent sponsor for a while and do some deals on a deal by deal basis, right? And gain that experience on a one off basis.

It's so hard to come to market these days with a first time fund, without that experience, particularly as a lead investor on deals, right? So if you don't have that partner level soup to nuts experience on several deals to create a track record, an attributable track record, do it on your own. It's not easy by any means. You've got to really develop some relationships with backers who will support independent sponsors. There's a number of firms out there that do that. Family offices have been well known to do that, RCP and a lot of institutional investors are now backing independent sponsors. So it's much easier than it historically has been, but experience is key. And you also need the talent, and the talent is shown based on the performance of your track record.

What are some maybe overlooked qualities that a GP might possess, or you've seen in your history with looking at GPs that would bolster them in your eyes?

Yeah. Well, this has evolved over the years, right? Initially when I first started investing in private equity, having an operator or two at the firm was a huge differentiator. Now, if you don't have any operators, it's looked poorly upon you as a firm. You're essentially incomplete. But I think qualities now that I think would bolster a firm is, again that unique angle or sector specialization, it's hard to be a generalist private equity investor. Firms that say, "Oh, I'm a specialty manufacturer," that's still relatively generalist, right? What does that really mean? But being able to say, "Hey, this is a specific subset of the market I know extremely well." Also a lot of firms that I've backed over the years are very, very thesis driven, which is helpful as it relates to getting up to speed on a specific part of the market, ability to really benchmark all the different players and constituents meet with a lot of the players, develop those relationships in that specific sector or community to be able to really pick the best deals available, I think is unique. But it's hard these days.

Yeah, no doubt. It's certainly one way to develop relationships and experiences through the independent sponsor intersection, and we've certainly seen that with firms like RCP and others, where they come in with an independent sponsor and then ultimately end up within the committed fund as well. But talk a little bit about RCP's preferred timeline for a partnership with a GP. And how do you typically see relationships develop with a GP over that timeframe?

Yeah, I mean the longer, the better, right? If we can look at a deal or two with you and execute potentially on a deal and see how you operate through the buying process, as well as the value creation process and potentially the exit process, it makes it so much easier for us to underwrite a fund investment on a blind pool basis than someone who we meet for the first time who's raising their first fund. We don't know anything about them. We've got to do a ton of work. We can still do that. It just takes more effort for us. A good example is a manager that's coming to market probably at the end of this year, back at Allstate I invested with this manager two direct investments, sat on boards with this manager. We've had a lot of success with these two deals that I've done with them.

They've also shown the deals to RCP. RCP's done a lot of work on them. We hold them in high regard. Over the last four years that we've known them, they've continued to build out their team to be more institutional versus an independent sponsor two man shop. But they're coming to market in Q4. For me, it's an easy decision to back them. Obviously I've got to prove that to the rest of the RCP investment committee, but that's a situation where I know they're good investors, right? I've lived and breathed deals with them. Therefore ability to back them on a blind pool basis is a no brainer for me.

We have seen certainly in the past 12 months a very significant change, but increase in frequency of re-ops and managers coming back to market in many cases more quickly than the LP community may have anticipated. But with emerging manager programs still on the rise, what do you foresee for the future of the landscape with respect to Lps' willingness to invest with emerging managers?

Yeah, I mean, I'd agree. I think there's still a huge willingness to invest with emerging managers. The biggest issue is really staffing bandwidth and potentially with some managers constrained capital, right? That capital is competing with the re-ups, like you mentioned, as well as new GPs, which take more effort to underwrite. Oftentimes, especially if there's lack of attributed track record, the diligence process is significant for these emerging managers. Reference calls can span weeks and months even. So I think there will always be a desire to have emerging managers in your portfolio. My experience historically, RCP's experience has always emerging managers have been outperformers for us. Most likely due to the alignment aspect, right? These individuals, it's really their first opportunity to generate significant wealth or to prove themselves. Potentially a chip on their shoulder dynamic from their old firm.

So the outperformance is there, but it just takes more work to pursue. So I think there will always be the opportunity and the desire to invest with emerging managers, but you've got to balance that with staffing bandwidth. So certain organizations and institutions will have that bandwidth. I think a lot of organizations who are staffing constrained will not, and it's harder to pursue those opportunities. I think you're also limited too, in terms of check size, right? There are a lot of organizations that have to write really large checks to be able to kind of move the needle for their portfolio, which those are not typically opportunities for individual emerging manager fund investments. Right? If an emerging manager is only raising 250 million at 200 million minimum check from a pension, it's difficult for that GP to take. I mean, sometimes they would take it just to kind of move things along. But to me, I think that creates an opportunity for programs or SMAs with fund of funds or advisors to pursue the emerging manager program for these large institutions. And that will continue.

What changes have you seen recently with respect to advancing diverse managers within private equity? Certainly it's incredible the work RCP is doing. What have you observed within the broader private equity community?

Yeah, well, I think over the last several years, the social political events have underscored the importance of such investments. And as such a lot of institutions have developed specific mandates targeting DEI or ESG. This happened a while ago back in Europe, I think the US is starting to catch up. But to me, all of these dedicated mandates to opportunities, diverse manager opportunities or ESG opportunities, is really going to do a lot to move the mission forward.

What is the most important advice you would give to other LPs in order to advance diversity within private equity?

Based on our research, diversity should be part of every portfolio. It shouldn't be just to satisfy a mandate or a check the box situation. We are seeing significant alpha generated from diversity. Therefore it should have a spot in every portfolio, whether or not you're getting it from private equity or public markets, right? I think there's a reason to have diversity across multiple different asset classes, and the return profile is there. I think we're at a really unique point in the market where diverse individuals have the expertise and the experience now to generate really good returns. And now is a good inflection point to really put your money there.

Recognizing the inherent complexities, we've touched on some of them investing in a first time fund, what are some teachable moments you've encountered along the way?

Reference call, reference call, reference call. And not with just people on the GPs pre-populated reference call list. For first time managers, we probably average 15 to 25 reference calls, which truthfully takes up the vast majority of our diligence. Emerging managers' track record attribution is often difficult to get. So therefore diligence-ing it from every angle is super important. I think also, this is separate, ask the GPs if they need help, right? RCP has several strategies dedicated to emerging managers. One of which is really an anchoring strategy where we can come in early, help a GP really develop their firm and get them going from a fundraise perspective. It's a strategic partnership with Eaton Partners and it's really a way to not only help these managers get into business, but help them with the nitty gritty.

These are experienced investors, but not experienced GP fund or firm creators. And therefore all of the different capabilities that we can help them with, right, developing processes and procedures, help them get up and running from a back office and legal perspective, right? We've got all of that capability in house, or we have the Rolodex to help them with firms that are already vetted. I think a lot of GPs are sometimes hesitant to ask LPs for help, but if we're going to invest with you, we want you to be successful. And fundraising is hugely important to ensure an emerging manager is successful.

So I think emerging managers should ask for help, and that's something that going back to your question, a teachable moment, right? There's managers who I think pretend that they got everything under control and maybe don't necessarily, and everything sort of comes to a head. So offering help, asking for help I think is hugely important for first time managers. You develop a relationship with a GP, LP that should last 10 plus years. And so dig in early and really make sure that you are helping each other out.

So one of the aspects you mentioned around what RCP brings to the table, how much time do you spend, and maybe talk a little bit about your interactions with other Lps, and whether it's directly for bringing them in order to help those emerging managers you talked about for interesting opportunities going back and forth, maybe talk about how you interact with other LPs.

Yeah. I mean, I think that's super unique as I found to the diversity, the DEI private equity landscape. People are, especially on the DEI front, super willing to share their pipeline of opportunities, managers that they're excited about. I have probably 10 or so LPs that have a very similar mandate or investment style to me that I call on on a quarterly basis and we compare notes, and I think we'll do that more generally as well within the broader market. But I would say people who are investing in diversity are very passionate, and sharing opportunities and making sure that these managers are successful is even more apparent. So I would say I probably make, I don't know, five calls a week with individuals to help bring forward opportunities that otherwise might get lost in the market. I think systematically the financial markets have under-allocated capital to diverse managers historically. So we're trying to change that. By changing that is to share opportunities with other people in the space who have capital to invest.

Sure. So you and I have talked about our emerging manager conference, and I know you fully expect to be there and sharing your insights, but for the audience today, largely emerging managers, what is the most important piece of advice you would give to an emerging manager?

Take your time, be thoughtful about your approach to market. That may mean delaying a fundraise while you execute one to three pre-fund deals. But I think this is particularly important to your long term success. If you're not already necessarily have a track record where you're the deal lead in all aspects, sourcing, negotiating, structuring, value creation and exit. And during this time, use it as an opportunity to develop relationships with LPs, which at the end of the day should translate to fund investors. One other thing, for your first couple of deals, make sure you're doing deals that are right down the middle of the fairway for your strategy. There's nothing worse than trying to explain why you did this deal, but it wouldn't align with your strategy for the funds. So you never want to start fundraising conversations with that discussion.

Yeah. Explaining why it's going to be such a good deal even off mandate.

Right. But yeah. Make sure your deals that you do are right down the middle of a fairway. Yeah. That to me is first and foremostly important for people who are trying to develop a track record on their own.

Excellent. Well, thank you to our guest, Mary Hunt, for coming on the podcast today. We'll certainly be keeping an eye on all of the momentum within the DEI investment strategy at RCP as well as your emerging manager strategy. And thanks to our listeners for tuning into this episode of Fund Flow.

Thank you.

Thank you, Mary.

Thank you for joining us on this episode of Fund Flow. To learn more about today's discussion, please email host Jon Finger jfinger@mcguirewoods.com. We look forward to hearing from you. This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state, and should not be construed as an offer to make or consider any investment or course of action.