The interview below is part of a series from The McGuireWoods Emerging Manager Program featuring impressive emerging managers, as part of our ongoing commitment to the emerging manager community.
The McGuireWoods Emerging Manager Program supports emerging managers throughout the most critical stages of a fund’s evolution with a differentiated and proprietary approach to connecting emerging managers with limited partners, providing intelligence on market terms and preferences, and advising emerging managers on all components of building a durable brand as an investor. To recommend an emerging manager for a future interview, email Jon Finger at firstname.lastname@example.org.
Q: What led to the decision to raise your initial fund? What were the indicators that you were ready?
Samuel Loughlin: The decision to start Paceline Equity Partners followed a confluence of events. After a decade leading the North American region of a megafund, Leigh (Sansone, founding partner and chief investment officer of Paceline) and I saw an opportunity to take that broad experience set we developed across 250 investments and deploying over $20 billion of equity to move down-market into smaller deals, where the market is less efficient, and we believed we could generate more alpha.
Over that decade at the prior fund, we built and tested an investment discipline that was successful through multiple cycles and asset classes. We were able to take that framework and apply it to these smaller, more nuanced deals, where we're able to drive not only higher gross returns but higher risk-adjusted returns with proven competitive asset management and sourcing capability. When you couple that with the opportunity set we see in front of us, particularly in this uncertain macroeconomic environment where we operate best, the timing was well-suited for the type of investments we make.
Investing together for 10 years and generating very good returns was an indication that we had the skill set to launch the firm and raise a fund. In addition, given the breadth of our mandate, periods of greater dislocation are better for us. There's a broader opportunity set now, but that's not a necessity for us. There are always things breaking or being dislocated in the economy. But when you hit these periods of significant, macro-turbulence, like we saw with COVID-19 and like we're seeing today, particularly around inflation and higher interest rates, those are the best environments for us.
Q: How did you think about assembling your team?
SL: We're really lucky in that regard. We were able to lift out four additional founding partners who were in senior roles at our previous firm. Our group of six founding partners has worked together for 15 years. We also brought over three managing directors who have worked with us over a similar period. We have tremendous continuity at the senior level. To have a group that's worked together for that long is rare, not just in emerging managers but across the industry.
Today, we sit at 35 total employees and 22 investment professionals. It's a robust team that manages over a billion dollars in assets today.
Q: What were the most important considerations for you when choosing LPs to pursue for partnership?
SL: We really focus on the "P" part of LP. Our investors have been tremendous partners with us. They understand our investing style and work collaboratively with us. That's not just around the investments themselves. They've been great advocates, helping us find new investors. They've brought us deal flow, and we've helped them navigate investments they have away from us.
I think that's probably most exemplified by the fact that we deployed $300 million of co-investments alongside the deployment of our $350 million fund one. We've focused on partnership, and it's been mutually beneficial.
Q: What did you consider and prioritize when developing an investment strategy for your initial fund?
SL: We define ourselves as a special situations fund, meaning we exclusively focus on deals where there's some dislocation that's preventing capital from flowing efficiently to an opportunity or asset. Since we've been together for 15 years and we've done so many deals, we have the luxury of maintaining focus on industries and asset classes where we've had meaningful investment experience.
The final, key part of our strategy is we're maniacal about downside protection. This comes through in the level of conservatism we apply to our underwriting. When considering any new investment, we benefit from a robust originations network we've developed as a team over the past 15 years. We see tremendous deal flow. The prioritization is making sure we focus and execute on those opportunities that fit our core mandate and deliver fantastic risk-adjusted returns.
Q: With emerging manager programs on the rise, what do you foresee with respect to LPs' willingness to invest with emerging managers?
SL: We recognize that as general partners, we're not only stewards of our LPs' capital, but we're also stewards of their credibility. Nobody gets criticized for investing in a series 10 fund. But as an emerging manager, we're very aware that the decision to invest in the first or second fund might draw more scrutiny or second-guessing if things don't go well. We don't take lightly the stewardship of that extension of credibility. Quite frankly, we're going to work our tails off to ensure those LPs that took such a risk with us will never have a regret.
Q: Recognizing the complexities in raising a first-time fund, what are some teachable moments you have encountered along the way?
SL: Finding and doing great deals is every fund's top priority. I don't think I need to talk a lot about that. But you also must invest significantly in building the culture and infrastructure to ensure that every aspect of the fund — whether that's asset management, reporting, compliance or the development of your junior resources — is able to perform at an institutional-quality level.
As such, all the partners here have made a significant, long-term commitment to the success of this firm — that's personally, professionally and financially. We love what we do. But you have to build your firm the right way, and we believe that it's important to build an institutional platform in the process, as our partners expect this. You can't just focus on the deals.
Q: What is the best piece of advice you were given when raising your first fund?
SL: It's not for the faint-hearted. It takes a tremendous amount of perseverance because you're going to hear a lot of "nos." You can't allow yourself to be discouraged. As one of my mentors taught me, "Many of life's failures are people who did not realize how close they were to success when they gave up."
In addition, it's important to stay disciplined on deployment. When you're fund-raising, particularly a first or even a second fund, you feel significant pressure to do deals, but you need to remember that this pressure is to do fantastic deals. Despite the perceived pressure from LPs wanting to see you build a book, you need to stay disciplined in building a portfolio of really good investments.
About Samuel Loughlin
Samuel Loughlin is a founding partner and CEO of Paceline Equity Partners. He serves as a member of the firm's investment committee. Immediately prior to forming Paceline, Loughlin worked for Lone Star Funds, a Dallas-based private equity firm, from January 2008 until July 2017. From January 2014 to April 2017, Loughlin served as president of the firm's Americas region. In this capacity, he was responsible for origination and investment oversight for North American investments. During this period, Lone Star Funds deployed approximately $10 billion of equity capital across approximately 60 portfolio investments in North America.
Loughlin has also held numerous directorships, including serving as chairman of Foundation Building Materials, chairman of Forterra, chairman of Continental Building Products and chairman of Del Frisco's Restaurant Group.
Loughlin currently serves as a member of the board of trustees of University of Texas Southwestern Medical Foundation and the Baylor University Regent Selection Task Force. He earned a JD with honors from the University of Texas and a BA, summa cum laude and Phi Beta Kappa, from Baylor University.