Kelly Barofsky, Director of Investment Research at GEM, joined Giovanni Amodeo for an engaging fireside chat. They discussed how to identify opportunities in the mid-market, focusing on Kelly’s extensive experience and GEM’s investment strategies.

Kelly’s Background

Kelly’s journey in finance started with a master’s degree from Vanderbilt. She worked at UNC Management Company before joining GEM, where she now focuses on small buyouts and lower mid-market investments.

About GEM

GEM, based in Charlotte, North Carolina, acts as an outsourced Chief Investment Office (CIO). They manage capital for endowments, foundations, family offices, and a sovereign entity, providing endowment-style investment products and portfolios.

Defining the Mid-Market

• Characteristics: Funds under a billion dollars, companies with enterprise values under a couple hundred million dollars, and businesses with $5-$20 million EBITDA.
• Opportunities: Less competition, operational inefficiencies, and potential for growth and margin expansion.

Specialization vs. Generalization

Kelly highlighted the benefits of specialization, especially in sectors like healthcare. Specialized knowledge helps navigate regulatory complexities and payer dynamics, offering an edge over generalist managers.

Selecting Managers

Kelly emphasized the importance of selecting managers who fit the lower mid-market and align with GEM’s investment philosophy. She looks for managers with drive and entrepreneurial spirit, particularly those transitioning from large firms.

Succession Planning

Succession planning is crucial at GEM. Kelly shared how they assess managers’ readiness for succession by observing shifts in leadership roles and ensuring the next layer of talent is well-prepared.

Fund Size Growth

Kelly discussed the implications of fund size growth. While smaller funds are preferred for their opportunistic nature, certain strategies may benefit from increased capital. It’s essential to balance fund size with portfolio construction and team capabilities.

Alignment and Fees

Kelly underscored the importance of alignment between managers and investors. GEM prefers performance-based incentives over excessive fee streams, advocating for managers to invest their own capital and prioritize carried interest.

Operational Improvement

GEM evaluates managers’ operational improvement strategies through case studies and reference calls. Kelly stressed the importance of translating playbooks into actionable value creation.

Market Outlook

Kelly provided an optimistic outlook for the lower mid-market, noting its resilience and ongoing exit opportunities. She acknowledged challenges in the IPO market and the impact of macroeconomic uncertainties on investment decisions.

Investor Concerns

Common investor concerns include recession risk, tariffs, government efficiencies, and AI disruption. Kelly emphasized GEM’s proactive approach to managing these risks and maintaining a diverse portfolio.

Conclusion

Kelly concluded the chat by discussing the future of outsourced CIO services and GEM’s role in the lower mid-market. She expressed confidence in GEM’s ability to provide tailored investment solutions and navigate the evolving market landscape.

Key timestamps:

00:07 Introduction to the Fireside Chats
01:44 Understanding GEM’s Role in Investment
02:43 Defining the Mid Market Landscape
05:22 Specialization vs. Generalization in Management
08:03 The Importance of Sector Specialization
09:13 Identifying Red Flags in Managers
11:25 Assessing Managerial Drive and Entrepreneurial Spirit
12:43 Succession Planning in Management
14:31 Fund Growth and Strategy Alignment
15:57 Manager Incentives and Fee Structures
18:29 Evaluating Manager Effectiveness
19:47 Current Exit Market Challenges
21:36 Investor Concerns and Risks
23:05 Utilizing Portfolio Data
24:55 The Role of Investment Firms