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Perspectives

A new kind of private-equity firm

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Kip Kirkpatrick and Marty Nesbitt's Vistria, which focuses on private-sector investments that contribute to a public good, expects to close soon on a $1 billion fund, putting it in league with larger firms like GTCR and Madison Dearborn.
When Chicago financiers Marty Nesbitt and Kip Kirkpatrick founded Vistria Group in 2013, they had a different kind of private-equity firm in mind—one that would be more progressive in its practices and defy skeptics with strong returns, too. "I don't even like the term 'private equity,' " says Kirkpatrick, a longtime buyer and seller of companies who says the label conjures up images of "white men at the country club" and corporate raider-types like the Gordon Gekko character played by Michael Douglas in the movie "Wall Street." "I think we're so much different from that." Their approach is paying off. Chicago-based Vistria this month expects to close on a new $1 billion-plus fund, tallying a total of $3.1 billion under management, Kirkpatrick says. A fund of that size puts Vistria in the big leagues with larger firms like GTCR and Madison Dearborn. Kirkpatrick is a finance industry veteran who co-founded Chicago rival Water Street Healthcare Partners, but left and later ran unsuccessfully for Illinois treasurer as a Democrat in 2009. Nesbitt worked for Penny Pritzker's realty business and led a parking facilities company, but is best known for his work on President Barack Obama's campaign and now chairing the former president's foundation. As co-CEOs, Kirkpatrick and Nesbitt are still following a private-equity playbook that calls for raising money from institutional investors like pension funds, endowments and wealthy families, and then using it to buy companies they aim to expand and sell at a profit. Their focus on industry niches, namely health care, education and financial services, also isn't revolutionary. But what's different is their mission to make private-sector investments that contribute to a public good. While investment firms have pitched the "double bottom line" in the past, clients expected it would mean lower returns, Kirkpatrick says. "We're not going to sacrifice returns," he says. "We think by being better businesspeople and caring about these issues, we're going to produce better returns because we can attract better talent, because (portfolio) companies will be solving problems that, again, make them inherently more valuable. And that is a little bit of a radical concept." Fueling that unique perspective is its rare firm leadership profile, he says. Two of Vistria's 11 partners are African American, including Nesbitt, and the firm views that as a competitive advantage, Kirkpatrick says. (It also helps win allocations from some pension funds like the Illinois Municipal Retirement Fund that make a point of investing with minority-owned firms.) Still, Vistria resembles an old-line private-equity firm in other respects. Scrolling down its online directory reveals just one female partner and a host of women in less lucrative administrative roles. "We are trying hard to increase our gender diversity," Kirkpatrick says. "We don't make any excuses." In a $2.2 trillion U.S. industry known for adding debt to companies and cutting workers to bolster returns, it won't be easy for Vistria to cast a new image. But its impact-investing pitch may stand out for institutional investors increasingly focused on environmental, social and governance, or ESG, considerations. In a recent UBS Group survey of such investors, most said it's a "material risk" not to be engaging in such impact investing.

This general ESG-sustainable investing has really grown in its importance, not only at Boeing, but in the entire asset owner community.

Andy Ward, chief investment officer / Boeing
The Boeing funds invested $25 million in each of Vistria's second and third funds. Vistria's clients also include Chicago-based Grosvenor Capital Management and Oklahoma State University Foundation. Oklahoma State's $1 billion pension invested in Vistria's second and third funds, says Ryan Tidwell, its chief investment officer. While its impact-investing approach "was not a driving force," he considers it a plus, along with Vistria's in-depth understanding of public policy and regulatory issues. It's too early to judge returns, given the industry's 10-year investment cycles, but Vistria appears headed toward meeting the foundation's goal of earning at least 2.5 times its investment, after fees, he says. Kirkpatrick and Nesbitt accumulated enough wealth along the way to join their partners in investing about $100 million alongside clients in the third fund, which was more than twice the size of their $400 million first fund raised in 2014 and also larger than the $872 million second fund raised in 2017. Like other private-equity professionals, Vistria's partners rely on their networks to find prospective deals. Both Nesbitt and Kirkpatrick sit on the Rush University Medical Center board, and Kirkpatrick is also a trustee at Northwestern University, where he earned an undergraduate degree (he also has an MBA from the university's Kellogg School of Management). Vistria targets middle-market businesses where founders want to keep a minority ownership stake while tapping Vistria's know-how to double or triple the size of their businesses. It's often buying companies with significant regulatory exposure, and that can be dicey territory. For example, Vistria owns a pack of for-profit education firms, including Penn Foster, Vanta Education—linked to University of Phoenix—and Catapult Learning. That industry took a regulatory drubbing during the Obama years over charges of misleading students and saddling them with debt. Vistria invested in online education firm Penn Foster not only because it equips workers with the high school diplomas they need to advance at their companies but because the services fill a skills gap for frustrated employers that helps boost the economy, Kirkpatrick says. As for Vistria's gains, it tripled its money when it sold Penn Foster last year to Bain Capital. That's Vistria's kind of doing well by doing good.