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Stone Point goes very deep in a highly complicated, fragmented industry to drive high, consistent returns
Key Takeaways
- Chuck Davis, CEO of Stone Point Capital, discusses the firm's focus on financial services private equity buyout and growth investments.
- They focus on 70 subsectors, spanning from insurance to asset management. All of these are very heavily regulated and complex industries which require a high degree of specialization.
- They've been operating with a strong and continuous team (who have been on board for 12-14 years) and who know the ins and outs of the space - from competition to regulation to potential new customers.
- They add value via their domain expertise - they know many of the players in this very fragmented space and can help with strategy, hiring, acquisitions, etc.
- They have a very consistent track record with all funds returning above 15% net IRRs (except for one which was 12%), and a very low loss ratio.
Transcript
I'm Chuck Davis. I'm the CEO of Stone Point Capital. I spent 20 years as a partner at Goldman Sachs. And then, 20 years ago started, Stone Point with four partners, and we are a private equity firm focusing on financial services.
Financial services is a very large, very complex set of companies and industries, and it goes the gamut from banking and insurance and credit, and it's heavily regulated. Our focus is much more on the free cash flow service businesses who provide products and services to the big balance sheet financial institutions.
We just really believe in specialization. And our biggest advantage is when you talk about a business. All it matters is people, strategy, and culture. So our top 20 people have all been there for more than 12 or 14 years, and the continuity of that team is a huge advantage.
We have what we call the elephants, which are 70 subsectors within financial services and those 70 sectors have conferences and newsletters and acronyms and specialized regulatory environments. And you really need to study them. So we have been studying these elephant sectors for over 20 years. And so we're looking for the best company in the sector, then the work begins. How do we get into business with them? So we have a wish list of companies that we're able to partner with. And we've been very fortunate that they have chosen us many, many times as we choose them.
We look at all types of investments, whether they're buyout or growth equity. We do also do startups. So we don't really have a type of transaction as much as we are totally aligned with the owner-operators who put their own money up alongside of our money and our investors' money so that if things work well, everybody wins. If it doesn't work well, everybody has the same problem and concern.
We have enormous domain expertise in the sectors, so we know all the competitors, all the suppliers, all the customers, the regulatory environment. Many of these companies provide services to financial institutions like banks and insurance companies. We can introduce them to that customer base because we have more than 25 investors that would invest alongside of our other investors, who are insurance companies and major financial institutions. So we can check with those clients before we invest to see that they're happy with this product and with this company. And then we can introduce them to other potential customers that they haven't had a chance to meet. We help them with strategy, we help them with hiring, we help them with capital structure, and we help them with tuck-under acquisitions. Most of these companies are in fragmented industries with dozens and dozens of players. And so we know all these players and our companies have made over 400 acquisitions in the last three years, which is really added to the value and the scale and the size and the profitability of these companies. And that's because of the owner-operators, and that's because of the talent that we look for and our knowledge and our expertise to find these folks and to convince them that we could be a value-added partner is really our skill. They're the ones that really make the companies grow and succeed, and we help them any way we can.
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