E288: Inside a PE Fund Ranked #1 in IRR, DPI, and TVPI

How do you raise $875M in one of the hardest fundraising markets in decades and still outperform on DPI, IRR, and culture? In this episode, I sit down with Jesse D. Serventi and Atif Gilani, Founding Partners of Renovus Capital Partners, to unpack what actually compounds in private equity over 15+ years. We break down why staying in the lower end of the lower middle market creates structural advantage, how talent density became their real edge, and why portfolio construction—not deal hype—is the hidden driver of net returns. Jesse and Atif also share how Renovus evolved from three founders doing everything into a scaled firm built to last decades, not cycles.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Weisburd?

  You've raised $875 million in one of the most difficult fundraising markets in decades. How are you able to accomplish this?

• 0:05Speaker 01

  For us, it was a function of having the right time, the right strategy and the right team. Our track record's been good. Leading up to the fundraise, we had been posting a lot of exits, a lot of very successful exits, and our DPI numbers have been great at a time when there isn't a lot of DPI. So the timing was really good. Our strategy resonated with investors as well. We focus on the lower middle market. We buy founder-owned businesses. We buy sub $10 million EBITDA businesses. And we are a purchase price matters firm. And I think all of that story is resonating right now with LPs. We have a 45-person team, which is quite a large team relative to our fund size. And I think people love our team today. Every onsite diligence session that people do, we get complimented on the quality of our team.

• 0:46Speaker 01

  And I think it's a combination of those things, the time, the strategy and the team that led to a great outcome.

• 0:51David Weisburd?

  Renovus, alongside being over strapped on 875 million, you're also ranked number one in terms of quantitative metrics like IRR, DPI, TVPI. What allows you to capture alpha in your fund?

• 1:02Speaker 01

  What's the secret sauce? It's a great question. Just a quick story. There was a morning in 2022 when we both woke up to having all these inbound emails from institutional investors, highly respected names from around the world, who wanted to set up meetings with us. That's not what we normally wake up to. And we were wondering what was going on. And it turns out we had been named in one of these studies. This particular study, HEC Dow Jones Private Equity Report, is one that is, turns out to be very widely followed. You needed to have 10 years of track record in order to get into that study. Come 2022, we had built up 10 years of track record. And I've been in that study every year since then. So it's just been fantastic for us and helped to raise our brand and raise our profile,

• 1:46Speaker 01

  which has been great for fundraising, but it's also been great for recruiting in executive talent to our portfolio companies, recruiting in young and very talented people who want to make their careers at Renovus. It's been an amazing momentum builder for us. But to answer your question, what is the secret sauce? You know, there's really no one thing in private equity. And we hear this all the time from founders considering selling their business. Every private equity firm looks the same. You know, we show up in our, you know, Patagonia vests and we look a certain way and, um, you know, we're smart people, but you know, from one firm to the next, are they different? And in some ways, we are like the others, you know, we do LBOs, we do some business repositioning. We employ smart, competitive driven people.

• 2:29Speaker 01

  So what is it that has enabled us to deliver the results that we've delivered for the investors? We actually, in, in last year's annual meeting for our investors, uh, tried to answer this question for them. And, you know, in the, in the course of our presentation, and what it really came down to was, uh, we, we put forward three questions for ourselves. What game are we playing really? How good is our team and do we have any special resource advantages? The game we're playing is about playing in the lower end of the lower middle market. Almost every deal we do is of some $10 million to that business. The number of at bats that we see compared to an upmarket strategy, it is night and day different. We have so many more targets that we can pursue within our strategy. We are buying from founders, we're the first institutional investor.

• 3:11Speaker 01

  We're buying fundamentally solid businesses, but where there is so much value that an experienced institutional investor like us can have. So we're trying to play what we call the game on easy mode. I think that's been a, a big driver. In terms of the team, we have a big team, you know, we, we mentioned that, uh, 45 people. That is large, especially relative to the fund size that we have. One of those investments that we've made is, uh, we have a full-time director of people. That's become more and more popular in private equity. A lot of times though, that people person focuses on portfolio companies. Our director of people spends all of her time recruiting, training and ensuring that we're living out our cultural values and that people can make great careers at the firm. We also work, uh, with an executive coach.

• 3:56Speaker 01

  He works with the partners, he works at the levels beneath the partners. And so there's just a lot of investment, uh, when you add all that up and a lot of time and focus spent on building a truly world-class team. So I think the team is, is a special part of why we've been able to produce the numbers we've been able to produce. And we now have, um, this kind of flywheel effect where we have stayed down market, uh, and, and focused on small businesses and have this vast network of people that are willing to talk to small business owners who are thinking about selling their business to private equity and can tell them, you should sell to these guys because if you roll a piece of your equity into the deal, it's going to do really well. Look at how well it did for me. And so I think just the staying power that we have.

• 4:38Speaker 01

  Had in the market, been doing this for 15 years and all the successes that we have has built a brand and a network of references that really is helping us to stand out relative to the company.

• 4:49David Weisburd?

  Over those 15 years, what has compounded exponentially and what has compounded linearly?

• 4:55Speaker 01

  I won't be surprised to hear me say this. I'm so uber focused on talent. It's the part of the business that I like the most. I think that has really compounded exponentially for us. We have, we mentioned that we showed at our annual meeting, the series of slides about what makes us special and why we're able to produce great results. One of those things was all the boomeranging talent that we've had at the portfolio level. We had a page that was just focused on CEOs and founders who have done business with us on a repeat basis. And we had people on there that hadn't just done like two deals with us. They had done three deals with us and they'd all been successful. And I think when you're able to build that network of really good people who want to keep coming back into the Renovus ecosystem. And they happen to be friends and connected with really good and really talented people and they're pulling their people in.

• 5:39Speaker 01

  I think that network effect is really special and compounds.

• 5:42Speaker 02

  There are so many thoughts that come to me. One of those is our own evolution. When we started the business, we were really deal guys and had really good training and experience of putting deals together. Over the last 15 years, we've elevated our role from just deal leaders to fund managers and from there to firm owners. And what that means is that as we've studied different models, we have become good at not just doing a great deal at the deal level, but delivering great fund products to the LPs where we are generating not just good deal returns,

• 6:24Speaker 02

  but good gross returns and most importantly, great net LP returns by recycling capital, by using really innovative financial capitalization at the fund level. So those things have resulted in very significant growth in terms of the results that we've been. Able to produce. So that evolution obviously continues and brand is something else that has had a pretty significant impact that 15 years ago, nobody knew who we were today. Thanks to all the transparency that the parties are bringing to our end of the market through rankings and through a lot of benchmarking, a lot of investors, not just here in the US,

• 7:06Speaker 02

  but globally are able to find us and raising capital has become a lot easier than it was 15 years ago.

• 7:13David Weisburd?

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• 7:58David Weisburd?

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• 8:43David Weisburd?

  in terms of what drives the company, how much comes from the three of you versus your hires and this machine that you built in terms of talent? That's a great question.

• 8:51Speaker 01

  First fund, it was really the three of us that did everything. We raised the fund, we sourced all of the deals, executed, did the portfolio management work ourselves. And so certainly all 100 for for Fund One and the goal has been to shift that down over time. And we have been very successful in doing that. Now we think of ourselves really, we've gone away from being players. We're still playing, but we're playing player coaches and we've organized the firm to with a specific intention of enabling really good and talented people, coaching them up, working with them, developing them and seeing them spread their wings and being really successful. And now we're at like a point of our own individual careers.

• 9:31Speaker 01

  We're like, nothing makes us happier than seeing people get it. I was saying, just as we were kicking off the podcast, that we just completed an interim call where we announced all of our internal promotions for the year. I mean, it was kind of an emotional event for many of us. Like there is great pride in seeing the people beneath us succeed.

• 9:47Speaker 02

  Was that something that was difficult to cultivate? There's a lot of learning that goes as you build a firm. As investors, you take a lot of pride in putting together the best deal possible, the best financial structure, the best executive team in doing both financial and operational engineering to get to a great out property investors. This is something we take so much pride in and that becomes a DNA. But when you're building a firm, it's not about the best deals you do. It's again delivering a great fund for the investors. And that means not just doing your job well, but creating an environment for your team members.

• 10:31Speaker 01

  Fund One, as I mentioned, it was just the three of us doing the entire thing. And that was a function of, starting in 2010, it took us two solid years just to get into business, no paycheck. And so we were really careful with our management fee dollars in the early years of the fund. Fund Two comes along, we start bringing in some institutional investors. In fact, our largest institutional investor in Fund Two is still our largest institutional investor today. And they asked us a really simple question, when are you guys going to start building the team? And they were walking us through about like why we Should do this, giving us comfort. Hey, you're going to be around for a while. And Atif says this sometimes, some of these institutional investors, they believed in us more than we believed in ourselves. And that helped get us started on really investing and thinking about Renovus as an enterprise.

• 11:16Speaker 01

  And we have so fully embraced that, you know, 10, 10 years later, after our second fund was raised, that today, this is what we have. We have a large team. We have a director of people. We work with an executive coach. And so it has been a gradual thing, but we've gotten some great advice that's helped us, you know, make that transformation that we very much needed to make.

• 11:35David Weisburd?

  That's my heuristic for who you want to surround yourself with people, people that see more new than you see yourself. And similarly to that, I look at the heuristic of who you want to hire is somebody that is going to do things that you never even imagined. So you bring somebody in, not only do things as good as you or even better than you, but come up with things that you didn't even think about.

• 11:53Speaker 01

  Absolutely. The, this concept, I think like Netflix popular, popularized it of, of talent density. You have a talent dense organization that just raises everyone's game. I think our people, our best people, they're raising his game, they're raising my game. It is awesome to have people around us, even if they're less experienced, but you just see their passion and competence. That makes everyone better, including us.

• 12:16Speaker 02

  Talent that we are hiring, they have a lot of new ideas, new competencies. They're better at AI than we would have ever been. So we've learned so much about AI adoption within our firm and how we can push that out to a portfolio of companies from one of our associates. So yes, there is this flywheel effect that Jesse was talking about. You learn from your junior people, they learn from you. And in a way, what we talked to them about is that we are looking to bring in more entrepreneurs in the firm, not more managers. And we're also constantly screening people, not just for their pedigree and resume, but for their potential. And Jesse was talking about.

• 12:56David Weisburd?

  How do you do that? How does a fund manager go about setting out, I guess, somebody's soft skills or somebody's future talent versus their track record of completing tasks?

• 13:06Speaker 02

  Spending time with them and having a good sense of who you want to bring into the firm and who you. Do not. Jesse was mentioning to you, our Chief People's Officer, she's someone who had never done any HR work. Jesse got to know her through his time with his local church, and she had such amazing people skills that Jesse kept talking to me that we need to bring her on. And when Jesse approached her a couple of times, she said, no. The person who is running our IR was actually an asset manager at Vanguard, but we saw in her the passion, the detailed orientation, which many times you don't see in other IR people. So we are really screening for

• 13:48Speaker 02

  attributes, not for people's backgrounds. And when we are hiring our people, we tell them the first couple of years are on us. Even when we are hiring, who you may consider plug and play investor who comes from a brand name private equity firm, we say to them, look, we do things slightly differently. We pursue the same kind of deals that you may have been at your firm, but we are operating at the door end of the market. We have more of a valuation discipline that you may have seen at your firm. We are willing to do more volume that you may have seen at your firm. So it is, and it takes them at least a year, but once they get it right, they really start to perform and become believers in our model.

• 14:31David Weisburd?

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• 15:16David Weisburd?

  And I want to get into your portfolio construction later, which I think is fascinating. But on the LP mix, you mentioned that that institutional investor Came in Fund Two and now they're one of the larger investors. How has your LP mix evolved from Fund Two to Fund Four?

• 15:27Speaker 02

  When we started in 2010, it was right in the midst of GFC and there wasn't any capital available for first time managers looking to start a blind pool of capital. So through Jesse's research, we stumbled upon this program run by the US One Business Administration called the SBIC program. Except that that program was really for mezzanine investors and for people who had a lot more deals on their track record as we did. But the best thing about that program was for every dollar of capital you would raise from third parties, the program would give you two additional dollars of capital.

• 16:08Speaker 02

  So essentially, the US One Business Administration became our largest LP in our Fund One with 67% of capital coming from them. And the rest primarily coming from family offices and high net worth. So Fund Two is really when we made the transition, not complete, but beginning to make transition from that investor base to bringing in a large university endowment, insurance companies and start building that base to our last fund, Fund Four, where instead of the SBA being 67% of our capital, it's less than 20.

• 16:45Speaker 02

  We've been able to retain all our large accounts and really proud of the 130% re-upgrade from our existing. Meaning investors who gave us $500 million in Fund Three, not only they have kept that investment with us, but on top of that, they've given us another $650 million. So we've been able to keep our existing, but expand the LP base and over time diversify away from the capitals that we've been receiving from the SBA.

• 17:14David Weisburd?

  As I mentioned, you were overscrapped. There's a lot of demand. How did you pick and choose which LPs you wanted to add to Fund Four?

• 17:19Speaker 02

  So how did we select our LPs? So I would say it's a matchmaking process. Obviously, our existings are the ones who know us best and they always have the first tips that the available capital that we're looking to raise. And they came in very, very strongly. So. They filled out most of the capital need that we had. And beyond that, we've been very strategic. There are certain areas and certain types of capital that we think could be a base for our long-term success and growth. So we brought in one large state program and we feel that could be a way for us to build that type of investor base.

• 18:03Speaker 02

  For the first time, we went outside the US and got a number of high-profile institutions and family offices in Europe and the Middle East. We think that we can significantly expand that. So while availability was limited, we used those limited slots to bring in what I would consider strategic investors who can really help us grow our capital base.

• 18:26David Weisburd?

  And that's just geographic diversification.

• 18:28Speaker 01

  The new investors largely people like, we're very confident that the capital base is going to be stable over a long period of time.

• 18:34David Weisburd?

  And to your point, it's not just the relationship with the person, it's also the quality. I just interviewed the former CIO of UTIMCO, the second largest endowment in the world. And I learned they're going to be the number one largest endowment in the next 10 years because they get one and a half, two billion dollars from the state of Texas from oil reserves every year. So kind of knowing where, what's going on with the underlying capital base is also really valuable versus a pension fund that might be overfunded or, or other pools of capital, otherwise great relationships, but they might be in a difficult situation from capital base.

• 19:02Speaker 02

  Absolutely.

• 19:02David Weisburd?

  So one of the most interesting parts about your fund is your portfolio construction. Tell me about your portfolio construction and how did you come about with this unique structure?

• 19:13Speaker 02

  Our portfolio construction has a number of attributes. First, we believe in starting out small and over time, building our position. So if you're looking to invest hundred dollars, particular business, we may start out at 50 or less. And over time, as we professionalize the business and we scale the business through acquisitions, we put in more capital. So building position over time is the first thing that we think about. Secondly, because we operate not just in middle market, but at the smaller end of the middle market, we look to create a diversified.

• 19:53Speaker 02

  Portfolio for every fund. So we have typically around 15 or so active positions for fund. If we have early wins, we give the profits to investors, recycle the cost basis. So have some of our capital make return more than once. And through that, we end up investing on average 120% of the LP capital. And for that capital to have a compounding effect on the overall net returns of the fund. This helps us keep the spread between gross to net return for investors low. And overall, deliver a really good fund product for the investors.

• 20:33David Weisburd?

  You guys have figured out what private equity has taken a long time to figure out, which is if you have a great company, why are you selling it four or five years later to your competitor? We're going to keep on investing and helping that company grow.

• 20:43Speaker 01

  I'd like to say that we figured it out right away, but it actually is a learning of ours. Atif talks, likes to talk about our, both our worst deal and our best deal we ever did. It was in a company called Red Nucleus. And this was done out of our second fund, which is, which is a great fund. But, you know, it was a business that we bought with $4 million of EBITDA. We took it to 12 million of EBITDA and sold it, did very well for our investors. And then that company continued to grow significantly after we exited with the team that we had put together, with the strategy that we had been executing. As we've grown our knowledge and grown our confidence by observing what, you know, upmarket GPs are doing, we've realized that we're able to do this. And so now there's no kind of dogmatic approach on our part that says, okay, when you double the EBITDA, now it's time to exit.

• 21:25Speaker 01

  And as a result, we have, you know, a business that started with four of EBITDA and today is 50. We have another one that started at three and today is 90 of EBITDA. So I think that's actually, you know, a practice that we're proud of today. And we think makes a lot of sense, but it's one that has been a learning of ours over time.

• 21:40Speaker 02

  Within these investments, not only that we're growing our EBITDA, we're improving the quality of our businesses. So we make as much money from growing the EBITDA multiple. So we, on average, have been able to buy these smaller businesses for mid-single digit EBITDA multiples. And we sell them at teens of multiples. So that has a compounding effect.

• 22:01David Weisburd?

  Family offices have been doing this for decades. I spoke to Sam Zell's partner, Mark Sotter, who continues to run his foundation's family office. Also Brent Bishore, he's in the Midwest. He has this 30-year fund where they figured out that, A, first of all, if you make a fund that lasts longer, you're making decisions over a longer time horizon, you actually build healthier businesses. If I asked you guys to flip something in three years versus holding it for 10 years, regardless of how good of a guys you are, your incentive is just going to be to build a fundamentally different business. What's corrupted that process historically is these two to three-year fund cycles. You always want to be showing momentum. So everybody ends up owning slightly worse versions of the business downstream because of these short-term over-optimizations.

• 22:44Speaker 01

  There's a lot we could talk about here. I think a lot of private equity has become what we say internally as investment banking plus. There's a very short-term orientation that's kind of crept into the industry. And it's not just among the GPs, managers, executives, the C-suite executives throughout the economy. They're now all trained to think this way. It's like, okay, I'm going to get hired, I'm going to exit in two years, and then I'm going to be on to my next private equity thing, the next thing I find. And I actually do think that if you can get your LPs to support this and you yourself can think differently, there's a great opportunity if you can be a little bit more long-term.

• 23:19David Weisburd?

  Why do founders lower their valuation in order to partner with you?

• 23:22Speaker 02

  So selling a business by a founder is perhaps the most difficult decision they ever have to make at a professional level. It is an emotional decision. It is a game changer financially for them. So they are very diligent about it. They look for a number of things and price is just one of those things that they look for. First of all, they look for a counterparty, meaning a private equity firm like us that is transaction-worthy, an entity that understands their business, has sector expertise, that has a really high close rate that, once we sign on a piece of paper, that we are interested in the deal that we would get to a closing of the transaction.

• 24:07Speaker 02

  So they care deeply about those things that the counterparty they are dealing with is transaction-worthy. And that is one area where as of late, privacy has gotten a bad rap, justifiably or unjustifiably. So we position ourselves as not just another New York-based LBO shop, but rather a founder-owned, founder-led firm that is based in Philadelphia and our location. We use it as a strategic advantage to give the message that we are a different type of a firm and we understand what it is to run a small business that's looking to become a mid-sized business.

• 24:46Speaker 02

  Beyond that, they do care about price. They take a few dollars less, but they are looking to get a fair price. So in that respect, a purchase price matters. But beyond that, in our model, we encourage them to roll over 20 to 25% of their stake. So they want to believe that the rollover stake could be worth more than the cash out they receive on day one.

• 25:12David Weisburd?

  You guys both embrace this contrarian philosophy that I share transparently, popularized by George Soros, which is invest and investigate. Put in a little money and learn more to get an insider edge. Tell me about that philosophy and how do you internalize that philosophy into your fund?

• 25:27Speaker 01

  We love Stanley Druckenmiller, who we famously learn from George Soros and read everything that he says. And of course, he's a, he's a public markets investor and more of a trader. But what we have taken from that statement and applied to our business is the view of, as we talked about earlier, building a position over time. When we enter into a new business model, there is a huge difference between owning something in that, in that segment and not. And buying something, even if it's only a $5 million EBITDA business, buys you a seat at the table. There are people who will talk to you that will not talk to just the private equity firm. There are other business owners. There are things that you get invited to, industry conferences. There is a big network of things that open up to you once you invest.

• 26:09Speaker 01

  And I can maybe just illustrate it through an example. We exited a legal services business called Harbor last year. And it was a thesis that we built in 2021 and, and made our first investment in early 2000s. And we ended up doing 10 add-on acquisitions over the course of our ownership period. The difference between what we saw when we didn't have an investment and what we saw when we did have an investment was night and day. And the add-on acquisitions that we sourced, we believe many of them, we don't see if we don't have something in there. And so investing in something allows for a much greater investigation of something, even when you start really small. So that's how we apply that Soros system to Renovus.

• 26:50David Weisburd?

  It reminds me of a diligence question I like to ask towards the end of the process, which is, what am I going to find out in the next board meeting that you're not telling me right now? People don't always, and usually they don't answer that honestly, but that's really what you're trying to suss out, which is, what am I going to find out within the business that I could never really find out? That's not in the spreadsheets, that's not in the data room.

• 27:07Speaker 01

  I'm a big believer in how you phrase a particular question, and I'm now going to use that question in all of our diligence sessions going forward. So, so thank you for that. You do learn so much about a business after you own it. That's a fact that every GP will at least admit to you privately. And obviously, investing involves making decisions about an uncertain future. And so as the future unfolds after you make the investment, of course, you're going to learn a lot. What we like about our strategy of doing follow-on investing and building our position over time is that, you know, if you could decide between investing all of your money in a company in day one, or invest in the same amount of money over a three or four-year period, and you could stop at any time, you would obviously choose that second, that second road 10 out of 10 times. And so we really like that.

• 27:50Speaker 01

  We like getting smarter, gaining conviction, investing accordingly, or losing conviction and stopping investing accordingly. So we love that strategy.

• 27:59David Weisburd?

  As a thought experiment, if you could invest $1 in the business to get access to information and be on the inside, obviously you would do it. So it's a question of what is the right sizing of the first check in order to make, make it more valuable than potentially the downside? It's not a matter of if, that makes sense as a strategy, it's a matter of sizing.

• 28:16Speaker 01

  Then our strategy is really a question of like business durability. You know, we, we invest in very small companies. There is such a thing as too small. You know, if you invest in a $2 million EBITDA business as the first thing you buy in a fund, is it even a business? And so that's how we think about that question.

• 28:32David Weisburd?

  If you could go back to 2010, when you were first starting Renovus. A lot of mistakes, a lot of lessons learned over the last 15 plus years. What's one piece of advice that's timeless that you would have given a younger version of yourself that would have either helped you accelerate your career or helped you avoid costly mistakes?

• 28:47Speaker 02

  Think of the business we were starting not just as a project business where we are doing deals, but like an operating business, build a business that would be there forever. That means to take more risk early on, to invest more in the team early on and do things that would pay off dividends not in five or 10 years, but over 25, 30 years. The reason why a lot of young investors like us have a three to five year horizon is that early on in our careers, there were multiple recessions and you got fired and you became unhireable.

• 29:32Speaker 02

  So there's been this mindset of feast or famine, that at times you could grab whatever you can versus investing in a business like most of our founders do who we buy from. They're never building a business to sell. They are building a business that may be transferred over to the next generation. So having that longevity to the business really helps you build a business that does good deals, but overall over time builds enterprise value.

• 30:03Speaker 01

  I love Atif's answer there and it aligns actually really well with the coach that we've been working with, you know, personally for many years now. When we hired him, and this is what he says to us now, he's like, "You guys hired me to help turn Renovus from a great fund into a great firm." And it wasn't something that we thought about in 2010. In 2010, it was about, hey, let's try to get into business together and build a fund. And somewhere along the journey, somewhere in fund two, we really started thinking about Renovus as a firm.

• 30:33David Weisburd?

  Well, Jesse, Atif, you guys are growing legends in the private equity space. It's going to be very fun to see where you guys go over the next 10 years and we'll have this conversation maybe in a couple of years and check in. And it's been a pleasure to sit down and thanks so much for sharing your story.

• 30:47Speaker 01

  Thank you, and we welcome doing that again with you.

• 30:50Speaker 02

  Thank you for having us.

• 30:51David Weisburd?

  Thank you, guys. That's it for today's episode of How Invest. If you're a GP with over $1 billion in AUM and thinking about long-term strategic partners to support your growth, we'd love to connect. Please email me at [email protected].