Flyover Country, Operating Partners, and The Deal-by-Deal Play
Who’s managing private capital in places the media forgets? What character does capital take on when it’s structured for primarily for permanence, without considerations of social prestige?
Two quick notes before we get to today’s piece.
First, I’ve joined Lidow PC, a boutique private funds law firm built for LPs and emerging managers. My new partner (and mentor), Teel, has already sharpened my thinking on private funds in ways I didn’t expect.
I joined for two reasons:
To get outside the gravity of “large” investment management.
And to put philosophy into practice, namely, the belief that legal fees should be transparent.
Every service is priced publicly on the website. Fund formations. Side letters. Fund investments into portfolio companies. 99% of firms won’t do that. But they should!
Second, thank you to the 40 people who’ve already read the management fee report. I’m glad it’s striking a chord, and I hope it’s just the beginning.
We’ve been talking a lot about the centers of gravity in these pages. Those centers generally concern the activity of investment management as it occurs in hotspots like New York or London.
But what about “middle” or “flyover” geographies in the United States? How might we think about pools of privately raised and managed capital in these places?
The term “flyover country” itself reflects this bias, describing regions that are literally and figuratively bypassed in national conversations. However, new initiatives and independent journalism are beginning to bridge this gap, highlighting the unique challenges and successes of these regions. These people are not headlining fundraising dinners for high-profile non-profits or sending their kids to Northeast prep schools.
Because traditional and new age media—Hollywood, the NY Times, etc.—generally funnel our attention to particular stories that have a flair which makes the entertainment easier to digest and more enjoyable to watch, we hardly have time to consider the massive amounts of economic activity going on, often in plain sight and sometimes under the radar, in small cities like Mobile, Chattanooga, or Carson City.
Places that rarely warrant sustained examination from the coastal titans and the cadre of commentators who uphold their supposed importance.
Places home to investors that range the disciplinary spectrum: trampoline parks, strip malls, locksmiths, daycare centers, rock quarries, and fertilizer distributors.
These aren’t the hotbeds of crypto funds or venture blitzscaling, but they do represent something arguably more enduring: capital deeply tied to local knowledge, operating businesses, and multi-generational wealth strategies.
In these regions, private capital is less about crackdown exits and more about resilience. Recurring cash flows and family ties (but not always) that double as governance frameworks.
Smalltown America investors love businesses that (1) can generate physical dollars during the lifetime of the investment (unlike, for example, a venture investment) and (2) can be held for relatively long periods of time.
There’s no big kahuna in a place like Sioux Falls (in law school, I learned that the South Dakotan city of “Pierre” is pronounced “peer” like the word “pier”; and yeah there are like 5 federal judges in all of South Dakota).
But there might be a dentist who owns a dozen car washes, a contractor quietly rolling up HVAC companies (there have been many silly, unemployed Harvard MBAs in recent years trying to do the same), or a church-affiliated group acquiring farmland via irrevocable trusts.
The legal and financial structures they use, such as limited partnerships or limited liability companies, mirror those found on Sand Hill Road or Park Avenue (specifically the haughty managers that have successfully bid for coveted Class A office space, arguably the most expensive in Manhattan, between E 46th and E 59th Streets).
But the motivations differ. Less prestige, more permanence. Less pitch, more patience.
What’s a Deal-By-Deal?
Recently, I saw someone position traditional investors and investment managers as those who invest versus those who are in the business of investing.
I think that matches with what I have told you guys about the topics that we generally discuss. We are in the business of professional money management. Not investing.
That is the core of what institutionalized private funds is about. Collect the money so that you can invest. But make sure you collect the money. And then collect some more.
But the middle America folk are typically anathema to this approach. They aren’t playing the game of raising larger funds in the next round.
You will often see them use a “deal-by-deal” approach. Which kind of explains itself: a group of people (or a single person) identifies a valuable investment and pitches it to capital partners. If everyone is on the same page, they move quick to buy the asset.
Then they find other stuff. And they raise on the basis of a pre-identified target. This is pretty much the opposite of a traditional private fund, which notably comes with “blind pool” risk. You know what the fund might buy based on its stated investment strategy, but you won’t know for sure until after you put money in.
A lot of the deals in smaller towns do not go through brokers, also known as investment bankers. Investment bankers are usually hired to look for buyers (on behalf of a seller, such as a private equity firm looking to sell a portfolio company) and then run the sale process, kind of like a real estate agent.
But these bankers take fees. They have conflicts of interest. They are often not familiar with certain geographies or lack the appropriate subject matter expertise.
Operating Partners
The deal-by-deal crowd can double, on the other hand, as investors and subject matter experts. They sometimes have been small business owners themselves. Which is like, not what the prestige-heavy coastal types would ever do.
It should not surprise us that large investment managers that are in the business of buying healthcare or tech assets usually have “operating partners.” These are affiliated experts who guide or offer consultations to the manager about the particulars of a business.
I mean think about it: most of the private equity professionals went from undergrad to banking to business school to private equity. How in the world could they have the informational wherewithal to diligence or appropriately identify utilities, telecoms, warehouses, or baby diapers?
They don’t. So they rely heavily on those operating partners.
Operating partners are brought in for their operational expertise, working closely with portfolio companies to drive performance improvements, implement growth strategies, and sometimes even step into interim management roles. Consultants may be engaged for specialized projects, such as digital transformation or supply chain optimization, and can be either internal (employed by the firm) or external (contracted for specific needs).
As you well know, the limited partnership agreement typically outlines which expenses can be charged to the partnership (and thus to the limited partners). Costs related to specialized consulting services can be borne by the fund, especially when they are not part of the general management fee. However, any work performed by consultants affiliated with the general partner should be disclosed to investors and may be subject to caps.
Sometimes, these operating partners will offer access to their broader network of experts who can drive specific projects.
Operating partners may also be eligible for carried interest (!!!), or some other arrangement that reflects a share of the profits from successful investments.
But the flyover people kind of do everything themselves, or with people they are friends with. Since the goal was to make money—more than acquire any sense of coastal prestige—they did it the only way one can actually buy and scale a business. They actually opened a flower shop, then some more, and then sold them. Which is what a business empire is after all, right?
And to be clear, there is a not insignificant number of these investors who make far more than an MD at a large fund could. Understanding this requires us to dispose of the traditional tools of finance and find recourse in sociology. Much of it is about the values they were raised on and the environments that shaped their motivations. Major investment managers employ investment professionals who largely follow a specific path that mainstream media has deeply familiarized with.
As a friend who works in these geographies told me earlier this week, “bro, I feel like the economic is on fire right now.”
That is not the reality of Wall Street mega managers. They are fighting narratives about how low interest rates drove their success, rather than their own business acumen.
Alpha is, invariably, in places unexpected.