KELLOGG CAUGHT UP WITH VISTRIA GROUP CO-FOUNDER KIP KIRKPATRICK ’97, WHO SHARED HIS INSIGHTS INTO BUILDING AN IMPACT-INVESTING FIRM FROM THE GROUND UP
Q: You founded Vistria Group in 2013 with your partner, Marty Nesbitt. What were you setting out to accomplish?
Marty and I both felt that we had a set of unique and complementary experiences and thought we could build an investment firm that could produce outsized returns based on the entrepreneurial and operating adventures we had enjoyed. I had co-founded a successful private equity firm in 2003 after working at a large bank for most of my career and, as such, had seen the normal private equity journey through multiple funds. Marty was a successful real estate investor and founder of The Parking Spot.
While each of those experiences was different for Marty and me, we found that we both had common passions. For example, we both enjoyed building teams, trying to “think differently” about our industries, finding “seams” or niche opportunities, and, most importantly, we both valued making a difference and creating a positive culture in whatever we did. We found that we shared a vision for building a new model of investing that was more mission-oriented, which led us to where we are today with Vistria and its focus on education, healthcare and financial services. For me, this mission-orientation was always missing from my prior private equity experiences.
Q: You’ve been quoted as saying you don’t like the term “private equity.” Can you explain why?
I think, unfortunately, that the label evokes images of Gordon Gekko-types from Wall Street. I also believe that the typical private equity firm still concentrates too much on financial engineering and cost reduction. Our firm is focused on growth. We want to partner with middle-market businesses and help management teams attract talent, land new customers, develop new products and navigate the changing landscape in Washington, D.C. When you combine our focus on culture, how we treat employees, and the diversity of our firm, we don’t act or look like the typical private equity firm — that is why I don’t like the term.
Q: What about the impact model intrigued you?
When Marty and I started The Vistria Group, we thought we had identified an attractive investment opportunity, but I have been surprised by how much bigger the idea has become over the past five years. Of course, people want and need great returns, but the market is changing and demanding great returns in a responsible manner. Put simply, it matters how you make those returns.
Marty and I wanted to create a private equity firm that invests in companies that make a positive impact because those companies are inherently more valuable. We are on a mission every day with a very talented team to prove this. It is motivating and inspiring to try and define this new approach to investing.
Q: What should we expect for the future of The Vistria Group?
We just closed on our third fund at over $1.1 billion and are actively investing out of this fund. We are fortunate to have raised over $3 billion since our founding, but feel like we are just getting started on our journey to redefine the private investment arena.
Longer term, we also think it is important to be a leader in the broader dialogue about the future of capitalism. Given some of the larger issues that we are struggling with in the world around income disparity and equal opportunity, we hope that we can contribute to the debate about solutions and become a case study for the positive attributes of private capital. Private investing doesn’t need to be zero-sum. You can do the right thing, help build great companies, generate great returns for investors and make a positive difference in society.
Q: Is there any advice you could give to alumni entrepreneurs in finance?
Embrace the journey and stay the course. I often have to remind myself or the team that it isn’t easy to build a business — and it definitely isn’t easy to create a new investment approach. We have been told no — directly and indirectly — so many times since we launched The Vistria Group that I have lost count. But we honestly believe that we are doing something important for our profession and we love the partners that have joined us on this journey. I always tell entrepreneurs to make sure that they have the stomach for it. If you think you can handle the ups and downs, go all-in and recognize, despite what you may read, that no company goes straight up and how you handle the disappointments and challenges defines you and your company. Embrace the journey. Stay the course.
Q: What particular investments would you point out as examples of success? Which ones are you particularly proud of?
Our firm is still young and the investment cycle can sometimes run 5-7+ years. We have made a number of investments in the education industry that make us particularly proud. One of our first investments was in the largest online, accredited high school in the country, Penn Foster. After a long successful history as a correspondence school, Penn Foster was gobbled up into a larger company and was a corporate orphan struggling to grow and attract capital when we bought it. We partnered with the management team, successfully carved it out and immediately focused the company on growth. We had spent years studying the education system in the US and what the popular press has deemed the “skills gap.” Unfortunately, employers often can’t find candidates with skills that they want and candidates can’t easily count on their traditional education degrees to prepare them for the modern employment market. As a result, the education market is changing to more skill-based training and certifications, as opposed to traditional longer-term degrees. Jamie Dimon, JPMorgan Chase chairman and CEO, recently said “the future of work is skills, not the number of degrees.” Penn Foster provided an opportunity for us to help build a company that helped young adults who may not have had the chance to complete their high school degree return to school in a cost effective and user-friendly manner. Our students were advancing in their careers but often needed their high school diploma to move into management. We invested significantly in Penn Foster to allow their very talented CEO, Frank Britt, to build an outstanding management team, call directly on employers to develop additional programs to help our students continue to “skill up” and improve the overall technology to enhance the student experience. Given our early success, we were able to position the company to be sold to a larger entity that could continue to invest in the business and were able to return 3.0x our investors’ original investment in three years — an internal rate of return of close to 50%. Our team did an amazing job on this investment, Frank is a lifelong friend now, and our team still talks about the power of attending Penn Foster graduations — these are life changing events for our students.
Q: Do you see the emphasis on investing in impact ventures as a trend for the PE sector in 2020?
Yes. I am very excited about this next generation of investors and our partners that are going to run Vistria over the next decade. Our people and our investors want to make a difference and don’t want to sacrifice returns. Our research suggests that the size of the impact market is estimated at approximately $502 billion today, up from a reported $15.2 billion in 2016. Over 50% of impact investing organizations made their first investment in the past decade. This rapid growth tells me we will continue to see significant emphasis on impact investing as more investors find that impactful investments produce great returns alongside broader value for all stakeholders. I also think the COVID-19 crisis is highlighting an important aspect of where we are today as a society. The private sector and the public sector must work closer with each other and recognize the positives that each side brings to the table. The disciplines and the innovation of the private market and the long-term thinking, planning and compassion of the public sector make a powerful combination when both sides work in tandem. I hope that the COVID-19 crisis will accelerate the impact investing space. Long-term, game changing ideas behind e-learning and telehealth (two areas of focus for us) need federal, state and local government officials working with the best and brightest in the private sector to find real solutions.
At the same time, while this seems new and the term “impact” is taking off, we also believe that this is what many of the great companies and investors have focused on for many years. Are we solving a problem that needs to be solved? Do we take good care of our employees? Do we develop talent internally? Do we have a diverse set of views internally so that we can anticipate changes and challenges ourselves so that we are not “asleep” around our strategy? Do we care about the communities around us and where we do business? I remember being super excited to share our vision with a mentor, Bill Osborn, former chairman and CEO of Northern Trust, and he replied, “Kip, that is what the great companies have been doing since the beginning of time.” So, maybe a different way to think about this is that we now have enough data and experience in the capital markets to know that we should be doing things in the private markets the same way that the great public companies have been doing this for years — do the right thing, treat people the right way, develop innovative products that solve problems at reasonable prices — in other words be a good corporate citizen and the most talented people will want to work there.
Q: What else would you like to tell your fellow alumni?
I’m very excited about the future of Kellogg and our new dean, Francesca Cornelli. I think she is the right person at the right time to lead Kellogg. I also hope as a loyal Kellogg alum, in some small way, I can help Kellogg be a leader in this emerging investment impact space.