Private Equity Q&A: Jeff Collins, Cloverlay

Niche asset classes have emerged under the private equity umbrella in recent years, providing a different option for investors that want not only PE exposure, but uncorrelated returns. Greg Winterton spoke to Jeff Collins, Partner at Cloverlay, to learn more about this part of the private markets world.

GW: Jeff, tell us about Cloverlay and its approach to private markets investing.

JC: Cloverlay accesses uncorrelated private equity returns through niche assets that are absent from their broader portfolios. We call them Adjacent Private Markets – intellectual property, obscure corners of litigation finance, media rights, aerial wildfire suppression, Broadway theatrical rights, and many others. They are all focused on emerging, uncorrelated sub-segments or in pockets of dislocation where most sources of private capital are not equipped to traffic. You won’t find them in a buyout fund, there are no public comps, and valuations are not based on EBITDA multiples

GW: What is the current level of penetration in some of these esoteric assets? Are we still at the beginning of the journey, or is it already reasonably mature?

JC: Level of penetration is one question, but timing and velocity of capital might be the more determinant factors of returns in our target universe. Some segments are at the beginning of their journey, and others are more mature than most investors realize. A blessing of our strategy is that when we begin our work on any one segment or deal, the rest of the investment world is largely unaware that the opportunity even exists or is investable. The curse of our strategy is that any segment, once proven out, tends to attract new capital in huge volume and at an increasingly rapid rate, competing down returns from those same interesting assets.

There are numerous historical examples of niches that initially offered compelling multiple of capital opportunities but then quickly became overly competitive and no longer interesting to us from a return standpoint. Music publishing rights are a perfect example: Current valuations have roughly doubled in the last 10 years, as there are approximately 10 groups with more than $1bn of dry powder focused on the space.

Professional sports are an interesting current case study: Franchises and their related assets can be incredible platforms, and an ownership change in a high-profile league somewhere in the world seems to make headlines on a weekly basis. But not all franchises or leagues are created equal. What parts of professional sports are most accessible to private capital? European Football comes to mind, with effectively no barriers to entry other than check size. And if you would like to invest in Latin American Mixed Martial Arts, you can do that quite easily. But what parts of professional sports are not accessible and have ZERO institutional dollars invested, but should? The NFL and college football are great examples. The first-mover private equity group that can secure NFL approval as a minority owner or can successfully partner with a major university or conference to monetize their rights and IP will access an enormous and growing asset class at a price point that will be wholly unachievable to the followers in the coming years. We are seeing that first-hand, having invested $75m into the NBA, MLB, and NHL in the winter of 2020-21, immediately after private equity ownership was first approved when stadiums were still closed, and the future was very uncertain. Institutional penetration and velocity of capital into sports have only increased since that time.

GW: One of the spaces you invest in is media rights. That’s seen increasing traction in recent years, especially music royalties. What are some of the keys to success in this corner of the space?

JC:  While music royalties sound like a remote corner of the private equity world, you might ask Bob Dylan how many bids he received for his catalog 18 months ago! In our experience, the keys to success in media rights broadly, and in music royalties specifically, are to target specific assets for specific reasons and to fully understand the potential upside and downside sensitivities to your underwriting assumptions. In royalties broadly, being a financial buyer is always inferior to being an operator – actually knowing the assets you are buying and actively doing something unique with them once acquired. Also, it is important to consider potential changes in the historical revenue curves of the music you are buying. Not everything grows at GDP or in step with Spotify plays. Country, classical, urban, Christian, and metal all have different return profiles, adoption curves, residual tails, and tangential revenue opportunities. Those have to factor into your purchase calculus, and for that reason, we have not been able to compete in iconic titles in probably ten years. There is just no inefficiency in pricing, but we love the assets. So instead of Bob Dylan, we acquired the Care Bears.

GW: I’ve read that you like the spirits business, specifically scotch whiskey. What’s your exposure there, and why is that interesting?

JC:  There are a number of ways to invest in the spirits business, which all sound niche but are in fact widely trafficked and efficient. Liquor is not a new, or small, or unsophisticated industry. It is global and it is massive. You have seen growth equity investments into new brands (mostly clear spirits) with global appeal, trying to be the next Casamigos. Or owning whiskey aging casks, effectively renting them out on 5-15 year contracts at 10-12% fixed interest rates set pre-2022. Bottling. Distribution…all are easy to access and see no shortage of available capital. But after sorting through all of the opportunities across the investible universe we found that most constructs solve for only one piece of a complicated and interconnected puzzle. Instead, we began working on a thesis in ~2020 focused on what spirits acquirers actually want to buy: premium quality and price point; owned inventory and supply; global reach. So, in 2022, we invested in Compass Box Scotch Whisky, which integrates the three critical components at once. First, a 20 year old premium niche brand. Simultaneously, we acquired several million litres of liquid inventory (and their casks) from our former production partner. Last, greenfielding a distillery in Fort William, Scotland as both a spiritual home for the brand and community and also as an owned base for all production, blending, and storage. Vertical integration is seldom seen in the spirits world, and we believe it is of particular interest to the most active acquirers in the space. Strategics already own their casks and are running out of production capacity for their acquired “labels”. Growth equity investors were interested in our brand. Credit investors are highly attuned to our liquid stock. Real estate investors would support our distillery. But very few investors are able to execute on all three components at once, and the combination offers a differentiated and more resilient return profile than any of its composite pieces in isolation.  

GW: Lastly, Jeff, what’s your message to investors in terms of where they should see niche private equity strategies sitting in a broader portfolio? Is it a replacing traditional corporate private equity or a complement to it – and why?

JC:  The portfolios we build are a complement to most institutional private equity portfolios – we invest in the cracks between the traditional buyout, venture, growth equity, real estate, and real asset investments that institutional investors cannot access. These exposures also provide downside protection through discrete asset coverage that offers investors less correlated exposure than traditional private equity models. Investors use assets like those we invest in as a completion portfolio; it’s a resource extension into the strategies and segments that may eventually end up on their desks four years from now; the point, however, is that pricing power still resides in the hands of informed, networked, forward-looking providers of capital in these markets.

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Jeff Collins is a Founder and Managing Partner at Cloverlay