Houlihan Lokey Inc. is looking to strengthen its relationships with private equity investors with the acquisition of BearTooth Advisors LLC, a fund placement business.
Houlihan Lokey announced May 21 that it acquired BearTooth, which provides strategic advisory and fundraising services to alternative investment managers. The addition of the BearTooth team will establish Houlihan Lokey's private funds group and will have synergies with the M&A and capital markets advisory services business, co-President and global co-Head of Corporate Finance Scott Adelson said in an interview.
Through its M&A advisory assignments, Houlihan Lokey has developed relationships with the private equity firms that are buyers or sellers in the deals. Houlihan Lokey can now offer those private equity firms fundraising services with the funds group.
Houlihan Lokey's capital markets professionals are also dedicated to private placements that provide corporate clients with capital from business development companies, commercial finance companies and institutional credit funds. The BearTooth team can now try to leverage those Houlihan Lokey relationships when working on fundraising assignments.
BearTooth's relationships are expected to provide some opportunities for Houlihan Lokey's capital markets business as well. Some traditional private equity fund limited partner investors, such as pension funds, are increasingly looking to invest directly in companies, said Bob Brown, who will co-head the private funds group along with fellow BearTooth founders Andy Lund and Jim McGee.
"These groups started investing in funds and have come to mature into direct-deal investors," Brown said in an interview.
The private funds group will become part of Houlihan Lokey's corporate finance segment, which also includes M&A and capital markets advisory services. For the year ended March 31, the corporate finance segment produced $528.6 million in revenue. JMP Securities LLC analyst Devin Ryan said he expects the private funds group to generate relatively little initial revenue — in the $10 million to $15 million range. But Ryan noted that Houlihan Lokey is a leader when it comes to working with financial sponsors, and the BearTooth team should enhance those client relationships.
"The opportunity for both platforms is to leverage Houlihan Lokey's existing breadth and depth, which can improve this group's potential," Ryan said in a May 22 report.
Houlihan Lokey was an active acquirer before going public in 2015, and the company has remained that way since. Including BearTooth, Houlihan Lokey has completed at least four deals since 2017.
When expanding, investment banks typically consider lifting out teams, individual hires or acquisitions. Adelson said Houlihan Lokey is constantly exploring all options. "We're relatively agnostic to how that talent comes on board," he said.
Houlihan Lokey executives had previously expressed interest in adding a fund placement business, and Adelson noted that the company considered a number of expansion options. Adelson added that Houlihan Lokey moved forward with the BearTooth deal because of the target's successful track record, and because "it was really just the right culture fit."
BearTooth had been in talks with Houlihan Lokey for more than a year, Brown said. Initially, the discussions were not about a sale, but about Houlihan Lokey potentially replacing Riverstone Holdings LLC, which owned a minority stake in BearTooth, Brown said. When BearTooth was founded in 2014, Riverstone provided working capital for the company and became BearTooth's first client, Brown said.
Riverstone, an energy- and power-focused private investment firm, sold its BearTooth stake in the Houlihan Lokey deal. Riverstone's exit will remove any potential conflicts of interest that prevented the BearTooth team from working with clients that focused on similar areas as Riverstone.
"Not having them as an investor any longer will definitively open for us the ability to work with other energy-focused firms," Brown said.
But the synergies with Houlihan Lokey were the driver behind the deal. Brown said the benefits of combining with Houlihan Lokey have been apparent for some time, as the companies have been referring business to each other.
"They were lacking our capability, and we were lacking some of theirs," Brown said.
