Institutional Investor Profile: Roland Reynolds, Managing Partner, Little Hawk Capital Management

Established in 2006, US fund of funds manager Little Hawk Capital Management focuses on investments in the early stage venture capital and growth equity space. The firm's investor base comprises family offices, foundations, endowments and high-net-worth individuals, predominantly from the US, that lack the capital resources or industry relationships to invest directly into the asset class.

Little Hawk closed its first fund of funds on just over $30m. To date, the fund has built a portfolio of ten managers. It is about 70 per cent committed now. Little Hawk plans to make four more fund commitments from its maiden fund over the next 12 months.

Roland Reynolds previously was a principal at IT and communications-focused venture capital firm Columbia Capital. Reynolds also spent four years in investment banking at JPMorgan in New York.

What type of investments do you look for?

'Principally, we focus on investments in smaller funds. On the venture side, we look for funds up to a size of $250m and in the growth equity space, a typical fund would be up to $500m in size. We aim to have 60 per cent venture and 40 per cent growth equity funds in our portfolio. There continue to be many excellent opportunities at the early stage. Historically, it has been the smaller end of the private equity market where the outsized returns have been made in the US.

The funds in our portfolio are all US-based and we are not looking at managers outside of the US. However, a number of our US managers invest overseas, particularly those operating in the growth equity space. That is why with our current portfolio, a little over ten per cent of our dollars at work are overseas, in five different countries across the world, and I would expect that to hold true over the life of the fund. In the longer-term future, we may include some overseas funds in our portfolio.

Within the US, our focus is on the Boston area and Silicon Valley, especially for venture. Growth equity is a little bit more outside of those two areas.

We look to diversify our portfolio across the IT, life sciences and communications sectors, with life sciences/healthcare at between 15 and 20 per cent, between 30 and 40 per cent in communications and between 40 and 50 per cent in IT.

We also diversify by stage, from very early stage to growth; and across vintage years, with a three-year investment period.

Our portfolio comprises Battery Ventures, JMI Equity, M/C Venture Partners, Novak Biddle, .406 Ventures, Foundry Group, Frontier Capital, Kearny Ventures, Fairhaven Capital and Rembrandt Ventures.'

Do you invest directly?

'No, our focus is solely on limited partnership investments, and we do not do any co-investments or other direct investments. It is our fundamental belief that direct and co-investments require a very different skill set.'

How much do you invest per fund on average?

'It is $2m today. This will increase as our firm develops.'

What are the most interesting industry sectors or segments going forward?

'Cleantech appears to be the fastest growing segment of the venture industry. However, it is still less than ten per cent of the overall industry. I am sure that a lot of money will be made in that segment. Our strategy is to wait and watch and get some early exposure to this segment through funds in our portfolio that have the mandate to do a little bit outside of their core IT or communications focus. That way, we already have some very limited exposure to cleantech venture. We would not look to make a direct investment in a cleantech fund for the time being.'

How many funds do you track?

'In the US, there are several hundred funds that fit our investment criteria and emphasis on smaller fund sizes, and we track them all.'

How do you find out about good investment opportunities?

'As for everyone, it is a relationship-driven game. We get referrals from the funds in our portfolio, from the members of our advisory board, from other GPs that we have a good relationship with and from other larger LPs such as university endowments.

How do you conduct your due diligence?

'Little Hawk's due diligence is about the three 'T's - thorough, timely, transparent.

Currently, there are two investment professionals in our team, and we spend a lot of time cultivating relationships, the first step in our due diligence. Our getting to know them is just as important as their getting to know us. The worst time for us to meet new managers for the first time is when they are already in the market.

Our due diligence process is probably not much different from anyone else's. We have put together and copyrighted our own GP Scorecard® which ensures consistency across segments and funds as we evaluate managers and it also ensures that we are transparent both with the managers themselves in terms of what we look for and how the process works but also with our limited partners in terms of how we think about evaluating firms.

We tend to do a lot of our due diligence sessions on site with the firm. We typically meet a team multiple times and use our own relationships for reference checks.

Depending on how long we have been tracking managers and the depth of our relationship with them, we can probably do our due diligence in a handful of weeks or we can do it over a couple of months.'

What are the qualities you want to see in a good GP?

'First and foremost we look for three characteristics of a team and we do not necessarily expect each senior member of the team to have all three characteristics, but we want to see all three resident inside of a partnership. The three characteristics are: a mix of deep operating and entrepreneurial experience; deep technical training for technology investors and deep scientific backgrounds for life science investors; and some very strong venture capital experience. We want to see excellent individual track records.

We believe that the best entrepreneurs have multiple options for taking money. We then ask ourselves what it is about the fund that we are looking to invest in that gives that firm an edge so that the best entrepreneurs are likely to take money from this group. The best entrepreneurs want to take money from somebody who has walked in his or her shoes in the past and look for guidance and perspective that is value beyond the capital provided.

We look for stable partnerships, a group that has appropriately shared economics among the senior leadership team, and a compelling strategy that is the right fit with the background and the experiences of the people on board.'

Which trends in the industry work in your firm's favour?

'There is this notion in the industry that backing top-tier firms, high in Roman numerals, de-risks an investment. I think that is incredibly short-sighted and does not really show an understanding of the dynamics of this industry. Many of the partnerships that have been around for 20+ years are now facing founder transition and succession issues. We have looked at a number of established firms that, in our opinion, have partnership stability issues.'

What is your appetite for first-time funds raised by first-time teams?

'We have made commitments to first-time funds. I certainly believe that the industry is changing and that there are some very compelling opportunities with next-generation managers who are managing appropriately small fund sizes. We focus on the teams and their skill sets and on partnership stability. The team members should have worked together before in some shape or form, for example in a board capacity or a co-investment capacity. Our preference, though, are spin-out situations and teams raising capital for a second fund.'

Would you consider secondaries?

'Given our fund size and my perception of the pricing in the marketplace today, secondaries are not core to our strategy, but we would look at opportunities. We have not done a secondary transaction to date.'

How would you describe the current investment environment?

'Right now it is clearly a tough time to exit companies. However, this is not going to last forever and because of our industry's long-term nature, this continues to be a good time to put money to work in venture and growth equity.'

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