LP Profile: 57 Stars

Click here for a full data profile of 57 Stars on Unquote Data, including comprehensive fund investing preferences and history

"We are entirely focused on private equity," says 57 Stars managing director Steven Cowan. "However, we also include venture, credit and other strategies within our private equity portfolio." Cowan says private equity is at a very interesting stage, as the markets on which the firm focuses are much more sophisticated than they were five to seven years ago. 

"The GPs are more sophisticated and so are portfolio companies," Cowan says. "Among the changes is an increasing emergence of sectoral funds in a number of particularly exciting areas. This evolution permits us to be even more surgical in our focus on the fastest-growing and most compelling opportunities in the fastest growing economies in the world."

The Washington DC-headquartered boutique asset manager specialises in private equity partnerships in markets outside the US and western Europe. It has more than 50% of its capital committed in the Asia-Pacific region, and smaller increments in Poland, Russia, Turkey, Latin America and Africa. Founded in 2005, it now employs 25 people and has offices in Germany, Washington, San Diego and Singapore.

The opportunity we see in co-investments is very robust and a significant percentage of the pipeline lies in deals in our focus areas with regard to our impact strategy" – Steven Cowan, 57 Stars

The firm primarily invests from a series of global opportunity funds, and 57 Stars Global Opportunity Fund 4 is now almost fully invested. "We commit to multiple strategies out of Global Opportunity Fund 4, including co-investment, secondaries, venture, and various sector and diversified funds," says Cowan.

As a private equity fund-of-funds, 57 Stars Global Opportunity Fund 4 invests in top-tier private equity funds pursuing control, expansion and growth capital investments. It has invested in 17 primary funds and 14 transactions, secondaries and co-investments. The vehicle has aggregated slightly less than $1bn and has 20% focused on co-investments.

57 Stars has an opportunistic approach towards investments, without having specific targets or buckets to fill with capital. "Rather, we have limits on certain approaches and geographies, to ensure we don't end up with concentrations of risk we are uncomfortable with," says Cowan.

Portfolio make-up and geographic approach
The firm's portfolio falls into two broad categories: diversified mid-market and thesis-driven. The diversified mid-market category comprises around 40% of the portfolio, while the thesis-driven category comprises around 60%.

The thesis-driven approach includes the firm's co-investments, secondaries and mature primaries strategy, structured transactions and its sector-driven strategy. "On the thesis driven funds, what we are trying to do is limit the blind pool risk that we have as limited partners," says Cowan. "The way we are able to do that is by investing in things in which we have a higher level of conviction, compared to broadly diversified blind pool funds." The firm develops this higher conviction through underwriting specific assets, by developing a structure itself or by investing in specific sectors.

Structured transactions, whereby 57 Stars tailors its own vehicles with a GP, also form part of this thesis-driven approach.  "Sometimes we use separate accounts that we design and underwrite ourselves, and sometimes they are small vehicles where we will invest in parallel with a GP's main fund," says Cowan.

The firm has 100 LP partnerships, slightly fewer than 10% of which are from Europe. On the GP side, there are approximately 70 relationships, of which 15-20% are in Europe. The remainder of its portfolio is split between Asia (45%), Latin America (20%), the Middle East and Africa (5-10%) and Australia (5%).

57 Stars has historically committed capital in both central and south-east Europe, including Romania and Bulgaria. However, within Europe, the firm's current focus is primarily Poland. Cowan says the LP has been investing in the country for a long time and that the opportunities have significantly evolved over the years. He says there are many more similarities with other parts of the EU than there were 10-15 years ago, especially when it comes to mid-market opportunities.

Co-investing with impact
In terms of average ticket sizes, 57 Stars invests $15-40m in funds and $5-20m on the co-investment side. "The opportunity we see in co-investments is very robust and a significant percentage of the pipeline lies in deals in our focus areas with regard to our impact strategy," Cowan says. He explains that impact investing has the potential to yield very attractive returns and add meaningful social impact at the same time.

57 Stars' approach to impact investing is primarily through themes such as healthcare, financial inclusion, clean energy, resource efficiency, education and affordable housing. "We have a very robust co-investment pipeline and estimate 60-70% of the transactions we have completed recently are potentially impact deals," says Cowan. "Still, the majority of our portfolio, including co-investments, are purely focused on financial return."

Co-investments represent around 20-30% of the firm's commitments. "The co-investment environment today is more robust than we have ever seen in the mid-market in emerging markets," Cowan says. "This evolution is a result of a confluence of factors both within the asset class broadly and as a result of the macro environment." He says 57 Stars is a relatively large investor in relatively small funds, which coupled with its focus on co-investment opportunities "has the ability to meaningfully reduce the J-curve, duration, and blind pool risk while materially enhancing returns".

The co-investment environment today is more robust than we have ever seen in the mid-market in emerging markets" – Steven Cowan, 57 Stars

Cowan has witnessed both significant co-investment dealflow and a pronounced uptick in interest among LPs. "As a result of that interest, a number of GPs are working harder to make those transactions available to their LPs," he says. "While the GPs are making transactions available to the LPs, relatively few are taking advantage of the opportunities available to them. This is one of the reasons the environment is particularly exciting right now, because we are both in a position to have access to those transactions and have the resources to execute on them."

Cowan notes that there is a larger number of investors seeking to do direct transactions, which tend to be focused in Europe and the US. "However, in the mid-market in emerging markets, we don't anticipate significant expansion of execution on direct deals by limited partners. This is because of the labour-intensive nature of creating value in the mid-market and the generally small teams that limited partners typically develop for their direct activities."

57 Stars commits to first-time funds, which typically amount to around 10-20% of its portfolio. However, Cowan highlights that when it comes to such funds, the firm only works with GPs where the team has a demonstrable track record of success investing in the strategy on which they focus.

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