When Alex Navab left KKR & Co. LP (KKR) two years ago after running the firm’s Americas private equity unit, his resume would have opened doors at the largest PE firms or a Fortune 500 company.

Instead, he gathered a group of executives to launch New York-based Navab Capital Partners LLC in April with plans to pursue large deals of $1 billion or more.

“I just wanted to start my own firm and really wanted to build my own business,” Navab told The Deal. “I feel fortunate to have built this team.”

NCP is example of a new crop of PE firms — spanning large deals and middle market — that have emerged with a double mandate of sorts: start up their own business while also seeking out other founder-owned companies to buy.

As private equity grows and matures as an asset class, more staffers are spinning off from larger shops, or just hanging out a shingle on their own. While data on the exact number of new private equity firms remains scarce, industry players have flagged this as a growing trend.

“I definitely have seen more emerging managers, particularly in Southern California,” said Thomas A. Waldman, partner, Stradling Yocca Carlson & Rauth in Santa Monica, Calif., who has worked with first-time funds such as Los Angeles-based Gallant Partners LLC. “As firms become much larger and grow their teams, sometimes you’re seeing people that have had some successful deals wanting to put their own capital to work and take on more risk. They’ll start their own firms and do their own deals.”

Sometimes the new firms launch with seed capital from their previous firm. Others that manage to find attractive acquisition targets raise capital from family offices or other capital providers to buy companies outside of a traditional fund.

While firms without a fund don’t earn the customary 2% management fee and 20% carried interest of a fund, they often collect fees from investors when they close a deal. They may also earn a consulting fee from the business, often as a percentage of Ebitda.

But the road isn’t easy.

“You start out as a smaller business and the first thing you and your team has to do is find attractive deals,” Waldman said. “You’re doing doing all the legwork yourself. You’re doing business development and deal execution and management of your portfolio companies all with a small team.”

Competition for deals also faces newer firms just as it does with larger players, as dozens or even hundreds of firms strike out on their own in an already crowded landscape. Sometimes more established firms such as Riverside Co. or Huron Capital LLC will use independent sponsors to source deals.

“The secret sauce is in building relationships and finding deals that are off market, which is always a challenge and requires a lot of time and effort,” Waldman said.

LPs continue to search for new managers in the hope of getting in early on a successful firm instead of battling for a berth in an already hot sponsor. Texas Retirement System hosts an annual meeting of emerging managers in Austin, as a step toward investing in them. The event routinely attracts well over 1,000 attendees, up from just a few hundred in recent years.

“There is an appetite in the LP community for these first funds,” Waldman said. “The rumor is LPs like the hustle and the entrepreneurial spirit involved in those first-time and smaller funds.”

But LPs remain picky about backing firms that lack members with a track record of working together on deals. Sometimes teams of two or more people may jettison from a firm with a solid history of deals under their belt. More likely this may not be the case.

“Not every first time fund gets raised,” said Alan Pardee, managing partner and co-founder of New York-based Mercury Capital Advisors LLC, a placement agent. “It’s more of an art than a science.”

HC Capital Taps Family Office Wealth

John Kelly, managing partner at Chicago-based HC Private Investments LLC, co-founded the firm in December 2016 after eight years as vice president at Purchase, N.Y.-based MVC Capital LLC. The firm operates more like a family office with backing from Chicago-based HC Tech LLC, an asset management firm founded by Joseph Niciforo.

With Kirkland & Ellis LLP as a key legal adviser, HC Private Investments focuses on consumer and industrial companies, such as food, food ingredients, pet products and pet food, as well as engineered component manufacturers and medical devices.

“We’re looking to be the first professional investor in a company by buying from families and owner-operators,” Kelly said. “We bring executive resources to bear. We may need to have an industry expert involved to run the company on a full-time basis or be a chairman of the board.”

The firm’s roster of operating executives is a point of differentiation, as well as its family office structure, which helps it connect with family-owned companies. HC Private Investments taps capital not from a fund, but from HC Tech as well as other family offices that contribute capital on a deal-by-deal basis.

Rancho Cordova, Calif.-based Springboard Manufacturing LLC, one of HC Private Investments’ portfolio companies, was an industrial plastics injection molder with three owners. When HC Private Investments bought it, one of them retired. HC Private Investments brought in a new management team with medical device experience.

“Our goal is to [increase] that business, which has a strong customer base, and expand into high-growth areas such medical devices,” Kelly said.

Matt Moran, managing partner and co-founder of HC Private Investments, said the firm plans to continue its pace of roughly one or two buyouts a year. It would do much more if it didn’t avoid overpaying for targets.

For now, it prefers the non-fund approach to deal-making because it gives the firm more flexibility on hold periods and capital deployment.

“We want to grow the organization,” Moran said. “As we do more deals, we’ll hire more personnel.”

Moran is not surprised to see the large number of newer firms out there given the prosperity from the long Bull Market and the amount of capital available for deals.

“People see the success of their funds and figure they can go out and do it on their own,” Moran said. “Another factor is the evolution of the private equity market. As firms mature, a number of leaders don’t have succession plans, so people may choose to go out on their own if there’s no clear path for them to get to the top.”

Working Without a Fund

Brian Urbanek, managing partner, Harbor Beach Capital LLC, launched his Fort Lauderdale, Fla.-based firm less than three years ago after working at Sun Capital Partners LLC for ten years as managing director.

Its sweet spot is investing equity checks of $5 million to $15 million in platform companies with Ebitda of $3 million to $5 million, about $30 million to $50 million in revenue and about 50 employees.

“At Sun Capital, we worked on large and small deals in different industries,” Urbanek said. “What I liked the most was working on smaller businesses. Starting Harbor Beach Capital was a conscious decision to leave a larger platform and work with smaller businesses where we could affect more change with management, and professionalize the organization and supplement people on the team.”

Last year, Harbor Beach Capital landed a deal to invest an undisclosed sum in AVFX LLC, a Boston-based event technology services business. It did so without a traditional private equity fund.

“AVFX was right down our fairway,” Urbanek said. “The founder wanted to retire and he had day-to-day management in place. We invested in the business, while management rolled 20% of the equity in the deal. We have worked with them to enhance their reporting, grow the team by hiring sales people and we’re actively pursuing add-ons to build a national platform.”

For now, the firm has been able to raise capital for deals. It’s currently drawing in backers for a second platform deal after AVFX, he said. On the other hand, having a fund allows dealmakers to move more quickly on targets with a pool of capital to deploy.

“The jury’s still out for us on whether it’s worth it to raise a fund,” Urbanek said. “If you can continue to do a couple deals a year and build the base, you could grow slowly. And you don’t have the same IRR clock ticking with your independent deals. The hardest part with a fund is that you have six years to deploy it in new platforms. You need a good pipeline and a good team.”

Looking ahead to when the economy slows down, it remains to be seen if younger firms and their portfolio companies may be impacted more than established GPs.

“The new firms won’t go away if they stick to their investment cycle of buying low and selling high,” Waldman, of Yocca Carlson, said. “Competition for deals will cool off. If that happens, and there’s not much lending, my view is that buyout activity will continue as a way for companies to find liquidity [via M&A].”

While launching a new firm remains risky, GPs tout a careful approach in how they manage their business and the companies they buy.

“We’re not going to try to predict when the recession will occur,” said Kelly of HC Private Investments. “Any company we look at will go through a recession under our ownership, given it’s been ten years into the current cycle. We’re very cautious on how our businesses perform. It’s something we’re concerned about as we evaluate investment opportunities.”