Kensington Capital Partners

Blurring the Lines between Alternative Assets: From Venture Capital and Private Equity to Infrastructure and Hedge Funds

Since 1996, Kensington Capital Partners has provided investors with access to high quality alternative investments, offering unique opportunities for investors to participate in private equity, hedge funds and infrastructure. Over the years, the firm has invested well over $600 million into alternative assets.

Tom Kennedy started his career as an engineer for a large coal mining company, and this career took him towards capital funding responsibilities for large mining projects. Once his career shifted toward project financing responsibilities, he entered the financial world, first in an operating capacity then as an investment banker. In 1996, he launched Kensington Capital with the objective of investing in private companies, developing these companies to increase their value, and positioning them for sale to larger corporations.

In 2005, Rick Nathan joined the firm, bringing additional venture capital expertise to Kensington’s broader private equity investment programs. As an active private investor, Kensington Capital participates in management of the invested companies, modernizing and growing the business to increase returns for all stakeholders. This approach of involvement in all levels of the investment provides thorough investment and asset control, and offers the investment innovation and stable returns that today’s investors hunger for.

With volatile and generally underperforming equity markets and low interest rates for the past several years, Kennedy and Nathan recognized the value in extending Kensington’s alternative asset platform into new categories. The additions of Eamonn McConnell and John H. Walker have led the firm into hedge funds and infrastructure, respectively. This broader Kensington alternative asset platform offers access to assets that are attractive for investors. Today, approximately 50 per cent of the capital under Kensington’s management comes from Canadian institutions and endowment funds, with the balance from high net worth individuals.

“Investors have been hurt by the volatility, and they are not earning through fixed income products, so the institutions and high net worth individuals are looking for an alternative product. We have solutions to some of their problems,” says McConnell.

The Kensington Advantage

“Stocks and bonds have been the history of investing forever,” says Nathan, “and the 2008 downturn was an ‘inflection point’, so to speak, towards alternative assets – venture capital, infrastructure, private companies, and hedge fund strategies – and bringing these investments to individual investors and smaller institutions. This is the Kensington platform.”

Another downside of limiting your investing to the Canadian public markets is the fact that these markets offer limited investment options outside resource and financial sectors, and the fact remains that a major part of the Canadian economy remains in private hands. This bottleneck makes for less diversified and therefore more volatile investment portfolios; however, Kensington’s focus on private business investment opens the door to invest in the whole of the Canadian economy.

“In our funds we have a great diversity, businesses such as consumer products, manufacturing, business services, and all the areas you really don’t get in the Canadian public markets. Yes, our clients should have a portion of their portfolio allocated in the public markets, but we offer the opportunity to extend and diversify investment portfolios into the private markets for lower volatility and more choice,” says Nathan.

Kensington’s portfolio of infrastructure projects, such as power utilities, have the ultimate upside of a stable return and a fairly low risk, with a realistic return in high single digit / low double digit annual return. But Kensington does not cater only to those who wish for a safe investment with reasonable return. The firm also offers private equity and hedge fund products. According to Kennedy, the rule of a thumb in private equity investments is to double or triple the value of each portfolio company over a 3 to 5 year holding period, which should result in returns across the fund that are consistently from five to ten percentage points (500 to 1,000 basis points) higher than the public equity markets.

Asset Management

According to Nathan, what separates the successful private investors from the pack is the ability to build strong business networks. The nearly 20 years in business, history of active investment and business leadership, and close affiliations with industry organizations like the CVCA (Canadian Venture Capital and Private Equity Association) and AIMA (Alternative Investment Management Association), all have built an invaluable network of business partnerships across the private capital sector, the hedge fund sector, and the power industry. Kensington offers the benefits of this strong network to investors, and is capable not just of finding solid investments, but also closing the deal.

Kensington Capital’s team does not simply offer investors a list of investment products and companies managed by financial professionals. The team at Kensington is comprised of finance and industry professionals with a wealth of management experience. Kensington transforms these businesses into modern operating modes by increasing efficiencies that translate into increased business valuations. Kensington Capital continues to foster this core capability within its team. The balance of financial merit and industry experience represents the secret ingredient that develops these companies to new heights for the greatest investor return.

“It’s easy to buy a business,” says Walker, “but it’s hard to buy a business well. It’s in the reputation. We are well known as trusted partners, and as good partners who can add value to a business. We have a whole group of professionals, and this group was designed to work actively with the management teams and help build up the business.”
The length of investment in private companies also varies based on each company’s position in the market and the opportunities within its marketplace. “For example, we have been invested in one company for nine years. This company has delivered an internal rate of return of 16 per cent, and has strong growth opportunities in front of it. On the other hand, we invested in a fast growing technology company some 16 months ago, and over that period this business has grown and was recently sold for four times the investment, so the rates of return vary, and that’s why we also encourage diverse portfolios through our funds,” says McConnell.

As Kensington continues to grow both the range and number of investments, the plan for the future is to increase the strengths of the team, including broadening its executive team to continue to attract investors that are frustrated and skeptical about the public markets.