Private assets

How Flexstone adds value to its private markets investments

March 03, 2025 - 10 min

Nitin Gupta

Managing Partner – Flexstone Partners

Flexstone Partners has a 20-year track record of investing in private assets in the lower-middle market, sometimes called ‘Main Street’ companies. Nitin Gupta is based in New York City and is the Co-CIO of Flexstone, as well as one of its managing partners.

In this Q&A Nitin discusses why he prefers to invest in ‘boring’ companies that centre on three key themes. He also explains how Flexstone adds value to the companies it invests in and how they work with general partners and limited partners.

Q. You tend to invest in ‘mission-critical businesses’ in the lower middle market. Can you tell us how you work with these companies to add value and give us some examples?

Nitin Gupta: I’ve said in the past that we love to invest in everyday, boring companies. Now, why is that? Well, it’s because many of them have been around for a long time. They have a proven business model, and these are old economy businesses that you can touch and feel. We see them, we might know their products, we might have seen their ads, and we might have experienced the services that they provide.

These companies are not chasing some hot trend that’s great one day and gone the next.

These are not the cash-burning VC unicorns that are great to talk about at cocktail parties but have binary outcomes of either a home run or a strikeout. But what these companies that we invest in do have is great cash flows, and at the end of the day, cash is king.”

Many of them have been owned by families or individuals that have done an excellent job of growing the business to date, but they realise that they need help to professionalise the business and take it to the next level. They want to partner with someone who will do right by the business that these families have built and preserve their legacy, take care of the employees while allowing them the opportunity to take some money off the table and help grow the business.

While we’re very focused on building a well-diversified portfolio by end market we invest really around three key themes:

One is investing in businesses that are mission-critical and have a low-cost to the value they provide. This gives the company a lot of pricing power because it’s mission-critical, as well as the ability to sustain market downturns.
Secondly, we invest in companies that are in markets that are highly fragmented, which presents us the opportunity to consolidate the industry and execute on a buy-and-build strategy that allows for two things: one, it allows us to average down our going-in multiple, and two, it also allows us to realise synergies as we integrate and scale these businesses.
Thirdly, we like to invest in companies or industries where we can help digitisation trends grow further. This is not investing in some VC growth tech stuff, but it’s investing in companies that are using technology to improve the end customer’s business model or provide greater efficiencies to them.

How Flexstone adds value to the companies it invests in

Now, you also asked about different ways to add value. Here, the beauty of investing in the lower-middle market and in family-owned businesses is that there are many levers for us to improve performance. It’s not just about buying it at X multiple and selling it at a higher multiple down the road; it’s really about growing EBITDA and growing businesses. That’s essentially why the families trusted us with their business in the first place: to grow it.

So, there are various ways to do it. On the top line, you work with companies to better understand both the product they’re selling and the service they’re providing to their customers. Many small companies haven’t truly understood their customers or their market share with customers or why customers buy their products. So the pricing, as a result, is not optimised, and they may not have invested in new product development. You try to work on improving pricing, capturing greater wallet share, and better understanding the customer and putting KPIs around it.

On the cost side, you look to improve margins by improving procurement, consolidating, and optimising the supply chain to get better input prices.”

Many of these small businesses have grown nicely, but they’ve got very dispersed suppliers. If you consolidate them, you can get scale synergies — scale pricing. In terms of operations in manufacturing companies, this would entail walking around the shop floor and seeing where you can possibly improve operations. You know, bringing in a professional COO, for instance, who has seen other companies can bring best practices to this business. If you’re looking at a services business, you can look and see what things can be possibly outsourced versus doing them in-house, all in the spirit of improving margins. There are also other vendor cost savings, such as freight cost savings by consolidating freight with certain vendors and insurance savings.

Then, on the management infrastructure side, you bring in more experienced leadership into these businesses, and many times there are just gaps in the team. For instance, many of the companies we invest in don’t have a sales team, or if they do, it’s only one or two people. So now that’s a big opportunity to improve and build a sales team and really drive the top line. Another big investment on the infrastructure side that we do — again, I say we, but it’s really through our partners who lead these companies — we’re co-investing with them. It’s really installing an ERP (Enterprise Resource Planning) system. Many companies don’t understand their customer because they don’t have enough data to understand them. By installing an ERP system, you can now capture data and better KPIs around the business performance of these companies and just be able to make better-informed decisions and, as a result, better manage the working capital and the cash in the business.

And then outside of the company itself there’s also consolidation - pursuing add-on acquisitions allows us to scale the business. So it’s both organic growth as well as inorganic or add-on acquisitions that we’re really focused on. All of these initiatives lead to smaller and middle-market businesses deriving, during our hold period, most of their exit value from EBITDA growth versus financial engineering. If you’re able to drive EBITDA growth, it’s not surprising that you will likely sell these companies for a higher multiple than what you purchased them at. But of course, that’s not something we underwrite at the time of our investment.

Q. How do you work with general partners (GPs) and limited partners (LPs) and what is the difference between the way you work with them?

Nitin Gupta: Our investors are our limited partners, and that’s the lifeblood of our business. They’ve trusted us with their capital and put us in business, so they are very near and dear to us. They’re our partners in doing this and that’s why we have the ability to invest.

Now, general partners are the folks that are leading private equity funds.

So, we wear both hats. We’re both GPs, because we’re general partners to our co-investment and our secondary funds, but we’re also LPs in other private equity funds because we’re investing in them as well.

75% of our business is working with GPs or working with our LPs to build customised portfolios or SMAs. As part of this, we’re invested in over 400 funds globally.”

These are evergreen mandates that we have, so we’re investing in private equity once every year, and we then solicit co-investment opportunities from these funds that we’re invested in, as well as through our network of relationships in private equity.

How we choose the best funds to partner with

For every fund that we partner with, we create a sweet spot matrix for them. What that is, is it’s a matrix that says where that fund has generated its best returns across geography. For instance, in Europe, a fund might be great in one country but not in another; across industry.

So a fund might be great in industrials but less so in consumer deals or healthcare deals. So we look at this by geography, by industry sector, by the amount of leverage they put on their best deals, the valuation of their best deals, and by what value-add because some companies might require more hand-holding in terms of operational improvement, while a fund might be better at doing top-line improvements but not operational improvements. We rate each of these funds to see where their best deals have come from and also by partners— which partners within these private equity funds have generated the best returns.

Once we create the sweet spot for that fund that we want to partner with on the co-investment opportunity, we then overlay that co-investment opportunity on top to make sure it fits within the sweet spot of that GP. This is extremely critical because we realise we don’t control these companies, we’re a co-investor. As a result:

it’s really important that we get the partner right on these co-investment opportunities. That’s why we make sure that the co-investment fits within the sweet spot of that GP. If it doesn’t, we pass on it, and we’ve had such a strong network, deep deal pipeline and a rigorous diligence process, that we select less than 3% of the deals we see.”

There’s such a strong pipeline that we’re never forced to do a deal if the deal doesn’t fit this - that’s the first aspect of it.
We then look at portfolio diversification in terms of our investment process, and that really goes towards making sure that we’re creating a well-diversified portfolio in terms of industry, GP, vintage, end markets, and macro risk factors. That’s the risk mitigation and risk management side.
The third aspect, which is very important, is when we really dig into the company, we’re reviewing all the materials that are provided by the company and prepared by the lead investor or lead GP investing in that deal. We review all the consulting work done by consultants, the quality of earnings done by accountants, the legal work, the opinions, and because we’re invested in over 400 private equity funds globally, we typically know other private equity funds that have invested in that sector that we’re looking at. We often call on these firms and call the CEOs and operating partners of the PE funds to better understand that sector and what could be potential risks of investing in it.

All of this comes down to Flexstone being a very active co-investor. It’s not a passive co-investment strategy; it’s a very active one where we consolidate all of that learning through the different steps into creating our own Flexstone returns base case and a downside case, which is different from the lead sponsor base case assumptions. This structured process that we have, that we’ve stuck to fund after fund, is really important, and that’s really what’s contributed to our strong returns and low loss ratio.

Q. Where are you seeing the most growth and interest for Flexstone, and do you expect this to continue?

Nitin Gupta: Because private equity is such a high alpha-driven asset class it is drawing a lot of interest across all types of investors. We’ve had institutional investors partner with us and we’re also seeing interest from a lot of family offices, particularly given our strategy of investing in small middle-market businesses, many of which are family-owned. Families and entrepreneurs can relate to that.

We’re starting to see a lot of interest from the RIA channel as well. There’s growing interest within private equity, and investors are understanding now that not all private equity is the same. They can have the allocation to the larger end, which are the typical branded larger global funds, but they’re also realising that to drive alpha, you really should also allocate to the lower middle market as well.

This material has been provided for information purposes only to investment service providers or other Professional Clients, Qualified or Institutional Investors and, when required by local regulation, only at their written request. This material must not be used with Retail Investors.

In the E.U.: Provided by Natixis Investment Managers International or one of its BRANCH offices listed below. Natixis Investment Managers International is a portfolio management company authorized by the Autorité des Marchés Financiers (French Financial Markets Authority - AMF) under no. GP 90-009, and a simplified joint-stock company (société par actions simplifiée - SAS) registered in the Paris Trade and Companies Register under no. 329 450 738, Registered office: 43 avenue Pierre Mendès France, 75013 Paris. Germany: Natixis Investment Managers International, Zweigniederlassung Deutschland (Registration number: HRB 129507). Registered office: Senckenberganlage 21, 60325 Frankfurt am Main. Italy: Natixis Investment Managers International Succursale Italiana (Registration number: MI-2637562). Registered office: Via Adalberto Catena, 4, 20121 Milan, Italy. Netherlands: Natixis Investment Managers International, Dutch BRANCH (Registration number: 000050438298), Registered office: Stadsplateau 7, 3521AZ Utrecht, the Netherlands. Spain: Natixis Investment Managers International S.A., Sucursal en España (Registration number: NIF W0232616C), Registered office: Serrano n°90, 6th Floor, 28006 Madrid, Spain. Luxembourg: Natixis Investment Managers International, Luxembourg BRANCH (Registration number: B283713), Registered office: 2, rue Jean Monnet, L-2180 Luxembourg, Grand Duchy of Luxembourg. Belgium: Natixis Investment Managers International, Belgian BRANCH (Registration number: 1006.931.462), Gare Maritime, Rue Picard 7, Bte 100, 1000 Bruxelles, Belgium.

In Switzerland: Provided for information purposes only by Natixis Investment Managers, Switzerland Sàrl (Registration number: CHE-114.271.882), Rue du Vieux Collège 10, 1204 Geneva, Switzerland or its representative office in Zurich, Schweizergasse 6, 8001 Zürich.

In the British Isles: Provided by Natixis Investment Managers UK Limited which is authorised and regulated by the UK Financial Conduct Authority (FCA firm reference no. 190258) - registered office: Natixis Investment Managers UK Limited, Level 4, Cannon Bridge House, 25 Dowgate Hill, London, EC4R 2YA. When permitted, the distribution of this material is intended to be made to persons as described as follows: in the United Kingdom: this material is intended to be communicated to and/or directed at investment professionals and professional investors only; in Ireland: this material is intended to be communicated to and/or directed at professional investors only; in Guernsey: this material is intended to be communicated to and/or directed at only financial services providers which hold a license from the Guernsey Financial Services Commission; in Jersey: this material is intended to be communicated to and/or directed at professional investors only; in the Isle of Man: this material is intended to be communicated to and/or directed at only financial services providers which hold a license from the Isle of Man Financial Services Authority or insurers authorised under section 8 of the Insurance Act 2008.

In the DIFC: Provided in and from the DIFC financial district by Natixis Investment Managers Middle East (DIFC BRANCH) which is regulated by the DFSA. Related financial products or services are only available to persons who have sufficient financial experience and understanding to participate in financial markets within the DIFC, and qualify as Professional Clients or Market Counterparties as defined by the DFSA. No other Person should act upon this material. Registered office: Unit L10-02, Level 10 ,ICD Brookfield Place, DIFC, PO Box 506752, Dubai, United Arab Emirates

In Japan: Provided by Natixis Investment Managers Japan Co., Ltd. Registration No.: Director-General of the Kanto Local Financial Bureau (kinsho) No.425. Content of Business: The Company conducts investment management business, investment advisory and agency business and Type II Financial Instruments Business as a Financial Instruments Business Operator.

In Taiwan: Provided by Natixis Investment Managers Securities Investment Consulting (Taipei) Co., Ltd., a Securities Investment Consulting Enterprise regulated by the Financial Supervisory Commission of the R.O.C. Registered address: 34F., No. 68, Sec. 5, Zhongxiao East Road, Xinyi Dist., Taipei City 11065, Taiwan (R.O.C.), license number 2020 FSC SICE No. 025, Tel. +886 2 8789 2788.

In Singapore: Provided by Natixis Investment Managers Singapore Limited (NIM Singapore) having office at 5 Shenton Way, #22-05/06, UIC Building, Singapore 068808 (Company Registration No. 199801044D) to distributors and qualified investors for information purpose only. NIM Singapore is regulated by the Monetary Authority of Singapore under a Capital Markets Services Licence to conduct fund management activities and is an exempt financial adviser. Mirova Division (Business Name Registration No.: 53431077W) and Ostrum Division (Business Name Registration No.: 53463468X) are part of NIM Singapore and are not separate legal entities. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Provided by Natixis Investment Managers Hong Kong Limited to professional investors for information purpose only.

In Australia: Provided by Natixis Investment Managers Australia Pty Limited (ABN 60 088 786 289) (AFSL No. 246830) and is intended for the general information of financial advisers and wholesale clients only.

In New Zealand: This document is intended for the general information of New Zealand wholesale investors only and does not constitute financial advice. This is not a regulated offer for the purposes of the Financial Markets Conduct Act 2013 (FMCA) and is only available to New Zealand investors who have certified that they meet the requirements in the FMCA for wholesale investors. Natixis Investment Managers Australia Pty Limited is not a registered financial service provider in New Zealand.

In Korea: Provided by Natixis Investment Managers Korea Limited (Registered with Financial Services Commission for General Private Collective Investment Business) to distributors and qualified investors for information purpose only.

In Colombia: Provided by Natixis Investment Managers International Oficina de Representación (Colombia) to professional clients for informational purposes only as permitted under Decree 2555 of 2010. Any products, services or investments referred to herein are rendered exclusively outside of Colombia. This material does not constitute a public offering in Colombia and is addressed to less than 100 specifically identified investors.

In Latin America: Provided by Natixis Investment Managers International.

In Chile: Esta oferta privada se inicia el día de la fecha de la presente comunicación. La presente oferta se acoge a la Norma de Carácter General N° 336 de la Superintendencia de Valores y Seguros de Chile. La presente oferta versa sobre valores no inscritos en el Registro de Valores o en el Registro de Valores Extranjeros que lleva la Superintendencia de Valores y Seguros, por lo que los valores sobre los cuales ésta versa, no están sujetos a su fiscalización. Que por tratarse de valores no inscritos, no existe la obligación por parte del emisor de entregar en Chile información pública respecto de estos valores. Estos valores no podrán ser objeto de oferta pública mientras no sean inscritos en el Registro de Valores correspondiente.

In Mexico: Provided by Natixis IM Mexico, S. de R.L. de C.V., which is not a regulated financial entity, securities intermediary, or an investment manager in terms of the Mexican Securities Market Law (Ley del Mercado de Valores) and is not registered with the Comisión Nacional Bancaria y de Valores (CNBV) or any other Mexican authority. Any products, services or investments referred to herein that require authorization or license are rendered exclusively outside of Mexico. While shares of certain ETFs may be listed in the Sistema Internacional de Cotizaciones (SIC), such listing does not represent a public offering of securities in Mexico, and therefore the accuracy of this information has not been confirmed by the CNBV. Natixis Investment Managers is an entity organized under the laws of France and is not authorized by or registered with the CNBV or any other Mexican authority. Any reference contained herein to “Investment Managers” is made to Natixis Investment Managers and/or any of its investment management subsidiaries, which are also not authorized by or registered with the CNBV or any other Mexican authority.

In Uruguay: Provided by Natixis IM Uruguay S.A. Office: San Lucar 1491, Montevideo, Uruguay, CP 11500. The sale or offer of any units of a fund qualifies as a private placement pursuant to section 2 of Uruguayan law 18,627.

In Brazil: Provided to a specific identified investment professional for information purposes only by Natixis Investment Managers International. This communication cannot be distributed other than to the identified addressee. Further, this communication should not be construed as a public offer of any securities or any related financial instruments. Natixis Investment Managers International is a portfolio management company authorized by the Autorité des Marchés Financiers (French Financial Markets Authority - AMF) under no. GP 90-009, and a simplified joint-stock company (société par actions simplifiée - SAS) registered in the Paris Trade and Companies Register under no. 329 450 738. Registered office: 43 avenue Pierre Mendès France, 75013 Paris.

The above referenced entities are business development units of Natixis Investment Managers, the holding company of a diverse line-up of specialised investment management and distribution entities worldwide. The investment management subsidiaries of Natixis Investment Managers conduct any regulated activities only in and from the jurisdictions in which they are licensed or authorized. Their services and the products they manage are not available to all investors in all jurisdictions.

Although Natixis Investment Managers believes the information provided in this material to be reliable, including that from third party sources, it does not guarantee the accuracy, adequacy, or completeness of such information.

The provision of this material and/or reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of any regulated financial activity. Investors should consider the investment objectives, risks and expenses of any investment carefully before investing. The analyses, opinions, and certain of the investment themes and processes referenced herein represent the views of the individual(s) as of the date indicated. These, as well as the portfolio holdings and characteristics shown, are subject to change and cannot be construed as having any contractual value. There can be no assurance that developments will transpire as may be forecasted in this material. The analyses and opinions expressed by external third parties are independent and does not necessarily reflect those of Natixis Investment Managers. Any past performance information presented is not indicative of future performance.

This material may not be distributed, published, or reproduced, in whole or in part.

All amounts shown are expressed in USD unless otherwise indicated.

DR-69358