This month’s discussion highlights the Alternative Growth investments managed by WestCap. Since 2021, WestCap has been overseeing assets for WealthCo investors. We posed several questions to Dave Makarchuk, Chief Investment Officer at WealthCo, followed by a detailed conversation with Liz Prince, West Coast Investor Relations & Fundraising Lead at WestCap.

Q: Dave, can you provide an overview of WealthCo’s Alternative Growth Fund?

A: Broadly speaking, our Alternative Growth Fund aims to achieve long-term returns exceeding those of public equity markets by primarily investing in illiquid alternative equity securities within private markets. The portfolio includes allocations to alternative investments such as Real Estate Equity, Infrastructure Equity, and Private Equity, along with more liquid assets offering similar exposures. It is well diversified across asset types, sectors, geographies, and asset classes. Some investments within the fund may be privately issued and relatively illiquid, enhancing the potential for long-term returns.

Q: How do the WestCap mandates fit within the Alternative Growth Fund?

A: Our investments in WestCap’s Strategic Operator Funds offer diversified exposure to Growth Private Equity in the United States. Private Equity is a significant component of our Alternative Growth strategy, with a target allocation of 40% of fund assets. We have been gradually increasing our Private Equity positions over the past few years, currently standing at 36%. While we anticipate that this asset class may contribute positively to the fund, we do not make promises or predictions about future returns.

Q: Why is WestCap a good fit for WealthCo and its investors?

A: WestCap has assembled a highly accomplished team of business leaders, led by Laurence Tosi. Their focus is on tech-enabled, asset-light private companies, which they aim to evolve and transform to potentially achieve above-average returns. Rather than merely acquiring companies, they engage actively in the management and development of their investments. This level of involvement is a significant factor for us.

Q: Liz, How would you describe the overall investment strategy for WestCap’s Strategic Operator Funds?

A: Our strategy focuses on identifying innovative companies with established customer bases, demonstrable revenues, and proven product-market fit. WestCap actively engages with its portfolio companies across various operational disciplines to support their growth, enhance efficiency, and position them to become leaders in their respective industries. At this stage of their development, these companies experience rapid growth and simultaneously require significant operational support to scale profitably.

Q: From your perspective, how does your strategy differ from those of other Growth Private Equity funds?

A: WestCap is the pioneering Operating Equity firm specializing in high-growth, asset-light technology companies with a distinct operational advantage, aimed at driving disciplined growth and long-term value for our investment partners. With a team of 60 investment and operating professionals, our operations group is nine times larger than the industry average, actively applying our functional expertise to each company.

The Scale of Our Operating Edge
Our operating team is multiple is multiple times larger than other firms’

We believe that WestCap’s Operating Equity™ model, which we define as the combination of a "buyout-style" investment approach paired with deep, multifaceted operational expertise, brings together the best qualities of both innovators and operators. Applied to companies in the post-venture, pre-later stage growth phase, we believe these skill sets help our businesses scale in a disciplined manner at a crucial inflection point in their maturation. We refer to this as “disciplined growth.”

Q: It sounds like the thematic focus is important. Tell us a bit more about each of the 5 themes.

A: Our five core investment themes are categorized as follows:

Financial Technology (“FinTech”) – Focused on addressing inefficiencies and fragmentation across financial services.
Real Estate Technology (“ReTech”) – Aiming to make travel and accommodations more accessible while digitizing the real estate ecosystem.
Experience Technology (“ExTech” or “Experience Economy”) – Platforms designed to create meaningful life experiences as consumer spending shifts from material assets.
Life Technology (“LifeTech”) – Focused on providing equitable access to essential healthcare.
Infrastructure Technology (“InfraTech”) – Core infrastructure technology intended to power asset-light, industry-leading marketplaces, including cybersecurity and payments, with a foundation in security and transparency.

Q: How many unique investments are within the funds? How do you decide which sectors to invest in?

We currently oversee 37 portfolio companies and generally anticipate having 20-25 companies per fund.

Our investment approach is structured around five core themes, as outlined earlier. Within this framework, we monitor a range of sub-themes. When opportunities within these sub-themes align with our underwriting criteria, we proceed with a thorough evaluation, always considering the optimal construction of the portfolio.

As depicted in the accompanying chart, the sub-sectors highlighted in white represent active themes where we are proactively sourcing opportunities. Notable current sub-themes include cybersecurity, wealthtech, and real estate capital markets.

Sub-sectors shaded in blue indicate target themes where we have yet to invest but identify significant potential. Our team introduces new target themes quarterly, including compliance/fraud in cyber, office of the COO, sales tech/ad tech, and private markets.

Lastly, the sub-themes shaded in gray signify mature investment areas, such as travel and gaming, where WestCap has already achieved substantial success (e.g., Skillz fully realized). We are not currently focusing on outbound work in these areas due to the strong inbound flow generated by WestCap’s established reputation. Additionally, the macroeconomic drivers in these mature themes have diminished post-COVID recovery.

Q: How do you identify new investment opportunities for the funds?

A: WestCap’s investment sourcing capabilities stem from a deep network and reputation among the WestCap Partners, the Investment Team, and the StratOps Team, established over decades as operators, enterprise builders, and investors. There is a focused process to identify entrepreneurs and companies operating in our target industries. The depth and breadth of the WestCap relationships, built over time, make the network differentiated, robust, and enduring. As a result, WestCap’s thematic research, paired with its deep network, drives a significant part of its investment opportunity flow. WestCap’s investment opportunities are predominantly exclusive and direct, with limited dependency on sourcing from banks, brokers, or other intermediaries.

Approximately 40% of our sourcing is driven by outbound efforts, guided by our thematic research. The remaining 60% of our investment opportunities come from WestCap’s extensive network, including earlier stage investors, direct company inbounds, investment banks, existing portfolio companies, and fellow board members.

Q: How do you decide when to sell a position within the fund? How long is a typical holding period?

A: At WestCap, we believe that our portfolio companies should have the potential to pursue an IPO or exit to a strategic buyer. We also exit our positions through secondary sales and M&A transactions. Additionally, given WestCap's Strategic Operators group has a capital markets focus and expertise, post-exit via an IPO, the team has the capabilities to manage share sales efficiently and effectively.

WestCap typically seeks holding periods of four to six years; however, in certain instances, such as funding acquisitions or add-ons, the holding period may extend to five to seven years.

Q: Over the last few years, inflation rose significantly, and interest rates followed. How has the higher interest rate environment impacted the Strategic Operator funds? And Private Equity overall?

A: As historical track records show, growth equity outperforms across all timelines, especially during sustained high-rate environments. Additionally, asset-light structures have proven to be more resilient to business cycles. As these businesses do not have heavy asset investments, their business models allow them to respond in a more timely and agile manner when emerging from a cycle.

Growth equity is the top-performing alternative asset class
Outperformance increasing during periods of normalized rates

Q: How would you describe the current environment for Growth Private Equity? What is your outlook?

A: We have seen a repricing in the private markets following the early 2020s, a period when new pools of capital distorted the late-stage growth equity segment, driving valuations to unsustainable levels. During this time, WestCap remained patient, slowing our deployment pace and waiting for valuations to rationalize. As these pools have exited the market, the opportunity set has expanded, and attractive investment opportunities have emerged.

We believe there is a significant investment opportunity around market cycles, as funds formed during a downturn tend to outperform. WestCap aims to capitalize on these dynamics to invest, build businesses, and generate attractive returns.

Q: Do you have any closing thoughts to share with WealthCo investors?

A: WestCap is in a unique position to continue capitalizing on the opportunity set, given our operational expertise and active engagement model, which is highly valued by early-stage investors, founders, and CEOs alike. We are actively pursuing attractive new opportunities and revisiting prior opportunities that we evaluated and passed on during the early 2020s, but at today’s more reasonable valuations, as well as discounted secondaries as an initial entry point through company-directed opportunities.

We believe the next few years will present a generational opportunity to invest, build businesses, and drive returns for our investment partners. WestCap’s unique Operating Equity model positions us in for success. WestCap was Built to Build.

2024 Q3 Market Insight WealthCo/WestCap