Viewing opportunities through Cloverlay's lens. A featured Q&A with Chris Rodzewicz, Partner at Cloverlay.
Q: Tell us a bit about Cloverlay and your role there.
A: We founded Cloverlay in 2015 to focus exclusively on Adjacent Private Markets – a collection of esoteric segments where we believe attractive returns exist beyond the crowded, competitive segments of traditional private equity markets. The niches where we invest are frequently opaque or misunderstood, less-trafficked segments with less correlated return streams. Our investment approach has a value bias: we target the fundamental value of tangible or intangible assets while we look for positive skew, or an asymmetrical upside to the total return. Our clients are typically institutions or sophisticated family offices who want a staff/resource extension and believe a portfolio approach to building a “diversifying private assets” program makes more sense than a laser shot into a single, nichey or esoteric investment. My role is focused on business development and capital formation.
Q: Did you invest in any new relationships in the last year, or was this restricted because of the pandemic? How do you anticipate this playing out for the remainder of 2021?
A: Yes, we were quite active in 2020: we made nine new investments with our team working remotely. Thanks to our ongoing market mapping work and proactive outreach, we had already spent material time – in some cases, years, with all nine partners pre-pandemic, and our personal networks were critical to completing diligence in a COVID environment. Technology was a big help, but I think our team navigated the pandemic efficiently and found comfort, stability, and confidence by leaning on our investment process and firm culture. The return to the office and in-person meetings will be a positive development, but our investigative thesis-building and diligence work will remain constant and predictable.
Q: You must be inundated with opportunities coming from various sources. How do you cut through the noise, and what gets your attention?
A: Given the segments we inhabit, it is hard work to sift through both the number and variety of the opportunities on our plate. Our team systematically maintains a regular dialogue with experts and potential partners in spaces we care about – even when there isn’t something immediately actionable. Those conversations, especially when we aren’t actively working on a deal, cultivate a relationship and the identification of angles that could become compelling in certain eras down the road. This is basically the opposite of waiting to be shown a deal. We also see compelling ideas in niches that have been flipped upside down or in cyclical industries that have been boring for the last decade (from the perspective of one looking to infuse capital). We always pay attention to fundless sponsors – industry specialists organizing capital to attack an opportunity. But sometimes, the best approach is to back a small, niche-focused fund manager. Given the wide variety of industry expertise and investment formats to pursue these opportunities, it’s a world where investors can really benefit from having Cloverlay play a role – to source, diligence, and execute on their behalf with proper context and understanding of the broader opportunity set.
Q: What opportunities and threats do you see for private market investors in 2021?
A: More traditional, mainstream strategies continue to see a surge of capital through the pandemic. While competition for deals in the traditional world continues to increase, there are assets that fall through the cracks – typically because they are misunderstood or esoteric assets, do not have public comps, and may not be valued on EBITDA, etc. Also, Cloverlay participates at the smaller end of the market for a reason: typically, size negatively impacts return due to more sophisticated eyes on larger deals. In our inefficient segments, the goal is getting our capital in the hands of experts properly equipped to exploit the current era. It could be a joint venture, building a new platform, or simply co-investing with an industry insider, but we always apply our value lens to secure assets that are the critical building blocks for larger companies or industries. We think most investors care about downside protection and differentiated return streams, so we are excited about the current market environment.
Q: Anything else you think prospective managers should know?
A: Our focus on esoteric assets and strategies is a function of an investment discipline balancing risk and reward, not simply to provide differentiated or token exposures. Frequently, too much attention is paid to the upside case in private markets. As equity investors focused on an asset’s intrinsic value rather than EBITDA or growth, the containment of the downside is key to Cloverlay’s case around positive skew. Our program is designed to identify capital voids across asset-specific niches and consistently hit doubles and triples. When we take a punch, we expect to recover the majority or all of our original cost – it’s an approach that resonates across our team and why institutional investors partner with us on their “diversified private assets” program. Each of our portfolios will have about 15 discrete positions, and when it works – our investors can have a reasonable expectation to make 2-3x with downside protection courtesy of the assets themselves and portfolio architecture.