Gibbons: Tell me about the name Peloton.
Faraone: Stephen and Mike and I are all cyclists. The Peloton in cycling is the group of riders who are working together, drafting off each other, and getting somewhere more efficiently.
Gibbons: Talk about your long-term capital approach and your relatively distinctive fund structure.
Faraone: Mike and I both found at OTPP that we often saw unique deal flow or proprietary deal flow because of the long-term capital profile that OTPP had: founders, families and CEOs that were looking for that eight- to 10-year partner, not the three- to five- or six-year partner. We thought that was a real, tangible advantage. At Peloton, we have a 15-year fund life, which is five years longer than a typical private equity fund. It doesn’t mean we have to hold things for a very long period of time, but we have flexibility to say, “We’re in year five or year four, and we want to go for another three to four to five years,” which is a nice optionality to have. We often saw businesses being sold by one private equity firm and acquired by another, and the two groups would both do well. You start to think about how, if the original group had continued to own that business, what would be the returns? Then, I’d say that there are a lot of great firms in Canada, but a lot of them have moved up in deal size. They’ve gotten bigger. And, in the lower middle-market, the competitive dynamic relative to the U.S. especially is pretty good.
Gibbons: Your broader strategy involves healthcare, finan- cial services and consumer products. But Peloton’s first three transactions were in healthcare. Why is that?
Faraone: We’ve spent the most amount of time in financial services and healthcare services. When we look at our pipeline, it’s actually been pretty equally weighted. So, we haven’t intentionally been looking to do healthcare services. What we like about all three of our businesses is that, first of all, healthcare services are relatively essential. Even in times of COVID, it’s a good place to be, because these services are needed and they can’t be deferred. So, there are great macro trends, and these are fragmented industries where we could pursue a buy-and-build strategy, which Mike and I did a lot of at OTPP. Then, the last point is that, for all three of them, we’ve partnered with founders. We’re the first outside capital that’s come in.
Gibbons: What do you think LPs found attractive about the Peloton story?
Faraone: I think team, track record, strategy, and then, pipeline. When we were out fundraising, the early lesson was that you need to have all four of those things before someone will invest or commit to your fund. One of the things that was important was having Stephen Smith’s involvement. He helped to get us started and really helped bring credibility as we went out to fundraise. This allowed us to recruit a team, allowed us to attract other investors, and allowed us to do deals as well.
Gibbons: So, what have you seen change over the last 12 months? Has COVID changed your approach to investing?
Faraone: We’ve probably shifted a little bit more toward essential businesses that have a strong essential component to them. We now have the ability to diligence and to interact on multiple deals at the same time with virtual formats. You can actually do more diligence meetings, more manager meetings. You don’t have to fly, spend the night in a hotel, meet that next day, and then fly back. You can literally spend three or four hours with a management team, take a break or not, and then get on with the next one.
Gibbons: What were the challenges and opportunities during COVID for your portfolio companies?
Faraone: It was very challenging. I remember the Sunday night where we decided to close all the dental clinics across Canada. We could still do emergency [procedures], but it was a bit of an uncer- tain time. We didn’t know how everything was going to play out. The veterinary business stayed open and pivoted, as pet owners know, to curbside service right away. That actually was fine. Then, the third business is a fertility platform. We actually didn’t own it when COVID first hit. We invested over the summer. They did have to shut down as well in the initial days. So, trying times for sure.
Gibbons: I’m curious about the community aspect of Peloton. You signed up for the Principles for Responsible Investing [PRI], which is becoming a much more important factor in the private equity community.
Faraone: OTPP was one of the early movers on ESG as an import- ant topic. Early on, we were incorporating ESG assessments into our investment memos. When Mike and I left to form Peloton, that mindset continued. We think PRI aligns with better long-term investment outcomes and it’s good risk management.
Gibbons: How do you push some of those principles down to the management teams?
Faraone: The first thing you can do is put ESG up as a board agenda topic. That can generate a lot of good discussion and generate awareness. Then, the second thing, what we’re still perfecting, is what are the right metrics we should be focused on: health and safety, whistleblower hotlines, diversity and inclusion?
Gibbons: How will Peloton thrive over the next five years?
Faraone: You really need to make sure you have a differentiated strategy and approach. You need to work very closely over the long-term with your management teams to create value.