124: A Banking Industry Insider's View: Financing Growth Through Debt with Robert Papenbrock, VP Finance, Guardian Dental

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to a whole new level. You have this natural talent, this unique ability. Happy day to you and welcome to another episode of DSO Secrets. I am Ken Kaufman, your guest host today, filling in for the illustrious Emmett Scott. I'm very excited to share with you who our guest is on today's show. Robert Papenbrock. He's the VP of Finance at Guardian Dental Partners. And for those of you keeping an eye on what's happening in the DSO industry, there was announcement that just came out earlier this week that Guardian has successfully, with Robert's help, raised $100 million debt fund to facilitate their upcoming growth plan. So we're going to chat a little bit about that. Looking forward to it. Prior to joining Guardian, Robert was at Citi where he was an SVP of health care specialty, as in the as functioning as a credit officer. And he also spen time at Opus bank, bank of America and National Citibank, and so has lots and lots of experience there. He earned an undergrad in finance from Boston College, MBA from Case Western Reserve University in banking and finance. Robert, so excited to have you on the show today.

Thanks, Ken. Really, really thrilled to be here. Thanks for the invite.

Awesome. Yeah, no, I'm really looking forward to the discussion, especially in light of some of the exciting things that you've been involved with there at Guardian, making a big difference. So I always like to start off. Our listeners are used to me asking this question, but I want to start off with this. What led you into the DSO industry and what in the world are you still doing here?

Well, it's a bit of a long story. I'll try to give you the Reader's digest version, but prior to joining Guardian in January of this year, I spent the first 25 years of my career in banking. So for 10 years I worked for National City bank in Cleveland, went through various management corporate training programs, held various positions there, and I was approached by B of A to be a credit officer at bank of America Practice Solutions. Everybody in this industry knows them well. I joined them in 2005 when they were or they generated 3 to 400 million dollars of loans per year. Ten years later when I left, they were on Track to do 1.5 to 2 billion along that 10 year period. They started, there was a subgroup that was formed to deal with the larger group practices. There were a couple of credit officers they called the senior credit officers, then market credit officers, just specializing in the larger and larger deals. That's how I got my first exposure to larger group practices. Then I was recruited over to Opus bank to create their DSO credit policy and program. And I was recruited over to Citibank to do essentially the same thing. So Citibank was the most recent bank that I worked for. Funny enough, how I got to Guardian was because Guardian was one of my clients or at least in the portfolio in my group I was more of a team lead versus a specific credit officer. So I oversaw it. But I'd like to say that although I joined Guardian only this year, I've been with them pretty much since the start.

Outstanding. Which was when they were.

They were founded in late 2018 and purchased their first group of practices in March or April of 2019.

Okay.

Right now.

Yeah. So tell us a little bit about Guardian, like what attracted you to them and what's the current size and what do you. How are you guys thinking about the future?

Sure. So. So like I said, Guardian was formed in late 2018. Currently we have 53 practices in seven states. Working with them in my former role at Citi, I really got to understand and get to know the management team here. Really, really get to know their story very in depth. Our managing partner, our president and a lot of the senior operational team. And you know, I said to myself, you know, if there's one client where I. One client where if I decided I ever wanted to work for, who would that be? And it was Guardian. So you know, talking to the managing partner here, you know, after forging a relationship for two years, you know, we just started talking about it and they had a need for a finance person and I wanted I was further far enough in my career where I felt like I could take that challenge and their need and my want just lined up very well. And after a couple months of talking here I am a Guardian.

Interesting.

Just a great group of people and very, very high quality character people.

Yeah, that's amazing. And really rapid growth there since the founding in late 2018 to 53 practices today. So I want to ask this because I'm fascinated With this, you spent this big chunk of your career in banking and banking is a different world than running a business day to day and being in a financial leadership role within a fast growing organization obviously like Guardian is. So I'm curious for you to explain to the listeners what are some of the biggest challenges that you faced moving from banking, which I believe some listeners might think, oh, banking seems like a cush job, right? They're pushing paper, they're, you know, these different things. And running a DSO is a different world. You're constantly out there innovating and driving and building relationships and you know, working with your clinical leadership and all of those sorts of things. So tell us like what are some of the biggest challenges or differences you've seen between such a long career in banking to jumping into the DSO world? And tell us what are some of the things you're doing to like overcome it and just learn how to be a great executive?

Yeah, yeah, that's a great question. Because people do have that, you know, that vision of banking being that 9 to 5 job and take every Friday and you go golfing, you know, it's certainly not the case. I would say the biggest difference is if you are going from a corporate, you know, a corporate bank or any bank really, it's a very structured and lack of a word corporate job. You know, you have a specific function, your day is probably 80% of your days are going to be spent in the same narrow set of functions. Whether it's doing, you know, working with outside counsel to negotiate credit documents, whether it be underwriting a deal, whether it be reviewing a deal portfolio, monitoring, you know, 80% of your job. You know, if you come in on that day there's probably an 80% chance you're going to be doing one of those things where coming to a company like Guardian or any sort of rapid growth company, you need an entrepreneurial spirit. It is very, very much an unstructured in an environment here, no two days are the same. So most days when I come into work I have this grand plan set and then by 10 o' clock it's kind of shot to hell and you just kind of just have to adapt and work on the most pressing thing first. So I would also say a big difference is working for a bank there's always another department to call and you'll get your answer right where here you have to find your own answers. So you know, Thankful I've always had a bit of an entrepreneurial side to me and I've found in previous jobs at Smaller banks or sort of remote, remote type of positions that I work very well in an unstructured environment and I prefer that. So when the opportunity came here, it was just great. It was great timing. But like I said, the biggest difference is it's an unstructured open environment. No two days are the same. So you have to be willing to adapt, you have to be adaptable and you have to be able to prioritize on short notice.

Yeah, makes so much sense. So much sense. And I'm certain there are some days where you're scratching your head questioning, whoa, what did I get myself into? Not in a bad way, because it's an opportunity for tremendous growth. I mean, those who show up in the DSO industry and try to grow are. We're a little bit gluttons for punishment because it hurts a little bit. And there's some painful learning curves that we all have to go through to get better and to better serve our organizations and better support the doctors and the whole clinical side of the business. And so it's an interesting learning experience, but I appreciate you sharing that and, but I don't want anyone to think that it's, it's linear. And I think you did a good job articulating that.

Yeah. And in my particular case, there were a couple of cushions. Number one, I'm an industry veteran. I've been doing dental since 2005. So, you know, it's different from the lending side, certainly from, from the operational side, but at least I knew the language. And then secondly, I had worked with Guardian for close to two years before I took this role. So I had a couple of head starts where new entrants to the dental world. You're absolutely correct, it is an uphill battle.

Yeah, that makes perfect sense. We're all feeling some of the same uphill battles. So tell us just a little bit about Guardian. What are some of the main advantages of the model that you're following and the way you're looking at your growth and scale and what are some of the challenges you're facing and what types of things you're doing to try to overcome them? So maybe if you start out, what are sort of the advantages of your model and what's that investment thesis you guys have built out?

Yeah, so first, let me begin by saying there's no one right model out there, you know, and we talk about this in our dental finance forum calls, and that's certainly the case. As a lender, I, as a former lender, I've pretty much seen every model out there. And you can be successful by using any model. So provided that you operate it correctly and efficiently and don't stray from, don't stray too far from that model. Basically any model can be successful provided it's proven so. Guardian. We have chosen to be more of a partnership model versus a dots on the map model, I guess is a good, a good way to say it. Where you know, we want close ties with our partner Dennis, who basically run our regions. You know, they roll over equity as part of our, as part of our acquisition. So they're incented down the line with us to keep growing it going forward. They, you know, we try to have as much of a hands off, non corporate approach as we possibly can while still making sure that best practices are implemented throughout the corporation. We can take advantage of the benefits our scale gives us. The dots on the map approach is fine too. Might be a little bit more decentralized, less hands on. But we've found that for us and the people that we have here, the corporate philosophy and the partner philosophy have to line up. And that's one of our big decision criteria.

Yeah, that's right. We often say with an organization in the acronym dso, the S is the most important. It's support. And our job is to support the clinicians and in this case your clinical partners so that they can successfully help each of the dental practices and every associate within your clinical system to be successful in terms of comprehensively diagnosing patients needs and then doing the best they can to try to deliver on the treatment required in order to meet the requirements of the diagnosis. And it's such a critical piece. All models have to solve that. The way you're solving it is through the partnership model, which is really cool. Any challenges to that model that you find sometimes can cause roadblocks or constraints. And how do you guys think about that and try to solve those things?

Yeah, certainly every practice group in every region is different. So there could be inherent conflicts there. Maybe not so much conflicts, but slightly different philosophies or you know, their way or one partner's way may work very well for them, another way may work very well for another region. So there is a little bit of balancing there. So you do have the personality challenge sometime, you know, and not saying that in a bad way, want to make, want to make that clear. But you know, you are juggling various successful partners who have grown their practice groups and you know, that can be challenging. Some challenging sometimes. But at the same time that's the primary reason why we wanted to partner with them, you know, because they are proven in successful business owners. I'd say that as we grow, you know, going from, you know, eight practices or seven or eight practices to 53 now, there's a ton of standardization and optimization that we still have yet to fully realize, whether it be, you know, patient financing, programs, systems, vendors thing, things of that nature. And then, you know, one of our biggest pain points right now, and I'm sure this is common throughout, you know, the listening group here is hiring. The hiring environment is very, very challenging, especially for. Especially for. For hygiene. So, you know, we don't want to. We want to be strategic about it instead of just hiring. Hiring bodies to fill seats. But, you know, that that's certainly one of the biggest unknowns out there given, you know, the COVID and, you know, some states are partial lockdown, some are, some aren't locked down, and we've got practices in both. But, you know, hiring, filling, finding quality candidates to fill, to fill spots that we want as part of our team, that's difficult. All right.

Yeah, everybody's definitely facing that challenge. So I want to jump real quick to our lightning round, and then I'm going to come back to some questions about your most recent raise, and then we'll kind of wrap up with some of your thoughts and advice. For groups that are trying to figure out how to finance at least, you know, some or part, at least part, if not all of their growth through debt, you've got a unique perspective that I think they'll benefit from. So let's jump to the lightning round. What are you currently working on?

Preparing for our next round of growth. You know, given that we just closed the new credit facility, that gives us a lot of opportunity to grow. And we have some practices under LOI now, so planning for that and then just working on any sort of optimization program project that I can find now that we are of this scale, it's a lengthy process, talking to different vendors and et cetera, but take advantage of it. We have it.

That's right. That's awesome. All right. What are you the most proud of

professionally here? I would say just making the switch from banking to guardian. It's not an easy switch, you know, and having them believe in me as much as I believed in them when I was at Citi and they were just starting out and really seeing sort of the. What the goal they envisioned being realized and them giving me the opportunity to be part of it. And personally, of course, it's family and friends.

That's awesome. All Right. Favorite sports team?

Cleveland Browns. I'm a Cleveland native and it gets inside your blood, so at least they're good this year. There you go. Nice.

Favorite hobby?

As a group it would be spending time with my family, wife and five year old son. So the five year old son takes the majority of my time. And then if I'm doing something solo, it would be bicycling, cycling.

Like road, road biking or more cycling.

Road. Road biking.

I'm sorry, those are the same. Mountain biking or road biking.

Oh, I'm sorry. Road, road. So road bike. Prior to taking this job, I lived out in California for nine years and that's cycling paradise out there. I'm trying to find a way to recapture that here on the land of flat

awesome. You and I are going to need to jam offline about that.

Okay. For sure.

All right. Favorite app on your phone?

Any stock tracker app. I got, I got the bug in fifth grade when my fifth grade teacher assigned the class a project where we had 500 to buy two stocks. And then you track it on grid paper, the price movement over a 30 day period and I ended up getting lucky and picking a stock where I made like a 30% return in a month. And I said, wow, this is easy. And I've always had an interest in it since and find that reality is a little bit different.

Yeah, that's right. Have you ever lost more than 30%?

No. Sure. The tech wreck.

There you go.

But I've learned to. Not that I'm giving any investing advice, but I've learned to if you buy quality companies, just sometimes no action is the best action. It's difficult, but if the entire market's bad, pretty much means most stocks are bad.

That's right. That's right.

And favorite spreadsheet function, the formula function. I'm still learning all the various Excel functions, so we, we all use the most common ones. But you know, in this position versus banking, we need to build a little bit more elaborate models. And you know, one of, one of my favorites that I just learned is Sumif. You know, because we have, you know, 53 budgets, you know, 53 lines with multiple columns and it's hard to segregate data without it.

Yeah, very nice. Yeah, love, love the sumif function. All right, so let's jump into this. Guardian just recently announced and I will say for those who think I'm scooping news here, when Robert and I scheduled this several weeks ago, this was not on our radar screen that this would have closed at this point. But since it did we're going to chat about it since it's all public knowledge now. So Robert, tell us about what went into this process of raising this $100 million credit facility. What types of things did you have to do? I think our listeners would be really interested to hear the process you went through knowing that you've been a credit officer and so you know what the banks are looking for. All those little tidbits you could share along the way would be really helpful.

Yeah. So with our, with our previous lender and you know, at my previous bank the credit appetite was severely limited due to the fallout of COVID you know, even though dental has proven in the last 12 to 15 months that it's bounced back very, very strongly overall. Bank appetites don't bounce back as fast, we'll put it that way. And we saw from a lender the same thing happened after the financial crisis too. Right. Most banks appetite lending into that type of environment is limited. So with our current lender we ran into a internal cap that they decided given the current in environment and despite, you know, them financing all of our practices up to that point, they said well you know, we're okay going forward but we might want to syndicate the deal. So we're not taking all the additional exposure. And the syndicated facility that they proposed to us was not, we didn't have much appetite for it. So our managing partner and principals of Guardian have significant capital markets experience, much more so than me. So we decided to approach private equity debt funds which differs from private equity investment funds where they are purely placing debt and they are not taking an equity stake in the dso. So there are pros and cons to it. Certainly the pros is they are, since they're not a commercial bank, subject to all the regulations that banks are, they allow higher leverage, they probably understand risk better or at least on a more granular basis. So you can get higher leverage, higher facility or higher credit facility amounts. The downside is it's more, you know, it's more risk. So it's more expensive for sure. And they have much tighter and comprehensive reporting requirements. So if, you know, if you're dealing with a commercial bank, you know you've got anywhere from 10 to 20 million dollars out there. You're probably at worst on quarterly reporting and providing quarterly compliance certificate if you're an emerging DSO that you might even be on an annual reporting or semi annual reporting and don't even need to provide a compliance certificate type of thing. So with, with, with debt funds, they're going to want Monthly financials, monthly certifications. You know, they want to see data in much different ways. Whether it's, you know, monthly year, year to date, also trailing 12 months, three statements. So not only just the balance sheet and, and income statement, they're going to want to see a statement of cash flows. So you need the financial reporting expertise or an outside account to provide it for you. And then we can expect to, you know, a commercial bank might have five questions for, for you with each reporting package that you sent in. You know, we're expecting, you know, 10 to 20 monthly. Really, really, really grant, really, really granular explanations needed. So those are, those are the big differences between a debt fund and a traditional senior senior debt lender.

So it seems like to be completely fair, raising this amount of money requires a high level of financial sophistication by the DSO in order to initially raise the funds, but then to keep in compliance with what the credit facility is going to, is going to require. So, and it seems like breaking that down. I think you did a great job of breaking down some of those details. But anybody who's thinking about going down this debt road, especially if they're planning to do a large amount of debt and maybe little to no equity to get started, you've got to have some financial expertise and like you said, to be able to generate accrual based financial statements audited and produce a cash flow statement. These are things that most accounting systems really struggle to create. Until you get to the next tier systems which require higher expertise in your finance side. I just, I guess what I'm trying to say here, Robert, and you can validate this or invalidate it for those in the DSO world, you have to make significant investments in finance and accounting if you want to especially use debt for growth. Your opinion on that?

Yeah, yeah. Certainly the bigger you get, the more thorough reporting that you need, the more frequent you need. And it can be expensive for sure. You know, reviewed financial statements which are on accrual basis, you know, those can cost you, you know, 20 to $30,000 a year depending on your size size or even more audits are, you know, add another 20 or 30,000 on to that as well. And then if you have to really invest in, you know, hiring a CPA or a head accountant, your external CPA or a head of accountant in internally that's an expense as well. But you have to be able to produce the advanced financial reporting that a lender is willing to extend capital for you. It's kind of like if you want big boy money, you need big boy reporting is how it was put to me once and you know, in one of my previous lives. And that always kind of stuck with me.

Yeah, that's right. In going through the process, any, anything stick out as key lessons learned? Like you said, you'd never gone to the private equity fund or to the private equity credit funds in the past. Any, any lessons learned or things that stick out to you in that process?

It's a long, it's a long process. Expect a lot more questions. You know, when you're getting a credit facility with a senior bank debt lender like a B of A or a Citi, you know, you might have a call with a credit officer or a series of calls and it might be two to three hours, right. You know, over multiple meetings where with this, you know, we're, we're talking the significant investment in time. You know, this is not something that they're just going to look at the financial statements, jot down a couple questions and say, okay, all's good. You know, we're, we're ready to lend, we're ready to lend you money. It's a much longer process and it's a much more expensive process. You know, the upfront fees with the debt fund, given the additional risk are much higher, you know, and if you engage one, for lack of a word, broker or one head finance, almost like a search fund where you say, okay, you work at this, this investment bank, I respect you. You know, all of the debt funds or a lot of the debt funds out there that might have appetite, you engage that person and then that person engages the various debt funds. So not only are you paying the ultimate lender, you're also paying the investment bank that's leading the search process for you. So it's a lot more expensive than I originally would have thought. But then again, I've never negotiated with one before.

Yeah, it's expensive to go through the process and then it's expensive to deploy the capital when it's time because clearly it's not as if all this money just came into your bank account at the time of close, right? You're preparing for things in the future, which is very, very smart, a smart way to do it. But it's expensive and it's going to be expensive, expensive to deploy the capital as you go through the process, whether it's Q of these on acquisition targets and other analysis that has to be done, and then just to keep up with all the reporting requirements and, and, and realizing, okay, I'm borrowing money, but this Person looks at this like a partnership and they need communication and they want to be kept in the loop and all of those sorts of things. So lots of complexity to manage.

Yeah, ultimately we found a lot of appetite out in the market and I know a lot of listeners are approached by private equity funds on a fairly regular basis because the DSO consolidating world is certainly a hot market. We at Guardian, we just feel very humbled and fortunate to partner with our new lender, twinbrook. You know, for them to believe in us, you know, our story and our management and our performance over the last couple of years and being with us, it's just very humbling.

That's awesome. It's great perspective. All right, so as we start to wrap up, maybe if you could share some advice, if you will, about, you know, those who are out there trying to raise debt and trying to figure out the right way to finance growth. What are dental and DSO specific lenders really looking for when they're looking at some of these younger, more newly formed DSOs that are trying to raise debt funds? What are some of the key things and what advice would you give our listeners that fit that mold?

Yeah, I would say the most, the most important attributes here are proven track record. So that's tough if you're just in emerging. You know, some groups might have, you know, run 1, 2, 3, 4, 5 practices really, really well. You know, once you get past that point, going to number 10 or number 15, it's a whole different animal. So if you're going the traditional bank debt route, you know, they are going to be, or they're going to be more restrictive on the amount of capital that they're going to be able to give you. It's going to be much slower. So if you've got five practices, they might finance two in the next year. If you've got 10 practices, they might do four. So they have a much lower risk tolerance. If you are a group practice looking to become a DSO, bank's really going to look for a couple of things. They're going to look to see if the DSO itself is compliant on a regulatory basis. I'm talking legal structure, management agreements, operating agreements, etc. And it gets even more complex because each of those regulatory requirements vary by state. So if you're operating in multiple states, then they have to make sure that that passes muster. They're going to look at what entities can be borrowers, secure guarantors, or not be able to be encumbered at all as any sort of recourse. Or collateral. You know, the best structure for a bank is all, you know, both the DSO and the operating entities can be, can be co, can be CO borrowers. The next strongest is the DSO is the borrower or any sub dsos or borrowers and the operating entities are secured guarantors. Now that sounds like the same thing as a CO borrower, but it's, it's, it's, it's a little weaker because there's less legal recourse down to a guarantor versus a CO borrower. And then the least strong or the weakest is the DSO entity as the borrower. And due to any sort of state regulatory restrictions, the operating entities cannot be secured guarantors or borrowers. So really a bank is just lending into the, the assignment of the management and the operate and the operating agreements signed by the operating entities performing the work, collecting the cash. And it's really, they're lending into the strength of agreement as that flows up to the dso, who is the actual, the actual borrower then. The third thing is based on the first two things that I've talked about is in that structure, are there any cash flow leakage points that the loan structure is not going to be able to close. So a bank will want to, want to make sure from when the work is performed to when the practice collects that money that there's no way that that cash flow can leak out of the structure without it going back up to the DSO to pay that, to pay that credit facility back. So, you know, there's a couple challenges. There's not that many DSO specific lenders out there. Health care is considered a specialty, specialty lending industry. And if you consider dental is a niche within health care, DSOs are kind of a niche within a niche. So you know, for banks to execute on DSO lending, well, you need to find DSO specific healthcare experience lenders to be able to run, run that group for you. Those are hard to find since it is a niche as with any niche. And there have been a lot of stories of banks that have gotten into the DSO world, but they try to use regular GNI lenders, regular just generalists to lend into the healthcare space. And then before they know it, the bank's got a portfolio of healthcare deals that are either poor, poorly thought out or poorly structured or both. And then that leads to losses. Which is why you see a lot of banks with really ambitious plans say we want to get into health care and then they're out of health care in two or three years.

Yeah, it's a different world and they have to be ready, ready for it. This is great, great advice, Robert. If somebody wants to get a hold of you, what's the best way for them to reach you? Besides, do we, do we have you in our DSO Secrets group yet? Facebook page?

I'm not sure, but you have all of my contact info.

All right, so I'll make sure that you're invited into the DSO Secrets Facebook group so people can engage with you there and then any other ways that they could reach out if they've got questions or want to connect with you. All right. Well, this has been enlightening by all stretches. Robert, thank you so much for joining today's podcast and for all the amazing insights you shared.

Thanks again. Thanks again for the invite. Really appreciate it.

Yeah, you bet. Many, many thanks to all of our listeners for joining in today. This is a wrap on all things Credit Officer converted to VP of Finance helping raise $100 million credit fund in a niche of a niche, the DSO industry specialty, healthcare lending and all things associated with fast growing DSOs and how to finance that growth. Again, many, many thanks for joining today. Happy day.

All right, thanks again. Have a great day too. Foreign.

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