Independent Sponsors - Why Let Them Into the Tent?

I just want to welcome everybody to the first panel after lunch. I've been told that my primary job is to make sure everybody stays awake, and I hope we'll be able to do that. I certainly want to thank Rahm Emanuel for being our opening act. He was short. We'll be probably more long-winded, but hopefully equally interesting. Title of our panel is Independent Sponsors: Why Let Them Into the Tent? Just to give you a bit of background, 2 years ago we did a similar panel at the Winter Conference in Phoenix, and the topic of the independent sponsor panel at that time was Independent Sponsors: Who Are These Guys? And this was during the period, I mean, as recently as 2 years ago when independent sponsors were really treated like Rodney Dangerfield. And we didn't get very much respect from anybody, including our spouses, by the way. And 2 years later, you fast forward the tape, and now all of a sudden it seems like everybody's piling into the independent sponsor boat. So our topic this year, we've decided to be a little more bold: Independent Sponsors—Why Let Them into the Tent? So to make the case for why and when to let independent sponsors into a transaction process, we've assembled a distinguished panel of independent sponsors, if they say so themselves, all of whom are successful with enviable track records. I'm going to let each of the panelists do their own selfies, after which we'll dig into the topic for about 30 minutes. And by the way, because every independent sponsor has a slightly different model, I've asked each of our panelists to comment on what distinguishes them from other independent sponsors. We'll leave about 15 minutes for Q&A, and welcome any and all questions during that period. I'll go last as the moderator, but I'm going to turn to our panels now for their introductions. I'm going to start with Max Bizzara from Akoya. Thank you, Richard.

It's a pleasure to be here. I'm Max Bizzara with Akoya Capital. We're located here in Chicago. I'm happy to give you a brief overview of our business model. And how things have really evolved in the independent sponsor community over the last several years. We have— our model is we have a leader-led investment strategy. So our business model is really very operator-centric. We have 4 primary sectors that we invest in. Each one of the sectors is led by an industry luminary. These are individuals who have spent 30 to 40 years of their experience in extremely high-level operating roles within the industries in which we serve. So we have a sector-focused strategy and we have a leader-led strategy. The organization structure is the antithesis, and it's really by design, it's the antithesis of how most traditional private equity firms are set up, and that most PE firms are led by finance professionals. They may have an operating partner, or two, it may be a stringer on a resume, but the company, the firm is really led by finance professionals. Our model's really the antithesis. We have 6 partners in our firm. 5 of us have had significant P&L responsibility, business building responsibility, and really bring very, very deep domain expertise to the sectors that we invest in. We have one of our partners is a classically trained private equity professional. He has 20 years of direct investing experience prior to joining us. And we've supported him with 2 additional individuals that also have 3 to 5 years of experience in private equity. So we have a small deal team, but the deal team is really there to support the operating executives, not the other way around. We also— so we have our operating, we have our sector leaders, we have our small deal team, and then we have 2 individuals that focus on business development and deal sourcing. And we've bifurcated the BD process by both the direct channel and the indirect channel. So we have a small team of research people that supports our direct outreach. We do a lot of direct contacting of businesses that are aligned closely with our strategies. So it's essentially the equivalent of having our own in-house buy-side search capability. And then we have a partner who spends 24/7 really mining the intermediary community. And we have 3,000 intermediaries in our database that we are continually cultivating relationships with and mining for sources of opportunity. The final piece of the puzzle is we have a partner who focuses all of her efforts on talent assessment and talent acquisition. She has 25 years of experience in executive recruiting and talent assessment and leadership development. And what we find is the businesses that we invest in, without exception, they're owner-operator-built businesses. They're at an inflection point in their organizational development, and there's oftentimes an opportunity to upgrade the management team or augment a management team. So it's a resource that we have captive within Akoya that we invest in our portfolio companies.

We've—

just some of the metrics— we've completed 9 platform investments and 7 add-ons in the past 3.5 years. We, along with our co-investors, have deployed about $200 million of equity capital across the portfolio. So we've been quite active. And we have 2 businesses in market as we speak, so we're trying to take advantage of the frothiness in the market. We have 2 of our assets in market as we speak, and we have 2 other deals under letter of intent. It's been quite challenging to get deals under letter of intent in this environment, but we've managed to get 200 LOIs in, and with any kind of luck, we'll get them over the finish line. It's good to be here.

Great. Excellent. Stephen? Thanks, Richard.

So I am with Squire Ridge Company out of Cleveland, Ohio. I refer to ourselves as a private equity firm and not an independent sponsor, you know, and I'll go into that in a second. and we acquire niche manufacturing and specialty distribution businesses. I would say the, you know, the best way to kind of explain how I differentiate myself is kind of to look at what I did prior to starting Squire Ridge 2 years ago. And I was a general partner in a traditional private equity fund where we would raise capital, institutional capital. We'd go out and invest in companies. We'd sell those businesses in 5 years and we would try and generate an acceptable return to our investors. And a couple of years ago, I really saw— well, probably way more than that, probably 5 or 6 years ago, I realized that we spent a tremendous amount of time identifying companies, buying companies, making companies better companies, only to turn around in 5 years to sell them. So I saw an opportunity to go out there We have captive capital that's committed for transactions. It's a non-fund structure but committed capital. And we go out and we buy companies. And we have the flexibility and the desire to hold on to these businesses for longer than the traditional 5 years. So it really gives us an opportunity to look at businesses that are a little bit more outside of the box. Perhaps there's some cyclicality to them that traditional PE firms won't you know, find attractive. Maybe some issues with family being involved with the business, but just generally companies that may just take longer than 5 years to realize shareholder value. So, you know, we have 4 verticals that we go after: water treatment, specialty chemicals, specialty materials, and plastics and thermoplastics. And for each of these verticals, I have an operating partner that would obviously invest side by side but has, you know, 20-plus years of experience in those industries. So that's Squire Ridge. Terrific.

Ali, Ali, thank you. Um, I'm the managing partner of Kamas Equity Partners, and we're similar, more similar to Steve's firm. We look at ourselves as a traditional private equity firm but we do not have committed fund, and we try to run it that way. We have 3 very senior partners with substantial operating experience and investment experience, all in the 3— in the 4 verticals we focus on. We also have 2 pretty senior-level, mid-level persons with 6 and 8 years of experience. We have 1 person totally focused on business development. And we have one person completely focused on admin. We invest our own capital and our own— and our LP's capital in every deal. We do at least $2 million in every transaction, and we focus on 4 verticals: business services, healthcare services, consumer, and niche manufacturing. And as I mentioned, each of those we have substantial operating investment experience. We currently have 5 companies in our portfolio, all happen to be business services, but not for trying to do the other ones. We put an emphasis on being the first institutional capital. We like to partner with management. We look at ourselves as being very collaborative and good partners and try to add value beyond the capital that we bring. And we look where there's something additional. If it's right down Broadway, we probably can't pay enough or want to do that deal. We look for something where there's an opportunity to add significant value to the company, be it our knowledge of customers, vendors, talent, or something that we think we can bring to the situation. That adds more value than our capital loan.

Great. And then last but not least, Chip Grace from MayRiver Capital. Thank you, Richard.

Good afternoon, everyone. MayRiver Capital is a Chicago-based lower middle market private equity firm. We're focused on industrial growth companies. Typically these are high-value manufacturing, industrial service, and industrial distribution businesses. That are generally founder-owned or entrepreneur-owned, and typically between $3 and $10 million of EBITDA. We have 3 founding partners as well as 2 associates. We've invested in 3 companies to date over the past 3 years, totaling about $35 million of equity investment.

Okay, so my name is Richard Baum. My firm is Consumer Growth Partners. I founded Consumer Growth Partners in 2005, so we are now celebrating our 10th anniversary as an independent sponsor. That alone makes us successful. I formed CGP after spending 15 years as a sell-side equity research analyst on Wall Street covering retail and consumer products companies. I was at Sanford Bernstein Goldman Sachs and Credit Suisse. My original partners were the retail and consumer investment team coming out of a very successful SBIC called Kansas City Equity Partners, and we met during the IPO process of one of their portfolio companies where we were the lead underwriter. It was called Build-A-Bear Workshop. Some of you may know it and became a very, very successful IPO and returned It was a double-digit return of capital for them and their investors. We distinguish ourselves by focusing exclusively— we focus exclusively on investing in retail restaurants and what we describe as non-perishable branded consumer products. We don't invest in anything that's got a shelf life, a sell-by date. Or use-by date. We operate in the lower middle market, companies with $2 to $8 million of EBITDA. Our average investment size is about $10 to $15 million. We made our first investment at the end of 2007. We've made a total of 7 investments over that period, and we've had 3 successful exits, and we currently have our 4th company in the market and hopefully will close in the next 30 days or so. We distinguish ourselves from other independent sponsors by our industry focus. Each of my partners has well in excess of 20 years of industry experience, and we couple that with a 30-person executive panel of very experienced industry experts that we go to for a variety of things depending on the transaction. We also have a very extensive network of industry contacts and resources including the ability to bring a CEO into any of the companies that we invest in before the deal closes, and we've done that in half of our investments. We feel that we are competitive with just about every other potential financial buyer in our areas of focus when it comes to our ability to add value to both the target company and our financial sponsor. We don't go into a transaction unless we can convince ourselves that we are able to add significant value to both the company in terms of their growth going forward and to, our financial sponsor. Um, so with those introductions, uh, we want to address a number of questions and topics. Um, I'm going to start with the first one, uh, and direct it to, uh, Stephen Ross. and the question is, when does it make sense for an intermediary to work with or to allow an independent sponsor into their transaction process in the first place?

I guess I don't really know why it would be a question to begin with.

We can go to number 2. No, no, no, no, no.

I mean, it's a— I mean, I understand why the question is asked, and I've I've obviously heard the question before. I just don't understand why it's really a question. I mean, if I were an intermediary, I would be looking at— I know my job is to find the most suitable buyer for a business that's going to be a good steward for that company on a post-transaction basis. So whether that's going to be a strategic buyer, you know, a financial buyer, a traditional private equity firm, you know, an independent sponsor, you know, whatever it is, I would be asking the same questions. I mean, do these people have— does this firm have a track record of closing transactions? Does this person or this firm have a track record of being a good steward for a company and creating shareholder value on a post-transaction basis? I mean, I would not get caught up in the fact that— I mean, independent sponsor, the definition kind of runs the gamut from— I mean, you've heard a couple of different variations up here, but I would argue that no one on this panel has not closed a transaction because they haven't had the funds necessary when it comes time to close, albeit it's a fair question to, you know, to get answered. To include anybody in the process. But, you know, I think at the end of the day, you would ask the same questions about a financial sponsor that you would about a traditional equity sponsor. I mean, there are equity sponsors out there that have a lot of committed capital, that have reputations for, you know, submitting expressions of interest at 7.5 times, visiting a company and coming back with letters of intent at 5 times. So I mean, you got to, you know, there's pros and cons to everything. So I think at the end of the day, I don't see why you wouldn't include independent sponsors in a transaction process.

Okay. Anyone else want to comment on that?

Just a quick piece of data, Richard. Triago, which is a New York-based fund placement advisor as well as a secondary advisor did a study that was completed earlier this year. And in 2014, 27% of equity invested in deals for 2014 came from outside of traditional funds. So that would include independent sponsors, family offices, basically non-traditional private equity funds. So that's over a quarter of the market. That's up from 13% in 2007. So I think for people to ignore kind of non-traditional private equity funds as a potential buyer, you're kind of taking yourself out of a big chunk of the market.

Yeah, I mean, I think that to Steve's point, you know, we'd say rightly or wrongly, I think from an intermediary's perspective, when they look at funds of committed capital, they know that the capital has been committed, so if they want to, they can close. With us, we all have huge access to capital, but, you know, we can't— at least we can't say at any given time that we absolutely, positively can guarantee you that we are going to have the capital to close. Maybe you guys do that differently.

No, but I think— I think You know, I mean, obviously I see the opportunity out there to do what we're doing, but, you know, I think just because a fund has committed capital does not mean at the end of the day that they're going to be able to close a transaction or close a transaction, right? There's lots of other reasons why a deal won't close. So, I mean, it's one variable that you could be eliminating, but it's not a big enough variable in the grand scheme of things, in my opinion, to not look at, you know, independent sponsors as a suitable buyer for businesses.

Yeah, so I would— I'd be inclined to agree with you on that. In fact, when we first started up as an independent sponsor, when we— I think all of us could have gone down the road of becoming a funded sponsor, and when we surveyed the landscape, we felt that the that the one of the things that was not in scarcity was money. Everyone's money was the same. The scarce thing was the good deal, and we felt that we could find the good deal regardless of whether we had the money, committed capital or not. Let me go to the second question. This is really the flip side. Are there circumstances for which an intermediary should not allow an independent sponsor into the transaction process? And we'll go to Chip.

Well, you know, Steve touched on, you know, I think at a high level, the answer to this question kind of on a corollary basis. But I think that in order for an intermediary to evaluate an independent sponsor as a potential buyer of a business, they should ask, you know, how do you plan to differentiate yourself? How are you perhaps uniquely suited to buy this business? And I would offer to you that for even traditional private equity firms, any private equity firm in this market environment has to ask themselves that same question. It's a very tough buyer's market currently. You have to have an angle, you have to have some unique approach to that given opportunity that suggests that you should be, you know, the right owner for that business, whether it's an operating partner, whether it's a prior investment experience, whether it's a relationship close to the company that you can leverage, whatever it is. You know, I think anyone, traditional private equity fund, independent sponsor, they have to ask themselves that question in this current environment. And so I think it's a broader issue with respect to today's, you know, deal environment versus, you know, something specific to committed or noncommitted private equity funds. But I do think, you know, intermediaries, if they're doing their job, they're gonna understand why a particular independent sponsor, you know, really could distinguish themselves in the context of their process. And I think that's the right question to ask.

Anyone else want to comment on that? If not, I've got a follow-up really for the panel. And that is, so that would be from the, you know, kind of the intermediary looking at us. I think an interesting flip side is, are there certain kinds of deals that you could characterize in some way that as an independent sponsor you choose not to pursue? And this would probably be apart from— and you can't say, well, it's an area that we don't focus on, because that's not fair. But when you see deals that are in your areas of focus, when are the times that you decide we're not going to go after that?

I'll be happy to respond to that. Go ahead. I think what we tend to avoid and being much more disciplined around is if it's an extraordinarily competitive and frothy process, if the banker is really focusing on strategics and financials, and more importantly, if the seller is really indifferent in terms of who the buyer is. Or if the seller is really interested in maximizing every, you know, every dollar of value, not interested in reinvesting and rolling over into the capital structure and really playing for a meaningful second bite at the apple, those are situations that we avoid.

I think we— I think I mentioned at the outset, I think if it's straight down Broadway and a perfect company with a perfect management team currently owned by a private equity firm, and, you know, add on if it has a very good Harris Williams type broker, we stay away. I don't care if it's exactly in our industry. I mean, it's just way too competitive and too high a price.

I would agree with both of you. I would say that unless you're bringing an angle to a transaction, you know, you're going to have an added hurdle being an independent sponsor. I would say that there's been, you know, multiple opportunities that I've looked at where Squire Ridge on its own with my operating partners, where we saw a process that was going to be a competitive process, But as ourselves, as we're currently constituted, we were not going to be competitive. I have actually found myself partnering with other committed equity funds in transactions on a 50/50 basis. So it's, you know, equity funds that either have a particular area of interest or experience that would make me— would provide me with an angle. But I think at the end of the day, for any process, you've got to have some angle in the transaction.

Just to add briefly to that, Richard, I would say we tend to focus exclusively on situations whereby the qualitative factors are paramount. You know, we'll pay a fair price, a market price, but we really want to win deals and pursue deals based upon, you know, the fact that we are going to be a better partner than the competition to that particular management team. So these tend to be non-private equity owned companies. They tend to be founder-owned, family-owned, entrepreneur-owned businesses where, you know, the qualitative factors are really important. You know, who the buyer is matters, and that's where we tend to focus.

Yeah, I think I just want to make one comment, and that is, you know, with regard to pricing, I think another way to look at this is, you know, deals get done at at very high multiples right now. And, you know, I often, you know, hear a lot of, particularly the funds, you know, complain that they can't do deals because the price is too high. But there's a price out there that clears the market, right? I mean, somebody is willing to pay it. We kind of look at it and say this comes back to our where we can add value. So if, and I'd be interested to, you know, get some feedback on this, but we're not adverse to If we see a business that we know is going to go for a double-digit multiple, but we think we can add value to the company because of some angle that we have with our big network, we are not averse to going after that regardless of how competitive. We break down our— so our sources of capital we know, and everybody's, are going to fall into what we call it, we have 3 buckets and I kind of use the Wall Street description. There are deep value investors, there are what Wall Street calls GARP, which is growth at a reasonable price, and then there are momentum investors, right? So deep value investors, we know, you know, won't pay more than 5 times. GARP investors will pay 5 to 7. These are rough numbers and they move around with the market. and then momentum investors will pay 8 and north, and that's where they play all day long. If we feel that we can find a partner who is a momentum investor, and we have many of them, and partnering with them will make them a better owner and a combination of better buyer, you know, we are not reluctant to go after those. I'm wondering whether— we hear a lot about independent sponsors, you know, wanting to do— everyone wants to do deals at 5 to 7 times. And I'm just curious whether that's the way, you know, you guys look at the market or not.

We bifurcate it in 2 categories, right? One is businesses that are underperforming to their potential. They may become lifestyle businesses. They may not have a sales organization. But they're fundamentally good businesses, but they're underperforming to their potential. And you can buy those at a reasonable price. And we're very happy— they've got some hair. There may be family-related issues. There's some hair. There's some, you know, heavy lifting that needs to take place in order to maximize value. We're very comfortable investing and doing the work there. Alternatively, we're also equally as comfortable investing in a growth-oriented investment. So it's fundamentally a good company with great growth prospects, but they're under-resourced and they need financial resources, people resources, and strategic resources to leverage the growth opportunities. And we're very comfortable paying a fair and full price on a growth multiple for those businesses.

Okay, so I think that's pretty consistent.

Anyone else? No, we're not paying it. We wouldn't do any double-digit. And I can understand you still might think you make a return. I mean, we're— we'd rather buy something with a, you know, mid-single-digit, less than $10 million EBITDA, with a path to get it above $10 million. I mean, 3 levers we try to do is get some multiple expansion, pay down debt, and grow the EBITDA. And so we're, you know, we, we want to pay for growth, but— and I think that And I think there has to be some inflection point or some— you mentioned hair, but some, you know, something that, that we can help fix and help take the company to the next level. And if that— and it has that, then it's not going to be a huge premium multiple, right?

Okay, um, let's go to the next question for Max. Uh, what characteristics of an independent sponsor should an intermediary understand and consider in evaluating an independent sponsor's desirability as an investor? Some of this has been discussed.

It has, yeah. A lot of it has. I think what's important from the intermediary perspective is to really understand the capabilities of that independent sponsor. So I guess what I'm trying to say is I don't think all independent sponsors are created equally. There's a huge disparity and a huge range of how you define an independent sponsor, and it frankly goes anywhere from a glorified finder all the way to firms that are really built like a traditional private equity fund, and there's a whole continuum in between. And it's really no different than other segments of the investment community. You know, iBankers, there's a huge range of iBankers from the guy working out of, you know, the one-shingle guy all the way to Harris Williams. Same exists in SBICs. There's pure lenders, there's equity players. So I think it's really important to understand— don't lump all independent sponsors in one bucket. Really understand the nuances and differences between the independent sponsors that they might be inviting into a process. So I think that's one. I think the second is really focusing on track record. How many deals have they closed? What is their track record in terms of exits? What is their track record in terms of creating value post-transaction from a governance perspective? And what is their access to capital, right? I mean, I agree violently with, you know, looking at it from the independent sponsor's perspective, why were we even asking these questions? But, you know, I've had conversations with intermediaries and their focus is certainty of close and their focus is securing their fee, right? And so from their point of view, why add complexity? Why add a risk when you have a funded fund versus an unfunded fund? Why take the risk? So I understand that's what we're really trying to solve for. So I think providing a high degree of confidence and visibility on your financing relationships and some transparency around where the capital is coming from, I think, can also defuse it. And then I think the third point, which is one we've talked about, is— and this is probably the most important point— is really having a unique angle and being able to solve for the seller's desires and being able to solve for the wishes of the seller. So we, like others on the panel, we're really seeking situations where we can truly be a business partner to the seller and provide a lot more than capital. And so I think being able to speak to that, to the intermediary, is also an important attribute.

Steven? Yeah, just one comment, and all, you know, great points. I think the only thing I would add in terms of, you know, the track record, if I was an intermediary, I'd want to really understand what their experience has been in that particular industry of whatever the company is that you're selling. So if it's distribution, if it's plastics, if it's, you know, precision machining, you know, I would certainly feel more confident including an independent sponsor that had a particular expertise or past investment experience in an industry.

Okay. And then the fourth question, I'm just going to do a little intro to it because the first three questions really made it sound like the relationship between an intermediary and an independent sponsor is likely to be more adversarial than collaborative. But we think sometimes that's just the nature of the intermediary, assuming it's not. So, Ollie, question to you is, how does an independent sponsor work collaboratively with an intermediary in a way that will enhance, not complicate, the process? Well, I'm a collaborative guy. Any other reason?

Well, what we try to do is work harder, smarter, and nicer. You know, we try to be very respectful of his— the role he's playing. It's obviously— it's a very valuable role that individual is playing. So we're very respectful of the process. We are very prepared for the management meetings. We get our stuff in on time. We do what we say we're going to do when we— you know, we do what we say we're going to do, and we do it then. And I don't think there's any difference between— in this question— between what a high-quality traditional PEG would do and what an independent sponsor would do. You know, we just— we try to work harder, smarter, and nicer.

Anyone want to add to that?

I think I agree with Ali 100%. You know, kind of outworking, out-hustling everyone in the process is really key. I think the other factor is, which is important for us, is full transparency and making sure that we are meeting those milestones with respect to our capital raise, you know, in lockstep with our due diligence, so that we come to that intermediary at the point of IOI, at the point of LOI, with, you know, a fair amount of transparency with respect to you know, who's contributing what and how is the governance going to work, because that's important to the management team. And we really try to stay a step or two ahead of the process in that regard to make certain that we can deliver, you know, committed equity, if you will, as committed as anything is, you know, prior to a letter of intent. And then also give them some assurance post-LOI that we actually have the money raised, you know, through subscription agreements, etc. And I think if you're going to operate without a fund, you have to kind of accept that you have to be more transparent, you have to overcommunicate, and really kind of outwork and out-hustle everyone else.

Okay, let me, let me play the devil's advocate for a minute on that one, Ollie and Chip. So I'm the intermediary and I'm saying, that's really nice, I like that you're like that, you're collaborative, you're going to work hard, but, but I'm showing this deal to 15 private equity funds, they're nice, they're generally collaborative, they work hard. Is that really going to be— should that be a distinguishing factor as to why I should let you into the process?

No, I think it's what value you're going to add to the— what value do you bring other than money? I mean, everyone's money is the same color. And, uh, but I don't— I didn't think the question was more how do you work collaboratively with the intermediary, not why are you going to win the transaction, why are you the best partner for that thing.

We assume if you get in, you're going to win. Let me give you a— throw at it something a little bit different. So when we try to get into some of these processes, and a lot of times we don't get in at the beginning because we'll kind of wait until the process has kind of run its course and may not be going so well. But even in the beginning, we will say, you know, you, Mr. Intermediary or Ms. Intermediary, you have got— you're going to go out to— I don't know who you're going to go out to, 50 or 100 or something less than that, but you're going to go out to the group that you always go out with. We've got 500 investors that we can go to. We know everything. We know half a dozen things about all of them. We're going to go to people that you never thought of going to. There are family offices you'd never approach in a million years. There are SBIC funds that generally are kind of like second thoughts to people. They're not going to be your first thought. So we're going to enhance— we're going to bring you potentially more investors into the process. And then we usually get the question, which is, well, I don't want you going to the same people that I'm going to. So a couple of times we said, okay, here's what we'll do. We'll give you— we'll show you our list because our investors won't do it without us. You show me your list and we'll see what kind of overlap there is. So we did this in one transaction that we ultimately did. They showed us— I said, give us your top 25, we'll give you our top 25. So we switched. They gave us their top 25 and we went back and said, I said, on your list of top 25, there are 2 firms that we would have gone to. That's it. And they said, well, we looked at your list, we only knew like 2 or 3 names. So it really is presenting them with a way— so by collaborative, we really enhanced the— I mean, I felt that we enhanced the process, and I think we all probably have the capability to do that. You can't do it every time, but for certain situations it works great.

Yeah, I would think that, you know, if you've got a banker that's got a deal that's kind of right down the fairway for lots of buyers out there, I don't think they're going to see a lot of value in seeing your list. But I think, I think that there could be a tremendous amount of value if a banker is not getting traction on a deal. So if a banker is kind of striking out with the mainstream buyers out there and is now looking for for, you know, more of an alternative buyer or someone that, you know, may have a, you know, may be able to deal with the cyclicality or the family issues or something else. But, you know, I think the one thing, and I'm not quite sure how everyone on the panel operates here, but the one thing we're not really focusing on or talking much about that I think really does differentiate independent sponsors is, at least at Squire Ridge, and I think here as well with you guys, is just the flexibility to own companies for longer periods of time. So when you talk about being collaborative with a banker, you know, you may be collaborative just by explaining to him that you can differentiate yourself to his client by saying, well, you know, here are 50 buyers, but they're all going to want to get out in 5 or 7 years, you know. And here's Squire Ridge, or here's whomever, Acquia, whoever. And, you know, they've got the flexibility to work with your son and make sure he's got a position, and they may want to bring in a professional CEO, but, you know, they're not going to be looking to do this again at the company in 5 years.

Well, I think that's one of the, you know, family offices are now getting more and more involved in direct investments, so we're starting to partner more and more with them. That's, for us, that's a big institutional group. Any fund, frankly, is for the most part, got 5 years, but a family office can go for much longer. What's interesting about family offices, and I think this also is, you know, kind of, you know, intermediaries like to hear this, is that, you know, family offices generally are very low-key, and I've been on, I've been at a number of different panels where family offices complain that they don't see enough deal flow, and then— but the independent sponsors say, well, that's because you don't want to be found. So it's a little bit of a chicken and egg. And so frankly, that— it says it's the same thing that you're saying, but it's really a way to kind of in concrete say, we can, you know, we could bring an investor that's going to be like— if that's what your client wants. So let me just ask last question, and then we'll open it up for, you know, for Q&A from the audience. And that is, what advice would you give to an intermediary who may be reluctant to allow an independent sponsor like yourself into the process? Single piece of advice, apart from change professions.

I guess I would tell them to reach out to an independent sponsor and have them refer them to a mainstream investment banker to call to see what their experience has been with independent sponsors in processes. I mean, you know, you talk about, you know, Western Reserve out of Cleveland. I mean, they're having a lot of success selling companies to, you know, independent sponsors as well as the mainstream, obviously. But I mean, if you've never done it before, then reach out to a banker that you respect that has sold companies to independent sponsors.

That's the old AT&T commercial.

Things have changed over the last 5 years. I mean, from when we've hired banks to sell portfolio companies, most of them included in their pitch today that they're going to— it's one of their classic groups of people And you certainly didn't see that 5 years ago. I think it's really been a change.

I think perhaps maybe before I open it up, the best thing that we could say about this panel is that if we do this again in 2 years from now, actually we will have worked ourselves out of a panel topic because we will no longer be considered independent sponsors. Everybody will know we're private equity firms and the color of our money is the same as everyone else's. Perhaps that would be the best compliment of all. Um, we've got about 10 minutes left, I think. Danielle? Um, anything we didn't answer that people would like to, uh, hear us opine on? Right there. Yeah, and I'll repeat the question.

So I'm a sell-side broker, and I spoke with a lot of other sell-side brokers here. We're all seeing— everyone's kind of got the same expression. We're The last 6 months, the bottom end of the independent sponsor world has just emerged like a typhoon, and they're tying up our clients by throwing in early LOIs with long exclusivity. We can't talk to clients out of it. And just the sheer, you know, work hours that have to go into getting their NDA signed, getting the material, answering their questions, you know, it's become a big, big problem in the last 6 months. I think the panel kind of— you guys talk about the upper end nicer, polite version of the independent sponsor. But there is this whole other animal out there.

The hamburger animal?

We're making significant changes to our business model to address this crisis.

How do you define— can you—

so let me just repeat the question first. The question is, sell-side intermediary spending a lot of time with independent sponsors who, when they get into the process, tie up a lot of potential buyers with LOIs or NDAs, periods of exclusivity. You're saying mostly happening at the lower end of the market. And the question is, what do we think about that, or what do we do about that, or what do we recommend that you do about it?

Yeah, what can we do? It's costing us a lot of money, and we need to know how to deal with bad apples.

Yeah, so how does he deal with the bad apples?

Maybe I'll take a quick, a quick shot at it. I think it goes back to a lot of what Max had commented on. I think you need to do some early due diligence on that particular group. You know, you need to ask yourself, you know, have I dealt with these people before? Do they have a website? Is it a single individual or multiple individuals? Do they have a track record? You know, do they have references? Just some pretty fundamental questions that I think if you kind of knock through that list, you're probably going to filter out 80 to 90% of the guys that are just out to try to remarket deals. And I think they're pretty easy to identify. Do they have a Gmail account? I mean, there's things that are as simple as that to kind of sniff out and be able to separate the wheat from the chaff.

So to speak. Is your question more about the low end of the independent sponsor world is locking— they're trying to lock up deals so you can't get them?

Or is your—

no, they're taking our clients we have on an exclusive basis and they're putting in LOIs way too early. We advise the client against it, but we can't not show an offer. And they want, you know, 4 to 6 months of exclusivity. That's money. And then they front run us. So I come to a conference like this, the buyers say Oh, I've heard about this deal.

There's a group in New York's called—

now we brought these guys to market. Who are those? These people? Yeah, well, they're reporting to be a buyer for us and they're running around to all the attendees here.

Yeah, I would go on to Yelp and post something by name on these people.

I think the, uh, the additional due diligence is a really good suggestion.

I think that's the key.

Does take you a little— I mean, it's a little more work. It doesn't— and again, I think To Max's point, and you've also indicated, not every independent sponsor is created equal, just like not every committed fund is created equal too. We run across the same thing, honestly. We run across other independent sponsors who tie up people that we would like to go to for ridiculous reasons, and we know they can't get it done, and now we can't get— that client, that investor is saying, well, we're tied to XYZ, so we can't do something with you. You guys. But you should be able to weed out, you know, most of the bad apples.

Yeah, I think, you know, adding to my list, you know, there's just a commerciality test, you know. I would never lob in an LOI or an IOI way in advance of a deadline. I would never ask for 4 months of exclusivity. I mean, it's just foolish. It's just, it's not commercial. So, and you know, you know what it takes. I mean, it's just It's unfortunate you're having that experience, but I think if you kind of go through a quick litmus test up front by way of due diligence, you can kind of weed that out.

Good. Other questions?

Yes, sir. Yeah, I had the same question that we're, uh, just getting that with our listing, new listings, and we get these leads through, um, and they're actually these types of people sometimes they might be one-person groups, and they do, they present some sort of LOI or something along that line, and it's happened on more than one occasion where they come back and after 2 or 3 months, well, I'm sorry, we can't get the money. Or they perhaps could be working with one of our regular buyers, and for example, is appropriate to ask them, okay, you say you're going to get this, these funds, where are they going to come from? And they might list a few buyers that we actually deal with. I'm just wondering, this is turning into a real problem, and I mean, to see the difference that you talked about between the high quality that we have on the panel versus some of these other people. I understand there's also an organization someone like us, trade association, or independent sponsors where they teach everybody how to do this. And of course, some of these new people get into it and they go around and talk to various private equity companies, say, okay, what are you looking for? And then they go out and try and do the things that we just talked about. I think this is becoming more of a problem for us as well as—

Yeah, I think just, just real quickly, you know, asking for sources of financing is completely within bounds, right? And it not only applies to equity, but it applies to debt. And, you know, do you have relationships that can actually get a deal done? So outlining that in a letter, I think, is critical and completely customary, frankly, in every deal that we've ever done. Or thought about doing. So again, it requires a little bit more work, but I think you should be doing that for any private equity firm, funded or non-funded, having them describe all sources of financing, contemplated debt levels in addition to purchase price. These are kind of, I think, basic things that you absolutely should feel completely within bounds to ask for.

Anyone add to that? Okay, does that answer your question?

You come in as a potential buyer, are you willing to pay the intermediary a fee?

There may be different opinions on that. To pay— so if it's you're representing a client and we're coming in, are we willing to pay you a fee?

Yeah, let's say that in our company we have 100 people throughout the country and there might be one team working on the seller and the other team working with the buyer. The seller would get his fee and then the other team, if they're working with a particular sign-up buyer or registered buyer, they would expect a fee from your group. It seems to me that if the— what I've seen, the groups that do not have the money already raised are more hesitant Why be in that situation?

Um, let me take the first crack at that. This is on paying sell-side fees and buy-side fees. Um, I think we'd probably all agree that your sell— your sell-side fee should come from your client. Um, so we wouldn't pay that. Now, on the buy side, the other side is kind of a buy-side fee. Our view is we'll pay a buy-side fee for a deal that is shown to us by a buy-side representative. So we'll do that. But if we're bringing the investor to the party, we generally will be collecting a closing fee of some sort from our investor, which typically may come out of the proceeds of the transaction. And so I would say we're probably— if you've got a team working with a registered buyer and we somehow come across that buyer, we would, you know, we would have to respect that that buyer has already signed up with your firm, and so we would not pursue them as a buyer because there's generally not enough economics for the buyer to pay your guys on the buy side and for us to collect from them as well.

Would you sign up then as a regular buyer, which means like private equity company might, that means that there's a deal that closes that you would pay fees, or you would probably try and stay away from that and say, 'Freeze the deals'?

I think paying fees is just part of the business, so I don't think there'd be anyone on this panel that would be averse to paying fee. I mean, quite frankly, the only time I have heartburn signing a fee agreement is when I get a phone call from someone and they're just telling me about a transaction that's in the market by a sell-side advisor. And even in those situations, I've signed fee agreements. You know, if it's a particular industry that you've got a real interest in. But I don't, I don't, I don't think that you should be particularly concerned about legitimate, experienced, independent sponsors paying fees for referrals. We don't have a problem paying.

I mean, we would love to pay on a successful deal. We brought value to that deal. Hopefully it was you. We'd love to pay you.

Yeah, I'd agree with everyone. I think the one tricky aspect is when you have the same firm on both sides of the transaction. I don't know the structure of your firm. I would say if, if your firm is kind of a loosely affiliated network of, say, 20 different offices, and you manage your own P&L, your discrete teams, you've got proper Chinese wall procedures and what have you, then it would probably be okay. But if you're in a firm of 10 people and you're all located in the same office in the same city, I think that's kind of borderline shady, to be frank. So, you know, playing on both sides of the transaction in a group that's contained in one unit as the same firm, I think could get you into some real trouble with the regulators.

But I don't think that's—

no, but I think your question though specifically was, you know, with 100, right? Yeah, it sounded as if it's a loosely affiliated network with kind of discrete teams, almost discrete P&Ls and companies, you happen to have the same brand, perhaps. Is that accurate? Okay. I mean, I think that's fine, and we, you know, like these guys, we'd willingly pay that. I think the key is, you know, tell me and convince me that there is a Chinese wall that's happening here, and, you know, we just don't like to have, you know, guys collecting fees on both sides of the deal. I don't think anyone would be all that interested in that, but most of which is your client. By the way, not us, it's the buyer.

So we'll say, you be transparent with us and we'll be transparent with you. I've got time for one last question, if there is. Okay, it looks like we've answered all the questions. So I want to thank you guys, the audience, very much, and thank our panel of distinguished private equity firms. Thank you. Thank you.