David

 Tell the ISCP Club a little about yourself and your firm and your experience working with the independent sponsor community:

I’m Chris Sheeren, a Partner at Longhouse Partners. Longhouse was formed in the late summer of 2018 and consists of myself and Nick Barker. Nick and I worked together at Huron Capital in Detroit for about 12 or 13 years before forming Longhouse.

We’re focused on equity investments in companies with between two and ten million of EBITDA across the business services, consumer, and niche manufacturing sectors. We say we have a preference for deals in the midwest, but our second investment was in Phoenix so, so much for that plan! But broadly defined, the U.S. and Canada are the geographies that we’ll look at.

We think the primary differentiator for Longhouse is our experience. Between Nick and me, we’ve spent a lot of time in the lower middle-market and closed over 60 acquisitions when we were at our prior firm. Over that time, we developed some pretty extensive networks, both in terms of executives and industry experts as well as capital providers that we can call on in a variety of situations.

What projects are you currently working on:

We are currently looking at opportunities in niche manufacturing, waste services, food production, and consumer products. The consumer business appears to have benefitted from the pandemic, while the other companies have been negatively impacted to varying degrees.

What are you currently looking for and who is your ideal investment partner: 

Without getting too specific about any one deal, we generally look for an equity investor who has experience working with independent sponsors and appreciates our deal experience and the value we can bring. That equity partner should be willing and able to move quickly and should have sufficient capital for add-on acquisitions as well.

Tell us a little about your migration from Huron and backing independent sponsors to Longhouse and now being an independent sponsor:

At Huron, we did a number of independent sponsor deals and I personally spent a lot of time over several years marketing to the independent sponsor community and getting to know a lot of independent sponsors. I actually chaired iGlobal’s very first independent sponsor conference a number of years ago! I worked hard to be a visible presence in the community and got to know a good number of independent sponsors which gave me a really good understanding and appreciation for the model. We liked the model so much, we decided to join the club!

Having that knowledge base coming in has really helped make this an easy transition for us. We came into this with our eyes wide open and knew some of the things to look out for and what to focus on. We’ve felt really well prepared for the ups and downs of being an independent sponsor.

Why do you think the independent sponsor model has become so popular and what changes do you envision in the future, especially considering the pandemic:

Independent sponsor deals have been happening under various names for decades, probably since the early 90s and maybe even into the 80s. So, it’s not a brand-new thing but I’d say that over the last five years, the model has gotten more acceptance. We had some “pioneers” in the space that were able to demonstrate that it's a viable model and they’ve proven that you don't need to have a dedicated fund in order to raise capital to do a deal – and that's really the bottom line.

I think that the success of the model feeds on itself. You start with a just handful of people and then as more folks are able to demonstrate that it's a viable model, you start attracting more people like us who are pretty experienced and funded investors who see the model and they see that it’s attractive and effective. That kind of success just builds on itself and the model gains even more acceptance in the market.

I don’t necessarily see many changes in the future; I think it will be more of the same. Hopefully, more of a continued acceptance of the model and maybe some continued standardization of economic terms.

How are portfolio company executives reacting to the current environment and what are independent sponsors doing to help triage in the current environment:

Everyone was obviously really caught off-guard by this. You do your contingency planning and people think about what do you do if you lose a customer, or what do you do if the CEO gets ill, but nobody really plans for a pandemic! So, what do you do during a financial crisis or any major industry crisis? It’s the basic blocking and tackling and managing liquidity and trying to assess the length and depth of the problems. It’s a huge mystery for all of us as we're trying to figure out if there's going to be a second wave and what does the recovery look like -- that's still something we're all trying to sort out as independent sponsors in general.

For us in particular, we have two investments that we work with and we’ve been able to act as a supplement to those management teams. Some independent sponsors take a more active role in management than others do, so it varies and I can't speak for everyone, but we’ve certainly been actively involved in managing liquidity, navigating the PPP loan environment, working with the banks, and trying to figure out eligibility and loan forgiveness…those sorts of things. We can also just be a sounding board and an additional resource for the management teams in terms of financial modeling and forecasting.

Can you share a little about the importance of maintaining and strengthening of existing relationships with capital providers?

Relationships are huge in our world, extremely important. As I mentioned before, having so many existing connections in the lower middle-market m&a community when we launched our firm, has been a great advantage. To know that we've got a list of groups that we can reach out to on any particular opportunity has really given us a running start.

Related to that, we always encourage folks to do their due diligence on us before they partner with us because we’re going to do ours too. You really don't know somebody until you've partnered with them. We feel like we’ve formed great relationships with Peninsula Capital (on our first deal), and Valesco Industries and Brookside Mezzanine (on our second deal) and have really enjoyed working with those groups on both deals. We’d certainly be excited to partner with them again.

In your time as an independent sponsor what has been one of your greatest success stories and what has been the biggest lesson learned:

I think our success story thus far is that we’ve been able to close two deals in our first full calendar year and launched two really great platforms. We're really excited and pleased and feel fortunate to have been able to do that.

In terms of lessons learned, we came into this with a really good understanding of the model so I’m not sure there has been anything that we’ve been really surprised by as a typical “lesson learned”. But, one thing that’s been really impactful has been the level of openness and collegiality and comradery amongst independent sponsors. It was something I’d heard about but to see the degree of cooperation among independent sponsors and people’s willingness to help each other out -- it’s been a really pleasant realization of what we’d be told, and really one of the most impactful things that we've seen.

Interviews

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