Tell the ISCP Club a little about yourself, your firm, and how you differentiate yourselves as independent sponsors:
I’m a managing director with Akoya Capital Partners and I joined the firm in 2010. Prior to Akoya, I was with two other private equity firms, Allied Capital and Reliant Equity Investors. At Akoya, we focus on the lower the middle-market, companies with roughly $3-15 million EBITDA. Broadly speaking we focus on four different verticals. The largest is specialty chemicals, where we've done seven platform acquisitions, we have considerable operating experience, domain expertise, a pretty deep network. Industrial, which we define as industrial products and industrial distribution. The third sector is consumer foods and finally professional information services, workflow solutions, tech-enabled businesses, and SaaS-based businesses.
As far as our differentiation, we take an operating centric approach to private equity investing and it’s the basis of our investment strategy. On our team, we have operating partners that have deep experience in the sectors that we focus on. They lead the process of deciding which investments we pursue and also play a pretty active role post-close in helping the management team execute the value creation plan. It’s really all about finding companies that are well-positioned and good opportunities for growth in sectors where we have directly relevant experience and then bringing in our operating partners who have “been there and done that before” and partnering with the seller and management team to execute the growth strategy.
What projects are you currently working on?
We’re currently working on several platform investments and add-ons, some of which have returned to pre-COVID levels, hopefully that continues to be the case. Others that are still dealing with the impact of COVID and we’re working to find a path forward. We are also working on a couple of investment theses and strategies in end markets and industries that could benefit from some of the changes that will take place due to COVID.
What are you currently looking for and who is your ideal investment partner?
We’re looking for owner-operated businesses in our targeted areas and sellers that are looking for a value-added, knowledgeable partner to help them take the business to the next level. We have a highly customized approach depending on the personal and professional needs of the seller and their family. The partnership dynamic is very important to us.
An investor that has experience (and hopefully success) in working with independent sponsors and partnering with independent sponsors is part of their investment strategy. The cultural fit, working relationship, and common operating philosophy are critically important. As we’ve seen, investments hit bumps, some things don’t go as planned and it’s all about your partners. The other elements are being bought into the investment thesis, investment strategy, and growth plan, roles going forward, and alignment of interests.
Talk a little bit about some of the risks and rewards you’ve experienced with the independent sponsor model:
Part of the independent sponsor model is that once you get the deal under letter of intent and have exclusivity, in most cases, you're trying to learn more about the business, developing a growth strategy, conduct operational and financial diligence, and continue to build a relationship with the seller and discuss their role going forward. Managing all those workstreams processes while you’re also talking to capital providers has always been part of the inherent challenges of the independent sponsor model.
As for rewards, we work primarily with owner-operated family-held businesses and work hard to identify owners that may be at a place in their lives when they want to get to liquidity and get compensated for the value they created, but they are also looking for a true value-added partner. These owners grew up in these businesses and if they believe their company is well-positioned and good opportunities for growth, in a lot of cases, they want to stay involved in some way to see the business double and triple in size. So when you’re able to bring those types of people to the table and you have that chemistry, that connection, and develop a common vision and growth strategy -- that's one of the best rewards. Fortunately, it's happened multiple times across our portfolio.
Do you think the independent sponsor model will become more or less popular in the wake of COVID-19, considering the hit investors will likely be taking on carried interest:
We’ve all seen that over the past 10 or 15 years that the independent sponsor model has been institutionalized. With COVID we have the devastating public health impact and everything that’s associated with that but we’re also looking at the overall negative effects on the general state of the economy and dealing with a COVID- related recession. That will alter investment strategies and extend hold times. Some businesses will struggle which will hurt overall returns and timing until they have a chance to turn around and get back to pre-COVID levels. Once we deal with the public health impact, I think it will be similar to managing and investing through some of the earlier types of recessions.
Given the number of people and talent in the independent sponsor marketplace now, I think that It’s going to continue to grow but with COVID it may just grow a little slower, and it may take some twists and turns, but I think you'll continue to see that greater participation and continued growth of the independent sponsor model.
Do you think COVID-19 will have any long-term impacts on how deals get done -- for example do you think investors will continue to do some aspects of diligence remotely:
People are starting to realize that this is going to be here for a while, and we are going to have to learn how to navigate it and work through it. Over the last four to six weeks, we've definitely seen a pick-up in activity - some of the deals that were sidelined due to COVID are getting back on track and other deals in market, or coming to market, have processes and timelines working toward a close late this year or early in 2021.
In general, I think there are several types of businesses. One that has had less of a COVID impact in April and May and they were able to bounce back in June, July, or August to their pre-COVID levels and those deals are probably moving back towards a normal traditional process. Then you have companies that have been really impacted by COVID and to what degree is still being determined. The general viewpoint is that these businesses will return to pre-COVID levels but the timing is anyone’s guess. For these businesses, they’ll have a COVID- adjusted valuation, they’ll also probably have more structure and some type of earn-out and things like that where there is some opportunity for the sellers to make up some ground if the businesses do rebound. There is going to be more risk-sharing between the buyer and sellers because there is still a lot of uncertainty in the future surrounding COVID. Lastly, there are businesses that will have a structural, permanent change as a result of COVID and the valuations will adjust accordingly.
What advice would you give to someone who is just starting out as an independent sponsor:
I think this really goes back to the first question of looking at your investment strategy and how you're differentiating yourself and how you can enable your co-investors to meet their investment objectives and earn risk-adjusted returns.
Fortunately, there are a lot of different capital providers who have great interest in working with independent sponsors. You really need to have a differentiated approach and demonstrate where you can add value. So it’s about coming up with that investment strategy and deal sourcing plan and being able to tie it to your skills, capabilities, resources, network, expertise, and opportunities in the marketplace – those are some of the most important things.
