Tell the ISCP Club a little about yourself and your firm and your experience working with the independent sponsor community:
Geneva Glen Capital is a family office-oriented private equity firm, thus we think of ourselves as patient capital as we are not preoccupied with fundraising every three or four years like a typical syndicated private equity firm. It gives our management teams and independent sponsor partners the ability to optimize the value of our investments and exit at the right time versus having a separate agenda of needing to raise the next fund and perhaps monetize investments before the best time to exit. Also, because we have a single family as our financial backing we're able to be flexible and creative in terms of the types of investments we make. They could be either control or minority investments, relatively small or large with from $3 to 25 million EBITDA, where we can invest anywhere from $10 million to $75 million per deal. Finally, we have the ability to invest in either equity or junior debt securities, although typically, we are primarily equity investors but we may supplement that with some mezzanine investment as well.
Coincidentally, I was an independent sponsor myself in the early days of Geneva Glen from 2008-2010, until we raised committed capital from a wealthy family. We understand the vagaries, the challenges, and the excitement of being an independent sponsor. I feel like we can be fairly empathetic and understand the emotional ups and downs of being an independent sponsor, particularly if you're working individually or just with one other colleague. The challenges of dealmaking for independent sponsors often get magnified when you're on your own or just have one partner versus a relatively larger number of colleagues to “cry on each other's shoulders”. We understand that it's very exciting to be an independent sponsor but it’s also can be very daunting to which we have a unique appreciation.
We've been working with independent sponsors since 2010, and they have been a very good source of investment opportunities for us. An aspect that we really enjoy about working with independent-sponsors is that they often bring unique angles or skill sets to an investment. They may have very specialized industry knowledge within a particular sector, which is great. And they help us leverage our time, because we are a relatively small firm with five investing professionals, yet we're investing relatively large amounts of capital between. Typically, we have majority control but the independent sponsor is able to manage the day-to-day activity post-closing and be on the front lines and we view them as a true extension of our firm and partners for that particular portfolio investment.
What projects are you currently working:
We are currently most active in multi-site healthcare services and food. At this point in the economic cycle, we are avoiding deeply cyclical markets as further recession impacts may forthcoming. Certainly, though this is a very unique recession with pandemic concerns warping traditional economic concerns, i.e. healthcare services usually resilient but now need to navigate through the closure risks not experienced ever before.
What are you currently looking for and who is your ideal investment partner:
We seek to invest $10-75 million per deal in either healthcare, consumer, business services, or industrial businesses in the U.S. or Canada.
We are seeking partnerships with independent sponsors where they ideally have a deal teed up (although open to getting involved earlier) and who are actively involved in the value creation process as a result of either their own domain expertise or operating partners they can bring to bear as well.
Talk a little bit about some of the risks and rewards you’ve encountered while working with the independent sponsor community:
Independent sponsors often find more proprietary deal opportunities outside of the typical auction process -- and there is both good and bad to that. Frequently an independent sponsor is able to strike up a relationship with the seller, perhaps an entrepreneur or a family-owned business, and there's a bit less competition to secure the investment…so that's the good news.
The challenge is that sellers like that are often willing to entertain selling their company, but are perhaps not completely vested in the sale process. If they were to hire an investment bank, they would typically need to pay a monthly retainer, who would assist the seller in a very laborious and detailed examination of the company's records. Sellers will get information requests from legal, accounting, and other consultants, have to commit to putting a complete data room together, and possibly spend money on a sell-side quality of earnings review. Working with an investment bank is a financial commitment that a seller has to make through the auction process and shows that they are truly committed to completing a sale.
With a proprietary deal, there may not be this upfront “skin in the game” so you just don't completely know if the seller is completely committed to closing the deal. So, the two biggest risks that I see with independent sponsors are – will the company pass muster in due diligence having not had such a detailed examination and seller remorse.
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:
It’s an interesting question. In looking at the deal pipeline post COVID, we’ve seen that the traditional auction process volume is down with less sell-side activity, but the number of independent sponsor opportunities has been level and has maybe even increased. And the reason for that is there's more broken deal activity with companies that were going to an auction process pre-COVID and then experienced a bump in the road and their earnings are not going to be able to materialize the way they represented. Those are opportunities for independent sponsors to pick up the pieces.
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:
Video calls have been a very big positive for us. We’ve done them for management presentations, typically after indications of interest are accepted and it has been very time efficient. We don't have to travel and worry about getting on airplanes and then social distancing with management teams. Ultimately, we do need tour operations and meet management teams but we’ve learned that we can wait until further along in the process. I suspect that the initial round of educating buyers on an investment opportunity by video will be here to stay. It's also beneficial for the sellers in that they don't have to host in-person, perhaps 10 firms who are parading through their operations. Confidentiality can be more easily maintained which is always a big plus for sellers.
What advice would you give to someone who is just starting out as an independent sponsor:
Having been there, my advice is to be prepared for a marathon, not a sprint. It could take a year or it could take two years before you close your first deal.. There are always ups and downs, deals fall apart, and that's typical, but that emotional side becomes magnified when you're an independent sponsor especially you’re working alone and don't have someone to commiserate with, as I mentioned earlier. So having that longer-term perspective is really critical.
The second piece of advice is to figure out your value add. Remarketing investment banker auctions is going to be even tougher these days because there not that many opportunities and I sense that investment bankers are going to be even more selective in terms of who they choose to spend time with during the process and are going to pick the folks who have the most speed and certainty to close. So you really need to figure your value add proposition.
Finally, I’d stress the importance of transparency with the seller, in terms of the fact that you will be bringing in outside capital so that there are no surprises. We've had unfortunate situations sometimes where that hasn’t been completely communicated, and that's always a delicate balance. You need to make sure you're putting yourself in the best light and bringing your capital sources along while you're engaged with the seller.
