Independently Sponsored: Fallbrook Private Equity

One of my clients I took public was K-Swiss Sportshoes, a company I liked so much that I left banking to work for the CEO to absorb some of his operating and growth experience. After business school at Wharton, I got deeper building my strategy toolkit in management consulting at McKinsey & Company. All of these experiences have helped me to bring a holistic skill set to the world of private equity.

I joined the growth equity private equity groups at Trust Company of the West as well as Thomas Weisel Partners, and then got the opportunity to co-found the growth equity group at Kayne Anderson as a GP. I’ve cumulatively invested over $1 billion across 50 platform and add-on companies, with about 2/3 of those investments being in technology products and services.

To complement my 25+ years of buyside deal experience, I team up on all deals with Neal Doshi of M3 Capital Partners, who brings deep experience across a variety of verticals in his 15+ years as an operator and management consultant. Together we can be as value-added as a traditional private equity firm in helping a company get to the next level.

From a post-deal standpoint, I am a seasoned board member, having been hands-on in all aspects of a company‘s lifecycle, including operational improvement, add-on acquisitions, executive recruitment, and the final exit. I have been an interim President as well. All of these help me to assess what might be needed and how our skill set can be the most helpful when pursuing new investments.

What is your investment thesis or value proposition?

Our overall approach is to partner with management teams, rather than replace or redirect them. In the lower-middle-market, entrepreneurs and founders know their business, competitors, and industry dynamics far better than we ever will. So rather than trying to fix what’s not broken, we look to be supportive in their business plan, whether it might involve organic growth into new products and markets, or add-acquisitions.

Our primary focus is on the end-markets of tech-enabled services, business and industrial services, healthcare, and specialty value-added manufacturing. In these areas, we can have the most impact pulling management, operating and strategic levers to grow equity value.

What I find the most exciting in doing add-on acquisitions or roll-ups is finding top-notch management that can run the holding company, successfully integrate acquisitions, and also spot under-managed competitors as tuck-in candidates. Turning them around in short order with superior management is really fun.

Any notable differentiators for the firm?

Given that we’ve both been so hands-on with companies in the past, we can be a bit more creative when it comes to structuring transactions that might not be for everyone. Whether it is aligning management with some type of deferred compensation and a buyout, or identifying a subsequent add-on acquisition to reduce customer concentration or diversify distribution, we think out of the box when possible to take assets that might not otherwise trade in broad competitive auctions, and still be able to put together a successful buyout and partnership with management to grow value.

But of course it’s not all about acquisitions. I also enjoy finding a high-growth business model that has been underappreciated either by management or by its customers. In some cases by slightly augmentating the management team, a new product offering or a disruptive service can scale very rapidly at attractive margins and cash flow. My past investments in LegalZoom and iBwave Solutions were good examples of this.

In most of our situations management has experience growing the company organically as a small business, but there is some professionalization required to make it institutional-grade for private equity investors. Given our skillset we can try to make this as seamless to management as possible, while also being a professional, efficient, and knowledgeable partner to our capital providers. If management finds the transition overwhelming, we can be “player coaches” on an interim basis while making strategic additions to the team as well.

what are you looking for, and where are you seeing opportunities?

Most private equity investors will say that management is the most important aspect of any deal, but in our view there are particular skills within those management team members that can make the biggest difference. We like to have at least one person in the management team with a very solid knowledge of finance and accounting, so that understanding both today’s EBITDA and where it can go in the future is well grounded in GAAP and will hold up through financial audits. Secondly, we also look for strong executive leadership in the founder or CEO, so that issues between management team members which can threaten execution are fixed before we ever even find out about them. And third, we look for strong sales leadership. Good processes and a robust front-office technology infrastructure give us more confidence in supporting and investing into management’s growth plans.

In terms of opportunity, like most Independent Sponsors we don’t participate in broad auctions. However, we’ve also found that even narrower processes around “cookie-cutter” and faddish business models with sub-$5M EBITDA can go for insane valuation multiples. So rather than chasing HVAC services or car washes at 20x+ EBITDA valuations, we try to find more “hidden gems” where there can be nice recurring revenue and consistent margins at more reasonable levels. We pride ourselves in sourcing opportunities that only a handful of our investors have already seen.

Finally, can you regale us with an interesting or funny M&A story?

One of our most colorful entrepreneurs was the successful and semi retired head of a family business in the building materials industry. When we first met him, he had a limp and was using a cane.  We’d heard he had recently injured himself, and we were concerned about his health and energy-level post-deal. We then also found out about his extensive travel schedule, such that he would be out of town for weeks at a time. What kind of leader was he? Was he even really paying attention? The answer became apparent to us when we finally visited his office and were amazed with room after a room of international race-quality Ducati motorcycles. His injuries had come from motorcycle accidents during racing in which at various times he had fractured knees, shoulders, and his hip multiple times.

Despite being in his 60s, he was a professional motorcycle racer who had won numerous country and league titles around the world. Whether it was in the hallway between the finance and accounting departments, or in a large storage room which was used for materials handling in the past, the company’s office instead was like a museum or gallery of antique as and modern racing motorcycles, well-maintained and race-ready. He toured us through room after room, also pointing out trophies and plaques from his multi-decade racing career. Our first impression was very wrong…he was an intense and passionate entrepreneur who brought that same persistence and dedication to a distinguished global motorcycle racing career as well!