Independently Sponsored: Riveter Capital

TONY HILL

Colleen and Sarah, welcome to the tenth edition of Independently Sponsored. Quite an auspicious number, if you ask me. It’s great to have you! Now, I know the theme of today’s interview is the ABCs of launching your own independent sponsor operation but, before we get to that, I’d be remiss if I didn’t ask you to tell us about Riveter Capital, what drove you to found it, and the meaning behind the name? I remember first reading about Riveter earlier this year in an article by David Toll and I was fascinated by its crystal clear, purpose-driven mission.

SARAH ABDEL-RAZEK & COLLEEN GURDA

Thanks for having us Tony! We founded Riveter in 2020 with the goal of combining our investing and operating experience to invest in women and minority owned or led companies in the lower middle market, which we define as $1M-$5M of EBITDA. Having spent most of our careers in a male-dominated industry, we knew the specific challenges many women in positions similar to ours face—as well as the opportunities to do things differently. We’ve both always had an entrepreneurial itch but were waiting for the right time in our careers to make the jump. Finding a partner in crime was also really important; both of us had the same vision yet complementary skillsets and the mutual support made the decision much easier.  

Women and minority owners represent so many small businesses but have very limited access to capital. Colleen and I saw a huge market gap in the PE world for these types of businesses with less than $4M EBITDA, a minimum requirement for many lower middle market PE firms. We are essentially trying to close the access to capital gap, while realizing good returns for our investors with limited competition.

The name was inspired by Rosie the Riveter, a symbol for female empowerment. The “We Can Do It!” poster is on the wall at our office as a consistent reminder for us personally as founders as well as for our mission to empower others.

TH

I love it! Rosie would be proud! Thanks for the background. Truly rousing and it reminds me of an interview we did with Richard Baum of Consumer Growth Partners where he remarked on the importance of “speaking the language of the seller”. Admittedly, the context was different, but I still see a bit of a parallel. Tell us, how has the market—business owners, bankers, capital providers, etc.—reacted to Riveter’s positioning?

SAR/CG

While we knew we had a unique angle and a big differentiator, we were overwhelmed by the feedback we received when we first launched. Everyone we talked to, from sellers to bankers to investors, made a comment about how they had never come across a PE firm solely focused on this demographic. In fact, the reason we are here today is because your colleague Mac Lothrop, who I met at a networking event, said that we needed to talk to you for this series given our unique strategy. More specifically, we have heard from numerous bankers that often women-owned businesses look for women-led funds or women investors to sell to and how they generally struggle to find investors that meet these criteria.

Last year, we got Riveter WBENC certified as a WBE; this has been another key differentiator for us—we are able to maintain WBE designations post transaction.

TH

That’s great. I’m elated to hear the market has been that receptive. Also, I’m very grateful to Mac for connecting us. Ok, let’s get to the topic du jour: launching an independent sponsor operation. Let’s start at the beginning. What are the big pros and cons of “going independent?”

SAR/CG

The biggest pro is the agility and flexibility it provides for individuals who have the right experience and background but don’t necessarily check all the traditional boxes for institutional investors and therefore can’t raise a committed fund. While we believe our backgrounds and skillsets are the perfect fit to execute on this strategy, investors really look for that history of investing together, and the lack of a joint track record was a big hurdle for us to raise a fund out of the gate. Unfortunately, this is a hurdle for most females in the industry who are looking to partner with another female to found a firm.

Being an independent sponsor allowed us to focus 100% of our time on deal sourcing, underwriting and execution so we can prove out our thesis faster, build a joint track record and give us the option to raise a committed fund in the future if we choose to. We have found that if you have a good deal under exclusivity, there is an abundance of capital options out there from banks to SBICs to family offices. And while it does take a bit more time during the transaction process to get individual capital providers up to speed on a deal, we haven’t had an issue yet, knock on wood, finding not only capital providers but good, value added capital partners.

The biggest con, as you might imagine, is not having the cash! A big hurdle for any independent sponsor is convincing investment banks to show you deals that fit squarely in your strategy because they are concerned about us not having committed capital. Therefore, we spend a lot of time building relationships with our core investment banks to earn that trust and credibility, and like to bring in our capital providers and partners early in the process to help demonstrate certainty to close.

TH

People ask me all the time, “what background or skill set does someone really need to be an effective independent sponsor?” For example, do they have to have a PE or banking background to succeed? Also, I’ve met independent sponsors of all ages, from young professionals in their early 20s to seasoned deal professionals in their 70s. To what extent does good, old fashioned experience matter, if at all?

SAR/CG

That is a great question and one we discussed at length before launching. I think the answer is: it depends on the strategy and what the sponsor wants to do post transaction. For us, we aren’t looking to be just deal finders; we want to be hands-on investors who are truly sponsoring the deal and bring a lot of value to the table. Therefore, we knew we needed to bring (i) a strong institutional view of investing, structuring, underwriting and diligence, and (ii) operating experience to bring financial, strategic and operational horsepower to these companies which are primarily founder/family owned and don’t have built out management teams.

TH

So, let’s assume you understand the independent sponsor game, you have the right background and skill set, and you’re ready to take the plunge. Where and how do you start? Can you walk us through the checklist?

SAR/CG

I’m not sure this is the checklist, but this was our checklist when we started Riveter:

• Define your strategy and differentiator
• Prove there is a big enough market for your strategy to be successful
• Understand who your main direct competitors are (if any)
• Develop a business plan
• Come up with a firm name (arguably the hardest part…) and incorporate
• Set up emails/website
• Trademark your firm’s name (if it’s as good as Riveter’s!)
• Get your name out there – develop a core list of investment banks and investors that fit your strategy and start reaching out
• Develop your souring strategy
• Deal source, deal source, deal source
• Find good deals where you have a strong angle
• Close deals!

TH

SARAH ABDEL-RAZEK & COLLEEN GURDA

(Sarah) I was involved in a distressed M&A transaction where we were negotiating a settlement with the largest creditor, a high-profile celebrity. Before we could get both parties in the same room, the attorneys spent 3+ hours negotiating a very thorough NDA to ensure that the meeting was kept confidential. After finally getting the meeting started, we took a break and the celebrity went outside and took a selfie with the law firm name clearly in the background and posted it on Twitter, immediately breaching the NDA we spent all morning negotiating…

Tony Hill