TONY HILL

Matt, I hope you enjoyed a pleasant and relaxing Thanksgiving, and welcome to the final Independently Sponsored interview of 2020. While we could not be happier having launched this interview series a few months ago, I’m not going to lie: I have NO qualms about 2020 making its way into the rearview mirror.

Matt Joen

I certainly did and hope you did as well. Thank you for having us; we are excited and humbled to have the opportunity to be a part of this series. It’s been great to follow the first several episodes and to see Trivest finding a way to showcase and support the independent sponsor community. Trivest has always been great supporters of our efforts at Timoneer and the broader independent sponsor community, and we appreciate that. That all said, we echo your sentiment regarding 2020 making its way to an end! Fingers crossed we can make it there safe and sound without any more surprises out of leftfield. I don’t know about you, but I’m nearing the point where nothing surprises me anymore…not sure if that’s a good or a bad thing.

TH

Haha. I hear you, Matt. On the bright side, there’s just a month left to go. What could happen, right? Moving along…

As a leader on Trivest’s Business Development department and, in a prior life, the co-founder of the largest [albeit now defunct] online deal sourcing network in the business, this month’s topic is particularly near and dear to my heart. Let’s talk about deal sourcing. Tell me, what’s your strategy? How is Timoneer doing the bulk of its origination? Are you casting a wide net or going surgical? Are you interfacing with intermediaries or going founder-direct?

MJ

Absolutely, you are in good company as we’re big believers that sourcing is an art within itself, especially in the lower- and middle-markets. To answer your question, all of the above. A little tongue in cheek, but the reality is our sourcing strategy is multi-faceted and we are firm believers that you must be in order to gin up unique deal flow. In our opinion, it’s not only advantageous to have multiple sourcing channels, it’s the key to success; you never really know what you’ll uncover and what type of unique situation might arise. While most of our time and effort is spent going “founder-direct,” we also maintain, and continue to build upon, a healthy network of intermediary relationships. For intermediary-driven investment opportunities, it’s process, opportunity, and situation dependent. When we formed Timoneer, we “white-boarded” a handful of industry verticals we planned to focus on given our complimentary backgrounds—we tend to take a targeted approach within those verticals. That said, we also maintain an opportunistic view of the world, and we believe in casting a bit of a wider “catch all” net across the market in other verticals we know well, but may not be at the core of our investment efforts; you never know what you’ll uncover and what angle you might end up having. We’re more opportunistic from that standpoint.

TH

I could not agree more. The field has become so crowded out there these days. You have to deploy multiple strategies, you must think outside the box. I just did a quick tally in my head and, at Trivest, we’re actively managing and tracking at least ten different origination strategies right now. So, what about the mythical “proprietary deal”? Everyone claims to drive a lot of proprietary flow, but it seems like only a very few firms are consistently good at it. Where does Timoneer stack up? How are you guys finding proprietary deals?

MJ

Ah, that old chestnut. It’s tough to speak to where we stack up, but I’d say we’re no slouch (“Don’t sell yourself short, Judge. You’re a tremendous slouch.”) and we consistently strive to perfect our model. While we’ve experienced great traction on this front, for us, the “challenge” with proprietary deals can be the average deal cycle, or time it takes to start making real progress. More often than not, there’s not an extreme, burning need to sell. Yes, owners may want to diversify their wealth, take on a partner to help catalyze growth, and perhaps further professionalize, but now versus six months from now rarely makes a meaningful difference in a seller’s mind. And truth be told, we don’t really mind this dynamic, as it gives us the opportunity to truly build a relationship. We enjoy this aspect and value the process—it’s one of the dynamics that gets us most excited about the lower-and middle-market. Yes, deal cycles can be lengthy, even frustrating at times, but developing strong relationships with interesting businesses, owners, management teams, and everyone in between, is one of the most rewarding parts of the process. On one hand, you’re energized to put money to work and start driving a positive investment outcome (and in many circumstances wish you could have done so yesterday). On the other hand, relationship building and ensuring alignment is not only important (and fun), but an integral step in the investment diligence process. So, with that said, we generally have a solid bench of proprietary deals we are harvesting while actively engaged with one or two in more advanced discussions. Inevitably some fall away for one reason or another, but we do a pretty good job of keeping a consistent pipeline that we hope to see materialize over the next 18-24 months. And to answer your final question…how do we find these deals? Similar to my comment earlier: it’s multifaceted and ever-evolving. Given our efforts are heavily relationship-driven across the board, we end up developing or seeing proprietary deals from several different channels in addition to our direct outreach efforts. And, if you would consider this proprietary or proprietary’ish, we also from time to time get sneak peeks or exclusive looks from some intermediaries that we’ve built a good reputation with over time. Other channels include professional networks and professionals, friends and family, and sometimes even other funded and independent sponsors.

TH

Sort of a double-edged sword there, isn’t it? On the con side, you have a long time to close or transact. On the pro side, though, that extra time opens a window to develop a relationship (and some level of exclusivity, in a way.) So, peering into the future at bit, how do you see the origination toolbox changing (if at all) in the medium- to long-term?

MJ

Interesting question and I would preface my response with the fact that my answer likely changes depending on the day. Wish I had the crystal ball! However, I do believe there will always be the standard baseline of channels (traditional intermediaries, tech-enabled sourcing platforms, direct efforts), that will evolve over time and perhaps come and go. One interesting dynamic we’ve seen unfold since our efforts started not too long ago has been the emergence of funded and independent sponsors working collaboratively together when there may be a great fit for one but not for the other—cross-sharing deal flow, if you will. We value the strong working relationships we’ve developed with our capital partners and always look to add value, even in deals we’re not involved in. There’s nothing wrong with building goodwill! In addition to that, we’ve noticed more proactive lenders raise their hands and offer introductions to companies that aren’t currently sponsor-backed but are looking to take on an equity partner.

TH

You mentioned online deal sourcing. I’d be remiss if I didn’t ask if you think platforms like Dealnexus [R.I.P.!] or Axial will ever fulfill their promise of “democratizing” the origination game?

MJ

Well this is a bit like opening pandora’s box! I would say they have, in theory and to a degree. To the extent which the buyside fully adopts these solutions as their main or only source I’m skeptical of, it maybe more of a novelty. At the very least, they are a great funneling tool to the “catch-all” approach I mentioned earlier. We’ve noticed that as relationships between sponsors and intermediaries are built through these platforms, you start to see direct deal flow from those same sources. So, staying power I guess would be the bigger question mark for me. Maybe there will always be a new crop to keep the engine going, I don’t know. I think it’s also important to note that from an adoption standpoint you have opposing forces. For example, and in our opinion, the buyer community enjoys the fragmented nature of the lower-and middle-market, although frustrating at times. That said, if you’re spending most of your time with brokered or banked deals, it’s a great efficiency tool. For Timoneer, online deal sourcing is a less relevant channel given our efforts are focused on more proprietary, or off-market, deal flow.

TH

Yeah, I’d submit that online deal sourcing showed early promise and interest from the industry, but the novelty wore off before the technology was able to find enough traction and, frankly, a truly viable business model. Today, I get the sense that the most “online” transformation is happening in the founder-direct channel, where companies like SourceScrub and Grata, to name a couple, are pointing buyers directly to viable targets. That said, yes, it may prove tough to get the online deal sourcing genie back in the bottle.

MJ

Couldn’t agree more, Tony.

TH

Well, let’s change gears for a moment. They say that one of the disadvantages of being an independent sponsor is that it complicates the already-difficult task of winning over a business owner (versus a strategic or financial buyer). What’s your take on that, and what does Timoneer do to stand out from the pack?

MJ

Dare I say relationship and approach at this point…All jokes aside, I would completely agree with that statement at face value. It’s all about how you approach a given situation and position the model and its advantages; transparency is key. I would also argue that’s a perceived disadvantage that can be overcome if the relationship, fit, philosophy alignment, and approach coalesce. Given that the lion’s share of our investing efforts are focused on entrepreneurial or founder-owned businesses, relationship, fit, continuity, and preservation of legacy are all meaningful considerations to most sellers. The independent sponsor model is, by definition, a bit more entrepreneurial, so that can have its advantages at times. If you’ve developed the right model, have solid relationships with capital partners, and approach the diligence process accordingly and with candor, our experience is that being an independent sponsor becomes less of a barrier. This typically rings truer in founder-direct situations vs. intermediary-driven processes. That’s not to say we don’t come across sellers who have heard horror stories or been victims of bad actors in the past. But having strong working relationships with capital partners, to the point where you can collaboratively work in parallel through opportunities from the onset, has been a critical tool for us…and it goes back to the topic of one of your earlier interviews on picking the right partner. We like to bring our capital partners in early, allowing us to work through opportunities in lockstep. Doing so typically eliminates common missteps and complexities in the deal process, and it certainly bodes well while interfacing with sellers.

TH

Ha…I think I see a theme emerging here. Kidding aside, I like your point about transparency being key. Last month, we sat down with Justin Loeb from Clearsight Advisors to discuss the potential impact of the U.S. general election on deal-making. Since then, quite a bit has happened: among other things, we have a President-Elect, two viable vaccines have been announced by Pfizer and Moderna, and deal-making continues unabated. Do you expect more or less deals to go to market in 2021?

MJ

There are lots of moving pieces, no doubt about it. Generally speaking, we’ve noticed deal activity pick up since the end of Summer. We would attribute a large part of that activity to processes that were put on hold due to COVID that started to move back through the system. We think that trend will continue into 2021 as companies recover or are forced to transact. Prior to the results of the election, we did notice a second wave of deals coming to market in fear of the proposed change in capital gains taxation. By and large, we’ve seen the deals that didn’t make a ton of progress during that frenzy relax a little and will likely spill over into 2021. Beyond that, we’ve noticed that “motivated sellers” seem to be feeling a bit more comfortable with the idea of transacting in 2021 without any surprises or unknown repercussions. Not sure we’re completely out of the woods from that standpoint, but we’re seeing greater comfort and less election chatter—more “business as usual.” It’s also worth noting the holidays are upon us, so we’ll naturally see a bit of a pullback through year end and into early 2021. Channeling positive thoughts with fingers crossed for the new year (in more ways than one).

TH

We’re hearing much of the same over here. Interestingly, October of 2020 was the most prolific deal origination month in Trivest history; however, after six months of month-over-month deal flow growth, that streak will finally end in November. I think you’re right: the holiday slowdown may be upon us.

Matt, I think I mentioned to you that, as a condition of doing an interview with Independently Sponsored, you have to come prepared with a funny or interesting story from your days as a deal-maker. We’re ready when you are!

Matt Joen

I guess the moment we’ve all really been waiting for. Happy to bring this interview to a close with a little levity and humor…or at least attempt to. Don’t worry folks, I’ll plan on keeping my day job after this interview. While my past is riddled with “did that really just happen” moments, one in particular comes to mind that involves a rural city in Washington state and a client who was a rodeo champion. As a bit of context, this is not a Timoneer event and dates back to my days in investment banking as a newly minted Associate with a fairly large bank in NYC. This particular engagement was actually my first deal staffing that I received when I transitioned to the firm, and over time, became the deal that would never go away and that consistently evolved. It was a smaller engagement than what we typically focused on but a very promising company, and one that seemed to periodically eat up a decent chunk of my time. At any rate, we ended up getting to the point where my Managing Director at the time suggested I spend a week on site with the Company to finish up the CIM and help pin down exactly what the Company was looking to accomplish. One of those tech-enabled Company’s that’s a hammer and everything around it is a nail type situation—needed strategic focus that would ultimately shape the positioning and how we went to market. So, I did just that. I hopped on a flight and headed over to Washington state. Now, I knew the founder-owner was a bit of character and lived on a ranch but didn’t fully appreciate how engrained he was in the rodeo community. Think it’s also worth noting for context that he insisted I stay at his ranch with his family. So here I go from NYC to this rural area in Washington to stay a week on a ranch in an effort to get this deal moving in the right direction. When I arrive at the airport, I was picked up by the founder-owner / CEO in this massive, mud-covered dually and taken directly to the Company to get acquainted with everyone and get my bearings. Once that was out of the way, I was told we were going back to his house, we’d each pick out a steak (from one of his cattle), grill, then ride some horses. CEO: “Ever ridden a horse before, Matt?” Me: “No, can’t say that I have.” CEO: “Ah, it’s easy, you’ll love it.” Me: “…ok, sure.” So, we eat our steaks (which were incredible by the way) then make our way to his indoor riding area. He provides me with a cowboy hat, and pair of boots, and gloves, then says “wait here.” He brings out a horse and tells me that this is a great, mild-tempered horse that everyone he teaches learns on (spoiler alert…this was not the case). He gives me some tips, props me up on the horse and the horse immediately takes off in a full sprint around the arena…I’m holding on for dear life. If you’ve ever ridden a horse, you’ll know that your first time on a horse can be taxing to your backside, let alone with a professionally trained rodeo horse. Now knowing that I was getting toyed with, I decided to suck it up and pretend like I wasn’t in an extreme amount of pain. We rode for hours, they taught me drills, how to rope, the whole enchilada. After we finished, the CEO looked at me, smirked, and said something to the affect that I should’ve cried “uncle” from the beginning versus trying to tough it out…and that I’d pay for it tomorrow. Being the big tough rodeo man that I am, I told him I’d be fine…wasn’t any worse than riding the subway during rush hour. The next morning, I woke up and could barely move. I hobbled downstairs at 5am after smelling breakfast cooking, only to find his whole family sitting at the table laughing at me as I completed my hobble of shame to the kitchen. After breakfast, he pulled me into his office, thanked me for being a good sport, then proceeded to gift me a belt buckle, cowboy hat, and my very own pair of cowboy boots. However, only under one condition: that I wear all three for the remainder of the trip no matter where we went. So, for the next week I shuffled around the office and around town with the CEO wearing the belt buckle, cowboy hat, and cowboy boots that were gifted to me and watched everyone laugh at me while knowing exactly what happened. Let’s just say I’ll never forget that experience and neither will my backside. And for those who are wondering, yes, I still have all three gifts to this day.

Tony Hill

LOL! And to think we were low on material for this month’s interview title…

Matt, it’s been a pleasure. Thank you for your time and insight. Safe to say Independently Sponsored is riding off into the 2020 sunset on a strong note and setting a high bar for 2021. Let me wish you and the Timoneer crew a very merry and safe holiday season, and all the best in 2021. After all, it sounds like we’re all chomping at the bit for the New Year to arrive.