Independently Sponsored: Akoya Capital

“Sneeze the Moment”

An independently sponsored interview with Max DeZara of Akoya Capital Partners

Tony Hill: So Max, welcome to our humble little series, “Independently Sponsored.”

Max DeZara: Well, Tony, thank you. It’s a pleasure to be here. Really appreciate the invitation. I think, in retrospect, I would much prefer to be talking about the ABCs of the independent sponsor community and how it’s impacting the private equity landscape generally, but unfortunately, we’re here to talk about the Black Swan event that we’re all confronted with at the moment.

I think we’re going to look back and recognize that this is a pretty special moment in time relative to capturing value in returns from a PE perspective. It’s difficult to see as we sit here today, but I do believe we’ll do a look-back and there will be some silver lining in this cloud.

TH: It’s great to have you, and I couldn’t agree more on both points. It looks like we still have a ways to go before reaching the proverbial “new normal” but, already, it feels companies’ gaze is pointed at the future, rather than the present, which is good. More on that in a bit. For now, tell us about you, Max. We know independent sponsors come in all shapes and sizes. What makes Akoya Capital unique?

MD: Well, I think we have a slightly differentiated business model where we really have employed a sector-focus leader-led strategy. Essentially, by that, I mean we have three sectors that we invest in, and each one of the sectors is led by an industry rockstar. Our partners have decades of deep relevant operating and domain expertise, and that really allows us the ability to be viewed as much more of a strategic buyer than a pure financial buyer. We have six very senior operating partners that lead our efforts across three different sectors complemented with a five-person transaction team, all of whom are classically-trained private equity professionals who bring a lot of the technical attributes you’d find at any other middle market PE fund.

And then we also have a partner named Liz Dominic. Liz and I have worked together for over 20 years. Liz focuses on the human capital elements of private equity investing—human capital assessment and talent acquisition across our portfolio of companies. I think it’s a little unique from a traditional PE perspective and really helps to create some differentiation, when we’re out talking to business owners and founders of the businesses that that we ultimately invest in.

TH: Okay, so let’s get to it. When COVID-19 really hit the fan back in March, a lot of PE portfolios got hit hard and fast. On our end we got lucky. Exposure was relatively limited affecting only a few of our portfolio companies very severely and we were able to batten down the hatches liquidity-wise pretty quickly to ride out the storm. What did you guys see in the Akoya portfolio?

MD: Yeah, I think pretty much the same. We currently have eight active portfolio companies, one of which has actually been a beneficiary of what’s happening with COVID-19. They’ve been able to pivot very nicely and transition into the PPE marketplace. So, we’re actually up year-over-year from a revenue and EBITDA perspective, but that’s clearly the exception to the rule. The balance of our portfolio companies are experiencing varying degrees of impact, and I’d say revenue is off anywhere from 10% to 40% across the board. I’m pleased to report that most of our portfolio companies have bounced back nicely and all but one is at or above pre-COVID revenues.

TH: Well, all in all, that’s not bad. Now, taking the question a step further: How did your debt and equity partners react?

MD: You know, they’ve been remarkably supportive. On the debt side, the lenders that we’ve worked with had been very proactive. They have really turned their attention inward toward their existing portfolio, wanting to ensure that the companies have sufficient liquidity and are well capitalized to weather the storm. We’ve been extremely pleased with how the lenders have responded. Likewise, on the equity side, with respect to our co-investment partners, they’ve also really stepped up. This has underscored the importance of choosing your equity partner and getting that right.

In my experience, you learn so much about your partners when the chips are down and when things are challenged. I’m pleased to say that our equity partners have really stepped up and have been highly collaborative, and in a strange way, I think this is actually creating a stronger bond between ourselves and our debt and equity partners.

TH: Ha. Again, I agree. I read somewhere that COVID-19 has become an “outcome accelerator” of sorts for relationships. In other words, it’s helped relationships destined to flourish, flourish faster, and relationships doomed to break up, break up sooner. I’m delighted, though not surprised, to hear you guys are in good shape with your partners.

Changing gears a bit and looking ahead to the future, let’s talk about the BIG question on every M&A professional’s mind: where do you see mid-market valuations going and what kind of opportunities if any, are you seeing to play offense?

MD: When we think about playing offense, we look at it from a couple of different perspectives. One of the companies in our portfolio rapidly took advantage of the fact that we have unique technology that could be aimed towards the PPE marketplace. So, we focused a lot of our efforts there.

Some of the other businesses were looking to seize other opportunities through cost reduction by strengthening and improving operational performance and operational efficiency. So, it’s really helped us, for better for worse, accelerate best practices across the portfolio from both a revenue perspective and a cost reduction perspective.

The other element is that we see COVID-19 offering a unique opportunity to really accelerate our add-on strategy in many of the companies in our portfolio—our buy-and-build situations—and we were already beginning to see that there are some companies that maybe don’t have the same level of liquidity or financial stability that our companies have, that we think can be bought at a fairly steep discount pre-pandemic. We’re very aggressively turning our sights toward add-ons and looking to grow through executing an acquisition strategy relative to new investments and new platforms. I think the jury’s still out, but our sense is that the exit activities have really fallen off a cliff as owners with challenged businesses are holding on to their assets through the crisis.

Now, having said that, because we have such an operationally centered approach towards private equity investing, we’re looking actively at pursuing some turnaround and distressed opportunities now. I mean, we don’t intend to play at the bankruptcy level of the continuum, but we think that there are fundamentally going to be a lot of good businesses with bad balance sheets that don’t have the same liquidity or financial staying power that we’re able to bring to the equation. And we think that these businesses can be bought at a pretty steep discount. We are also seeing a flight to quality and believe that businesses that proved to be resilient during the pandemic will still attract interest at healthy multiples.

And if history has a tendency to repeat itself, as a student of valuations, when you look at the last couple cycles, the greatest returns have been made right in the depths of a recession or just coming out of a recession. So, we’re taking a contrarian perspective, but we really do believe that there’s a unique opportunity to deploy capital and acquire fundamentally good companies that may have a challenged balance sheet or some liquidity issues that they’re currently dealing with.

TH: So, over here at Trivest, we’ve been witnessing an interesting pattern. Between February and April, when COVID was exploding onto the scene here in the US, deal opportunities from independent sponsors surged. At its peak in April, deal flow from the IS community was more than twice normal levels. In May, June and July, however, it went right back to normal. What do you make of those data points, and what impact do you expect on fundraising and the sources of equity capital on new investments?

MD: Yeah, I’m not surprised to hear that, Tony. When you look at just our co-investors, we work with traditional buyout firms like Trivest, and we’ve worked very successfully with family offices. And there’s a new emerging category of institutional investors, endowments and funds of funds who are actively looking to co-invest and do direct investing.

I think what’s happening in the early stages of COVID-19 is that the PE groups are separating themselves as a reliable steady source of capital; I think many of the family offices are pulling in the reins a bit and, I’d say, are unsurprisingly being a bit more fickle and allocating less capital for alternatives. I think some of the other institutional investors the endowments and fund of funds, they were beginning to stick their toe in the water and feel their way through it. I think they’re beginning to pull back. So, I think it really bodes well for firms like Trivest that have committed capital, as well as a history and track record of playing well with independent sponsors.

I think PE groups are better positioned to take advantage of opportunities in this marketplace, given what I referenced earlier about the other two channels beginning to retract a bit. But you know, having said that, while we’ve talked to a number of different investors, many of whom claimed to be open for business so to speak, I think it’s clear that the bar is significantly higher. And it’s going to require from the independent sponsors perspective, an increased time and effort in order to get deals over the finish line. In short, I think we’re going to find that, while there will be capital available, it’s going to be a lot more challenging to get deals financed over the next three to six months.

TH: Well, though self-serving, I guess, I hope you’re right about private equity being able to fill the void. I know that we, for one, would love to work on a deal with you guys. Maybe this will be the year…

Max, before we go, and in the spirit of ending this interview on an uplifting or humorous note, what’s the funniest or weirdest thing you’ve encountered in your almost 40 years of deal-making?

MD: As you know, we have an operationally-focused approach to our investment portfolio. As a result, we tend to focus more on what a business can become rather then what it’s been. There are many stories, but one that sticks out turned out to be one of our better investments.

The “before” picture wasn’t for the faint of heart. When we entered the facility for the first time and walked into the lobby, we were met with ripped dirty carpet and hunting trophies (buffalo and deer heads, along with several other small stuffed animals) mounted everywhere. It looked like a scene from the movie “Night At The Museum.” The company manufactured and formulated silicone products, and the plant floor had a layer of silicone that felt like a skating rink. The icing on the cake is that the founder drew a line in the sand and made us exclude the company’s toaster oven as part of the deal!!

At the time, the business was generating over $5mm of EBITDA on $19mm of revenue with 18 employees, so we knew there was some special sauce somewhere. Thanks to my partner who has over 30 years of experience in senior leadership roles in the specialty chemical industry, we were able find it and to unlock significant value. After professionalizing and transforming the business, we grew it to $80mm of revenues, $16mm of EBITDA and 160 employees and sold it to a strategic generating over a 3.5x MOIC.

TH: Max, I want to thank you for joining us. It’s been a pleasure and I greatly appreciate the insights. Now on a completely serious note, we wish you and your loved ones nothing but health, safety and security during these challenging times.

MD: Yeah, terrific. You know, as we look across our portfolio, one of the things I’ve experienced is that many of the industries are in a state of suspension—stuck between what used to be and what is yet to come. And I think the ones that figure that out and are able to adapt and pivot is what’s going to separate the winners from the losers.

But, thank you very much. I really appreciate being part of the series and I look forward to continuing to build our relationship with Trivest. I want to give you guys kudos for focusing on the independent sponsor channel and looking to partner with us because I think it’ll pay dividends all the way around.