As the fourth quarter of the year comes to a close, Matt has insights into how the robust M&A activity we’ve seen will impact the insurance market moving forward, as well as the challenges those in the industry are facing.

“We've arrived at a scenario where we have more demand than supply from the insurance market,” Matt says on this episode — referencing how demand combined with the increasing claim environment is leading to an increase in prices.

Also on this episode, a presentation excerpt from McGuireWoods Partners Greg Hawver and Jeff Brooker from the McGuireWoods Independent Sponsor Conference in October. The presentation titled, “What is Market with Respect to Independent Sponsor Deal Economics?” covers the independent sponsor survey. The excerpt in this episode covers the portion on closing and management fees.

Meet Your Hosts

Name: Gregory Hawver

Title: Partner at McGuireWoods

Specialty: Greg represents private equity and strategic clients in a wide variety of change-of-control transactions, minority equity investments, domestic and cross-border acquisitions, recapitalizations, joint ventures and corporate reorganizations, as well as advising clients on day-to-day corporate matters.

Connect: LinkedIn

Name: Rebecca Brophy 

Title: Partner at McGuireWoods

Specialty: Rebecca focuses her practice on advising private equity funds, other institutional investors, and strategic acquirers in connection with mergers and acquisitions and other complex business transactions. 

Connect: LinkedIn

Name: Jeff Brooker

Title: Partner at McGuireWoods 

Speciality: Jeff focuses his practice on advising private equity funds, venture capital funds and other institutional investors and strategic acquirers in connection with mergers and acquisitions, early- and late-stage investments, leveraged buyouts, recapitalizations, management buyouts and secondary transactions.

Connect: LinkedIn

Meet Your Guest

Name: Matthew Heinz

Title: Partner & Co-Practice Leader, Transaction Liability at Lockton Companies

Speciality: Matt’s name is synonymous with ​​transaction liability insurance for M&A professionals across the country. He has served as both an underwriter and broker during his time in the industry. Before joining Lockton, Matt served as a Senior Managing Director and Co-Practice Leader of Aon’s North American transaction liability team. 

Connect: In this final episode of Deal by Deal for 2021, Matt Heinz, Partner & Co-Practice Leader, Transaction Liability at Lockton Companies, joins the podcast to share the outlook on representations and warranties insurance.

As the fourth quarter of the year comes to a close, Matt has insights into how the robust M&A activity we’ve seen will impact the insurance market moving forward, as well as the challenges those in the industry are facing.

“We've arrived at a scenario where we have more demand than supply from the insurance market,” Matt says on this episode — referencing how demand combined with the increasing claim environment is leading to an increase in prices.

Also on this episode, a presentation excerpt from McGuireWoods Partners Greg Hawver and Jeff Brooker from the McGuireWoods Independent Sponsor Conference in October. The presentation titled, “What is Market with Respect to Independent Sponsor Deal Economics?” covers the independent sponsor survey. The excerpt in this episode covers the portion on closing and management fees.

Meet Your Hosts

Name: Gregory Hawver

Title: Partner at McGuireWoods

Specialty: Greg represents private equity and strategic clients in a wide variety of change-of-control transactions, minority equity investments, domestic and cross-border acquisitions, recapitalizations, joint ventures and corporate reorganizations, as well as advising clients on day-to-day corporate matters.

Connect: LinkedIn

Name: Rebecca Brophy 

Title: Partner at McGuireWoods

Specialty: Rebecca focuses her practice on advising private equity funds, other institutional investors, and strategic acquirers in connection with mergers and acquisitions and other complex business transactions. 

Connect: LinkedIn

Name: Jeff Brooker

Title: Partner at McGuireWoods 

Speciality: Jeff focuses his practice on advising private equity funds, venture capital funds and other institutional investors and strategic acquirers in connection with mergers and acquisitions, early- and late-stage investments, leveraged buyouts, recapitalizations, management buyouts and secondary transactions.

Connect: LinkedIn

Meet Your Guest

Name: Matthew Heinz

Title: Partner & Co-Practice Leader, Transaction Liability at Lockton Companies

Speciality: Matt’s name is synonymous with ​​transaction liability insurance for M&A professionals across the country. He has served as both an underwriter and broker during his time in the industry. Before joining Lockton, Matt served as a Senior Managing Director and Co-Practice Leader of Aon’s North American transaction liability team. 

Connect: LinkedIn

Acquired Knowledge

Top takeaways from this episode

★    An increase in demand and in claim activity has led to increased RWI prices. After more than 12 months of robust M&A activity, we’re seeing cases where insurance representation and warranties insurance market (RWI) carriers are not able to service all of the available deals in the market. Due to the increase in demand, carriers have to be more selective in the deals they want to underwrite. They are also charging more for their time.

★    While constraints due to deal caps are going away in Q1 2022, human capital constraints are not. As we move towards January 1st, those looking to structure a deal and secure RWI can look forward to any cap constraints being removed once we hit the new year. However, Matt explains that there will still be a constraint on the human capital available to underwrite and structure RWI meaning some of the current crunch we’re seeing in the market will continue into the new year.

★    Fees are unlikely to go down in 2022. The general sense is that while fees might stabilize in 2022 they are not going to go back down to the sub 3% fees seen previously in the industry. The prediction is that RWI fees will stabilize around the 3 to 4% range for the foreseeable future.

Episode Insights

[05:45] High demand: Matt shares how a hot insurance market and an increase in claims is pushing RWI prices up while insurance carriers also get to be more selective in the deals they underwrite.

[06:08]: The insurance market is getting more challenging: Today it is more difficult to get deals below 50-75 million in enterprise value, particularly if they are lacking audited financials. However, Matt notes that he believes reports of the M&A and RWI markets shutting down for Q4 are somewhat exaggerated.

[08:25] Carriers may be restricted by limit caps: Matt explains that insurance carriers may have a premium cap that when reached causes them to limit the new deals they take on as they manage their exposure in a particular market or industry. Not all larger carriers will have these same reinsurance restrictions.

[10:48] RWI premiums have increased: Looking at inclusive amounts for insurance including the premium, taxes, underwriting fees, and broker fees (if applicable), the rate has traditionally been 3-4% of the limit of liability assuming a policy equal to 10% of the enterprise value on a deal. Today this price has increased about a hundred basis points up to around 4 to 5%

[11:39] Underlying cyber insurance is crucial: Matt says RWI carriers do not want to take on all of the cyber exposure and carriers are now more careful about ensuring companies have existing cyber insurance in place at an adequate limit.

[15:28] Reps are no longer purely seller friendly provisions: Matt explains that claim activity for carriers around contract reps have caused them to re-look at how reps are written so they are no longer as seller-friendly as they were a year ago.

[17:44] Start early on challenging deals: Matt says that if you have a potentially challenging deal, including those in the $50-75 million range it’s important to line up RWI well in advance of your signing date and to make sure you have a well connected broker.

[20:39] Human capital constraints aren’t going away: While the capacity constraints Matt referenced earlier in the episode will be lifted in January 2022, the human capital issue and need for more experienced professionals working on these deals will continue to be a concern.

[24:24] Consult with an attorney on closing fees: Jeff notes that there are many different ways to structure closing fees and each comes with a different risk so you need to review what works best for you and your comfort level before making a decision.

[25:34] Closing cost calculus: Jeff says that the majority of closing fees are calculated based on the aggregate enterprise value of the deal, if the deal is valued at 50 million, then that is what the calculation is based on.

[27:17] Closing fees: Greg shares that according to their survey results, in the majority of deals, there are no fees paid to the equity capital partner. Sometimes, PE firms are an exception.

Contact

Connect with us on Facebook, Twitter, Instagram, YouTube.

This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

After years in this kind of environment, Harry Eichelberger of Archimedes Health Investors found independent sponsorship in physician provider services to be more exciting, more personalized, and more entrepreneurial. On this episode of the podcast, he discusses his approach to healthcare investment and how he came to focus on physician services.

Also on this episode of Deal-by-Deal, hear from McGuireWoods Partner Holly Buckley on digital healthcare and healthcare IT.

“We will continue to see an increase in traction on deals in healthcare IT, and there’s going to be a real race to consume the valuable assets in that sector,” Holly says.

The demand has never been greater for fully invested, sustainable healthcare. COVID just brought it all to the forefront. Yet considering the events of the past year and a half, the healthcare niche is even more relevant than ever for the independent sponsor.

Meet Your Hosts

Name: Rebecca Brophy

Title: Partner at McGuireWoods

Specialty: Rebecca focuses her practice on advising private equity funds, other institutional investors, and strategic acquirers in connection with mergers and acquisitions and other complex business transactions.

Connect: LinkedIn

Name: Holly Buckley

Title: Partner at McGuireWoods

Specialty: Holly focuses her practice on corporate healthcare transactional work and regulatory matters. She primarily counsels private equity funds and healthcare clients and is Chair of the firm’s Healthcare Department. 

Connect: LinkedIn

Meet Your Guest

Name: Harry Eichelberger 

Title: Founder and Managing Partner of Archimedes Health Investors

Specialty: Harry was a healthcare private equity, growth capital, and venture capital investor before founding Archimedes Health Investors, a private equity firm, focused on healthcare, in 2015.

Connect: LinkedIn

Acquired Knowledge

Top takeaways from this episode

★    For a successful physician practice management venture, focus on alignment. The healthcare space went through two major rollups, one in the 1990s and one in the early 2000s. During those years, the relationship between management and physicians was strictly transactional, and during these downturns, their bonds quickly ruptured. When management treats physicians like true partners, they share incentives, are invested in each other’s progress and are positioned for long-term growth.

★    Bet on Healthcare IT. COVID brought the forward movement of healthcare IT and digital healthcare, but this sub-sector of healthcare has been gaining traction for some time due to demographic shifts. These include: aging Baby Boomers, a declining...]]>You could do very well in large-cap, private equity by consistently generating solid returns at scale and volume. It’s great for large institutions and PEs that have the time and resources to compete at slews of auctions and zoom through portfolio after portfolio to close deals, quarter after quarter.

After years in this kind of environment, Harry Eichelberger of Archimedes Health Investors found independent sponsorship in physician provider services to be more exciting, more personalized, and more entrepreneurial. On this episode of the podcast, he discusses his approach to healthcare investment and how he came to focus on physician services.

Also on this episode of Deal-by-Deal, hear from McGuireWoods Partner Holly Buckley on digital healthcare and healthcare IT.

“We will continue to see an increase in traction on deals in healthcare IT, and there’s going to be a real race to consume the valuable assets in that sector,” Holly says.

The demand has never been greater for fully invested, sustainable healthcare. COVID just brought it all to the forefront. Yet considering the events of the past year and a half, the healthcare niche is even more relevant than ever for the independent sponsor.

Meet Your Hosts

Name: Rebecca Brophy

Title: Partner at McGuireWoods

Specialty: Rebecca focuses her practice on advising private equity funds, other institutional investors, and strategic acquirers in connection with mergers and acquisitions and other complex business transactions.

Connect: LinkedIn

Name: Holly Buckley

Title: Partner at McGuireWoods

Specialty: Holly focuses her practice on corporate healthcare transactional work and regulatory matters. She primarily counsels private equity funds and healthcare clients and is Chair of the firm’s Healthcare Department. 

Connect: LinkedIn

Meet Your Guest

Name: Harry Eichelberger 

Title: Founder and Managing Partner of Archimedes Health Investors

Specialty: Harry was a healthcare private equity, growth capital, and venture capital investor before founding Archimedes Health Investors, a private equity firm, focused on healthcare, in 2015.

Connect: LinkedIn

Acquired Knowledge

Top takeaways from this episode

★    For a successful physician practice management venture, focus on alignment. The healthcare space went through two major rollups, one in the 1990s and one in the early 2000s. During those years, the relationship between management and physicians was strictly transactional, and during these downturns, their bonds quickly ruptured. When management treats physicians like true partners, they share incentives, are invested in each other’s progress and are positioned for long-term growth.

★    Bet on Healthcare IT. COVID brought the forward movement of healthcare IT and digital healthcare, but this sub-sector of healthcare has been gaining traction for some time due to demographic shifts. These include: aging Baby Boomers, a declining workforce, the ever-present need to do more with less, and increased demand for telemedicine and other remote solutions. In short, the opportunity for digital health innovation is only expected to grow. 

Episode Insights

[00:47] Independent sponsorship in healthcare: McGuireWoods Partners Rebecca Brophy and Holly Buckley discuss the transition from PE to independent sponsorship within the healthcare space with Harry Eichelberger, Managing Partner at Archimedes Health Investors.

[02:54]: Bigger, faster funding: Funds in mature PE are raising more money and dispersing it more quickly.

[4:01]: The sweet spot: To Harry, lower-middle and growth equity are the most exciting healthcare areas because there is a need for the capital, expertise, and strategy an independent sponsor can offer.

[6:27] Dig into business models and alignment: Archimedes is deliberate about which health care spots it chooses to fund. The mid-2000s taught Harry and his colleagues valuable lessons about paying attention to long-term alignment with business models: how do companies bring value to their customers and how are they paid for? Radiation oncology was operating in a reimbursement environment positioned to fail when cuts were instituted, for example.

[8:59]  History repeating: In the 1990s, physician practice management (PPM) models often failed because the physicians and the management companies were not aligned. The PPM provided little oversight or systems to help physicians operate their practices to adapt to market fluctuations. It was focused on quick money and IPOs, so it wasn’t built to last.

[11:14] A different approach: Archimedes partners with physicians by tying their compensation to productivity instead of paying them a fixed salary. They create sharing mechanisms so that doctors can have access to IT, investments, systems, and management services. They also create alignment through equity ownership of the parent company. 

[13:28] The individual advantage: Many big, institutional sponsors are prohibited from looking at smaller deals. Not so for the individual sponsor, and starting small is an opportunity to grow a business the way you want to, not according to a pre-existing set of constraints and policies.

[15:27] Start small: Find deals. Conduct due diligence. Raise capital. This is the basic playbook for starting out as an individual sponsor. It’s extremely challenging, so keeping your ambitions modest in the beginning makes the most sense.

[17:41] Present as an entrepreneur, and use your relationships: Harry found CEOs took him more seriously when he emphasized that working with them was his own venture, rather than part of a cushy job with a PE firm. He was also fortunate to have many strong contacts from his days in the PE world that he could leverage.

[18:46] Lean is nimble: Without the usual hours-long, extended meetings and flurry of memos that PE brings to mind, the individual sponsor can get more done in less time.

[20:54] Proof in crisis: During the most devastating moments of the pandemic, some healthcare companies showed up. Others didn’t. This underscored the importance of company culture. Archimedes was in the middle of due diligence when COVID-19 hit, and Harry says this turned out to be a great opportunity to see how the company they were evaluating responded to stress.

[24:27] 2021 outlook: Harry and Rebecca are both seeing delas being pulled forward. They discuss the deal outlook for the rest of the year and beyond and underscore why having the right partner is critical.

[28:28] Next big investment areas: Harry and Holly talk about what specific areas of healthcare they are bullish on. Harry likes physician services, while Holly is focused on opportunities around healthcare IT and digital health.

Contact

Connect with us on Facebook, Twitter, Instagram, YouTube.

This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

As the end of the year approaches, dealmakers have to navigate the ongoing unknowns of the pandemic along with the other factors that are tightening the pressure valve on M&A this year.

“I suspect this year is going to be just as tight [as last year], if not tighter,” Rebecca Brophy says on this episode of Deal by Deal, talking about the haste at which dealmakers will need to get things closed while operating under a breakneck volume of deals.

Also on this episode, hear from DuneGlass’ Ryan Graham and Daniel Hosler about why they made the switch to independent sponsorship from private equity: “We tried to build something a little more founder-centric,” Ryan says.

With their focus on healthcare services and medical practices, Ryan and Daniel share their thoughts on healthcare investment opportunities.

Meet Your Hosts

Name: Gregory Hawver 

Title: Partner at McGuireWoods 

Specialty: Greg represents private equity and strategic clients in a wide variety of change-of-control transactions, minority equity investments, domestic and cross-border acquisitions, recapitalizations, joint ventures and corporate reorganizations, as well as advising clients on day-to-day corporate matters. 

Connect: LinkedIn

Name: Rebecca Brophy 

Title: Partner at McGuireWoods 

Specialty: Rebecca focuses her practice on advising private equity funds, other institutional investors and strategic acquirers in connection with mergers and acquisitions and other complex business transactions. 

Connect: LinkedIn

Name: Jeff Brooker

Title: Partner at McGuireWoods 

Speciality: Jeff focuses his practice on advising private equity funds, venture capital funds and other institutional investors and strategic acquirers in connection with mergers and acquisitions, early- and late-stage investments, leveraged buyouts, recapitalizations, management buyouts and secondary transactions. 

Connect: LinkedIn

Meet Your Guests

Name: Thomas J. DeSplinter

Title: Partner at McGuireWoods 

Speciality: Tom is an accomplished dealmaker and partner in the firm’s M&A and Corporate Transactions Department. 

Connect: LinkedIn

Name: Ryan Graham 

Title: Managing Partner and Founder at The end of the COVID-19 pandemic seemed to be on the horizon until the Delta variant showed up, bringing with it the potential to shake up the deals market once again.

As the end of the year approaches, dealmakers have to navigate the ongoing unknowns of the pandemic along with the other factors that are tightening the pressure valve on M&A this year.

“I suspect this year is going to be just as tight [as last year], if not tighter,” Rebecca Brophy says on this episode of Deal by Deal, talking about the haste at which dealmakers will need to get things closed while operating under a breakneck volume of deals.

Also on this episode, hear from DuneGlass’ Ryan Graham and Daniel Hosler about why they made the switch to independent sponsorship from private equity: “We tried to build something a little more founder-centric,” Ryan says.

With their focus on healthcare services and medical practices, Ryan and Daniel share their thoughts on healthcare investment opportunities.

Meet Your Hosts

Name: Gregory Hawver 

Title: Partner at McGuireWoods 

Specialty: Greg represents private equity and strategic clients in a wide variety of change-of-control transactions, minority equity investments, domestic and cross-border acquisitions, recapitalizations, joint ventures and corporate reorganizations, as well as advising clients on day-to-day corporate matters. 

Connect: LinkedIn

Name: Rebecca Brophy 

Title: Partner at McGuireWoods 

Specialty: Rebecca focuses her practice on advising private equity funds, other institutional investors and strategic acquirers in connection with mergers and acquisitions and other complex business transactions. 

Connect: LinkedIn

Name: Jeff Brooker

Title: Partner at McGuireWoods 

Speciality: Jeff focuses his practice on advising private equity funds, venture capital funds and other institutional investors and strategic acquirers in connection with mergers and acquisitions, early- and late-stage investments, leveraged buyouts, recapitalizations, management buyouts and secondary transactions. 

Connect: LinkedIn

Meet Your Guests

Name: Thomas J. DeSplinter

Title: Partner at McGuireWoods 

Speciality: Tom is an accomplished dealmaker and partner in the firm’s M&A and Corporate Transactions Department. 

Connect: LinkedIn

Name: Ryan Graham 

Title: Managing Partner and Founder at DuneGlass Capital 

Speciality: Ryan focuses on identifying and implementing cost reduction and growth opportunities to drive meaningful improvement to the bottom line. He has deep operational expertise with a track record of growing EBITDA through revenue and margin improvement.

Connect: LinkedIn

Name: Daniel Hosler

Title: Managing Partner and Founder at DuneGlass Capital 

Speciality: Dan has operational and deep deal experience, having started three companies and spending 15+ years in private equity. He knows the universe of buyers, what private equity looks for in a deal, and how to make operational improvements to increase the value of a medical asset. 

Connect: LinkedIn

Acquired Knowledge

Top takeaways from this episode 

★    As the duration of the pandemic remains unknown, don’t expect a repeat of 2020. The Delta variant of the coronavirus has changed the course of how we thought the pandemic would end. Rising cases and potential lockdowns have the power to shake up M&A deals, but that doesn’t mean anyone should panic. Nobody wants another wave of lockdowns. Additionally, the anxiety that caused deal flow to plummet when the pandemic first started isn’t likely to repeat.

★    In a seller’s market, independent sponsors have a bit more leeway to get creative. Because of how strongly biased the market is toward sellers right now, it’s hard for buyers to set very many conditions about the deals they make. But independent sponsors have a leg up due to their personal relationships with buyers that allow for more thoughtful transactions. Right now, it’s a bonus to be flexible!

★    The rest of the year is going to be busy. There is a general consensus that the next few months are going to be a busy time for M&A — the QV market is particularly backed up. It’s not quite yet at the point where people are turning away work, but getting deals closed before the end of 2021 is going to be very tight.

Episode Insights

[01:41] Independent sponsor networking: McGuireWoods Partner Greg Hawver previews the fourth annual Independent Sponsor Conference, which will be in Dallas in October.

[08:16]: Keep your finger on the pandemic pulse: Jeff says that he doesn’t think purchase agreement language is going to completely change with the new wave of the pandemic, and that the tools we’ve previously developed will likely still stand. But he points out that it’s a fluid situation.

[12:22] Less fear of the unknown: Rebecca points out that, while the COVID-19 Delta variant is posing challenges to the market, she would be surprised if deals froze as much under a potential Delta lockdown as they did at the beginning of the pandemic. Now, people know what to expect a little bit more.

[16:20] Gearing up for a busy season: Gregory, Rebecca and Jeff all say that they’re seeing less legal bandwidth to help independent sponsors close out deals during this busy market. Thanks to possible changes in tax law, getting over the initial pandemic slump, the continued trend of retiring baby boomers, and more, dealmakers are in for a packed end of the year.

[22:21] The political backdrop: Gregory says that although the election of President Biden took place last year, people are now starting to wonder if he will enact some of the tax regime changes he said he would. New tax codes would have an impact on deals.

[28:06] Keeping an eye on healthcare macro trends: Daniel says that DuneGlass looks at large healthcare macrotrends when deciding which deals to pursue. One macro trend he mentions: As baby boomers age, demand for joint replacements is likely to surge.

[29:08] The golden age of biotech: Daniel says that even though he’s not a biotech investor, all healthcare investors and independent sponsors should become more familiar with the world of biotechnology. Even if you’re working in the middle market, you’ll be able to pick up on trends throughout the healthcare industry by paying attention to emerging technologies.

[30:56] Why go the independent sponsor route: Ryan talks about why he and Daniel wanted to make DuneGlass an equity partnership fund that invests in small, founder-owned companies that can make a difference in the healthcare industry and in the lives of the people starting the companies.

[42:47] Learning from mistakes: Daniel says that he and Ryan pay attention to the mistakes that both of them made at private equity firms. They’ve developed a specific playbook to look at management services under the guidelines of, and they make sure to take it into consideration with every new decision they make.

[44:22] The future of independent sponsorships: Daniel says that he sees the rest of the investing world catching up to the benefits of the independent sponsor model, and sees a future in which this model becomes more and more dominant in the deal-making sphere.

Contact

Connect with us on Facebook, Twitter, Instagram, YouTube.

This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

As the Managing Director at Pleasant Bay Capital Partners, a private equity firm focused on investing in lower-middle market companies in the healthcare, technology, business services, and industrial products & services sectors, he has helped bring value to both sellers and capital providers.

“We think sellers value [our vertical focus]. We understand the sector they’re in, we understand their business, and I think we can convince them we can be helpful post-close,” Scott says of Pleasant Bay’s standout strategies to close deals.

“And I think [capital providers] look to us because we do have deep sector expertise and a lot of these folks don't have that,” he says on this episode of Deal-by-Deal. “Healthcare is a tricky field, and if you haven't spent a lot of time in it, it can be a little bit of a nerve wracking place to invest. So I think that's important. And at the end of the day, we are bringing value and are able to provide value post-close and I think that's what a lot of capital providers are looking for.”

Tune into this episode to hear Scott’s tips for people interested in starting as an independent sponsor field. He offers strategies for how to cultivate strong relationships with businesses and potential capital providers as well as get the most juice out of a deal.

The episode also covers the pros and cons of doing deals with multiple capital providers and the importance of carving out a niche for yourself as an independent sponsor.

The last 10 minutes of the episode preview findings from the Independent Sponsor Deal Survey, which will be fully released at the fourth annual Independent Sponsor Conference. 

Meet Your Host

Name: Jeff Brooker

Title: Partner at McGuireWoods 

Specialty: Jeff focuses his practice on advising private equity funds, venture capital funds and other institutional investors and strategic acquirers. He specializes in mergers and acquisitions, early- and late-stage investments, leveraged buyouts, recapitalizations, management buyouts and secondary transactions.

Connect: LinkedIn

Meet Your Guest

Name: Scott Fisher

Title: Managing Director at Pleasant Bay Capital Partners 

Specialty: Scott has more than 17 years of experience in private equity, M&A, and corporate strategy and has worked primarily in the healthcare and life sciences sectors. 

Connect: LinkedIn

Acquired Knowledge

Top takeaways from this Deal-by-Deal episode 

★    Find a niche and distinguish yourself instead of aiming for huge transactions right off the bat. As the interest in independent sponsorship increases, there is more of a supply of investors that a business might choose to work with — so you’ll need to stand out. You don’t need to get the biggest deals right away: it will look better to...]]>Scott Fisher has been in the independent sponsor field for quite some time, and has learned a lot along the way. 

As the Managing Director at Pleasant Bay Capital Partners, a private equity firm focused on investing in lower-middle market companies in the healthcare, technology, business services, and industrial products & services sectors, he has helped bring value to both sellers and capital providers.

“We think sellers value [our vertical focus]. We understand the sector they’re in, we understand their business, and I think we can convince them we can be helpful post-close,” Scott says of Pleasant Bay’s standout strategies to close deals.

“And I think [capital providers] look to us because we do have deep sector expertise and a lot of these folks don't have that,” he says on this episode of Deal-by-Deal. “Healthcare is a tricky field, and if you haven't spent a lot of time in it, it can be a little bit of a nerve wracking place to invest. So I think that's important. And at the end of the day, we are bringing value and are able to provide value post-close and I think that's what a lot of capital providers are looking for.”

Tune into this episode to hear Scott’s tips for people interested in starting as an independent sponsor field. He offers strategies for how to cultivate strong relationships with businesses and potential capital providers as well as get the most juice out of a deal.

The episode also covers the pros and cons of doing deals with multiple capital providers and the importance of carving out a niche for yourself as an independent sponsor.

The last 10 minutes of the episode preview findings from the Independent Sponsor Deal Survey, which will be fully released at the fourth annual Independent Sponsor Conference. 

Meet Your Host

Name: Jeff Brooker

Title: Partner at McGuireWoods 

Specialty: Jeff focuses his practice on advising private equity funds, venture capital funds and other institutional investors and strategic acquirers. He specializes in mergers and acquisitions, early- and late-stage investments, leveraged buyouts, recapitalizations, management buyouts and secondary transactions.

Connect: LinkedIn

Meet Your Guest

Name: Scott Fisher

Title: Managing Director at Pleasant Bay Capital Partners 

Specialty: Scott has more than 17 years of experience in private equity, M&A, and corporate strategy and has worked primarily in the healthcare and life sciences sectors. 

Connect: LinkedIn

Acquired Knowledge

Top takeaways from this Deal-by-Deal episode 

★    Find a niche and distinguish yourself instead of aiming for huge transactions right off the bat. As the interest in independent sponsorship increases, there is more of a supply of investors that a business might choose to work with — so you’ll need to stand out. You don’t need to get the biggest deals right away: it will look better to pick and choose transactions you think you actually have a chance at. Choose to chase transactions in the areas you can carve out a niche for yourself, and you’ll experience more success. 

★    Expand your Rolodex of capital providers. Over the course of Scott’s career in independent sponsorship, he’s acquired quite a collection of potential capital providers to call on depending on the specifications of the deal. He knows what these partners want and what businesses they will be interested in, and he spends time cultivating relationships with these groups. If you have an idea of who might be interested in a particular opportunity and you’ve stayed on top of your relationship with them, it will be easier to seal the deal. 

★    Think about how to negotiate with capital partners. Your capital partners will look at their models and returns to figure out their budget and forecast models, so you should be doing the same. Work with your providers on a forecast that seems reasonable to all of you — providing realistic return projections and taking into account business growth, profit margin, and a fair rate of return.

Episode Insights 

[08:31] Put yourself out there: Scott says the Pleasant Bay team spends a lot of time doing proactive outreach, looking at their investment thesis and then making cold calls to find businesses that meet the criteria and are interested in independent sponsorship. 

[12:24] Connect with capital providers pre-LOI: Pleasant Bay starts to socialize potential capital providers before a letter of intent is signed, giving them information about the opportunity so they can get a running start if the deal goes through.

[16:58] Be strategic about how many capital providers you need: The number of checks you want to cobble together to fund a business really depends on the situation. There are situations when one capital provider is enough, and times when you’ll want more. Scott says it’s important to weigh the pros and cons and make sure you’re finding the right partner for you to get the deal done. 

[19:36] Look at the general set of economic parameters of most deals: Every deal will bring with it its own economics, but Scott says there is a general set of guardrails that most deals fall between and you can take as a guideline. 

[26:21] Sponsor economics are here to stay: Scott says the current state of sponsor economics seems to be working well for all parties. We aren’t expecting any seismic shifts in how deals are structured anytime soon, but if there is a downturn in the state of M&A, some independent sponsors might have to put more skin in the game.

[28:19] It’s all about the people: At the end of the day, you need to have a good set of people around you — from your team, to the capital providers, to the people working on the companies you’re backing. There will always be good and bad times, and other people are your best tool for success as an independent sponsor.

[31:01] Meet and learn in Dallas: McGuireWoods Partner Greg Hawver joins the podcast to discuss the fourth annual Independent Sponsor Conference, which will be in Dallas in October. Greg and Jeff also share some early findings from the Independent Sponsor Deal Survey.

Contact

Connect with us on Facebook, Twitter, Instagram, YouTube.

This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

But for those interested in getting started as an independent sponsor, getting to the point where you have the capital to invest and businesses that are willing to partner with you can seem daunting.

“The fact is, this is a tough world to go out and get your first few deals done, and it takes time,” says John Huhn, Managing Partner at Compass Group Equity Partners, St. Louis-based independent sponsor focused on middle- and lower-market transactions in niche manufacturing and consumer services.

But with help from people like John, would-be independent sponsors can get a leg up in the field.

On this episode of Deal-by-Deal, John talks to hosts Rebecca Brophy and Jon Finger about how he got involved in independent sponsorship and where he thinks the investing model is going.

Tune in to hear about how to get started as an independent sponsor, what kind of financial and legal terms you should keep in mind when making deals, and how to find the partners and capital providers: the “right people, with the right appetite, the right check size, and the right time.”

You’ll also hear about the different ways an independent sponsor can partner with a business, and how to harness the power of the independent sponsor community to learn and grow in your field.

Meet Your Hosts

Name: Rebecca Brophy

Title: Partner at McGuireWoods 

Specialty: Rebecca focuses her practice on corporate transactions, including mergers and acquisitions, equity and debt offerings, venture capital financings and strategic collaborations. 

Connect: LinkedIn

Name: Jon Finger 

Title: Partner at McGuireWoods 

Specialty: Jon Finger's practice focuses on private equity and corporate transactional matters, including mergers and acquisitions, securities offerings and corporate governance initiatives.

Connect: LinkedIn

Featured Guest

Name: John Huhn 

Title: Managing Partner, Compass Group Equity Partners 

Specialty: John has 25 years of experience in private equity, entrepreneurism and strategic consulting that he brings to his work as an independent sponsor.

Connect: LinkedIn

Acquired Knowledge

Top takeaways from this Deal-by-Deal episode 

★    Get clear on your preferred role in an investment partnership. Some independent sponsors are okay with a more hands-off approach once they’ve set their financial and legal terms with the business, while others are really intent on being a part of that business’ executive team, making sure strategic initiatives are implemented and providing oversight. There’s a...]]>The independent sponsor model of investing is becoming more popular with investors and businesses looking for a more flexible partnership than what the private equity model allows.

But for those interested in getting started as an independent sponsor, getting to the point where you have the capital to invest and businesses that are willing to partner with you can seem daunting.

“The fact is, this is a tough world to go out and get your first few deals done, and it takes time,” says John Huhn, Managing Partner at Compass Group Equity Partners, St. Louis-based independent sponsor focused on middle- and lower-market transactions in niche manufacturing and consumer services.

But with help from people like John, would-be independent sponsors can get a leg up in the field.

On this episode of Deal-by-Deal, John talks to hosts Rebecca Brophy and Jon Finger about how he got involved in independent sponsorship and where he thinks the investing model is going.

Tune in to hear about how to get started as an independent sponsor, what kind of financial and legal terms you should keep in mind when making deals, and how to find the partners and capital providers: the “right people, with the right appetite, the right check size, and the right time.”

You’ll also hear about the different ways an independent sponsor can partner with a business, and how to harness the power of the independent sponsor community to learn and grow in your field.

Meet Your Hosts

Name: Rebecca Brophy

Title: Partner at McGuireWoods 

Specialty: Rebecca focuses her practice on corporate transactions, including mergers and acquisitions, equity and debt offerings, venture capital financings and strategic collaborations. 

Connect: LinkedIn

Name: Jon Finger 

Title: Partner at McGuireWoods 

Specialty: Jon Finger's practice focuses on private equity and corporate transactional matters, including mergers and acquisitions, securities offerings and corporate governance initiatives.

Connect: LinkedIn

Featured Guest

Name: John Huhn 

Title: Managing Partner, Compass Group Equity Partners 

Specialty: John has 25 years of experience in private equity, entrepreneurism and strategic consulting that he brings to his work as an independent sponsor.

Connect: LinkedIn

Acquired Knowledge

Top takeaways from this Deal-by-Deal episode 

★    Get clear on your preferred role in an investment partnership. Some independent sponsors are okay with a more hands-off approach once they’ve set their financial and legal terms with the business, while others are really intent on being a part of that business’ executive team, making sure strategic initiatives are implemented and providing oversight. There’s a spectrum there, and anywhere on the spectrum is okay — but you should know that before going in.

★    Identify the right capital providers. When you’re starting out as an independent sponsor, you might just be happy to have the capital to close out a deal, and that’s completely understandable. But eventually, you want to be able to select investors who are worth more than just the capital they can provide. How many investors do you want? Can they provide industry insight? And once you’ve found some partners who you trust and have worked with in the past, consider going back to them in the future: a good partner can be hard to find.

★    Find deals in areas you know, and work to establish trust. As an independent sponsor, you have the opportunity to shape and improve businesses over time, so you’ll want to look for those deals in areas where you have contacts and expertise — this will also make you more attractive to capital providers. Do the hard work to find these deals, and if brokers and bankers are hesitant to work with independent sponsors, it’s good to have a financial partner by your side to show them that you’ll be able to finance their business.

Episode Insights

[03:42] Independent sponsor backgrounds: John says independent sponsors can come from all kinds of professional backgrounds — investment banking firms to recent college grads. There’s a spectrum of involvement in the business these different independent sponsors will have depending on their experiences, but there’s no right or wrong way to be one.

[05:35] Negotiating financial terms: Independent sponsors make money through transaction fees, management fees and carry, and the specifics of these deals will vary depending on who you’re working with. But John advises why you should put a minimum on your management fees.

[08:45] Different sponsors, different management strategies: John values playing a very active role in managing the companies his team invests in, but not everyone might want that kind of role.

[11:16] Adding advisors: Look for third party advisors on the investment team with expertise in the sector to help guide companies forward, ensuring the businesses you’re sponsoring continue to thrive.

[13:44] If it ain’t broke, don’t fix it: When you find a formula that works for your transactions, it’s not always wise to change directions, John says. If you mess with industry-accepted terms, you might see people backing out or different challenges.

[14:53] There’s plenty of capital out there: Talk to a handful of potential capital providers to find out what they offer before accepting just any check.

[21:14] Look at what you know: John says the Compass Group goes all in on a theme to find and secure deals, reading trade publications and going to trade shows to make contacts.

[27:06] Follow through is critical: Sometimes brokers are hesitant to make deals with independent sponsors because of a fear that you won’t follow through on financing. It’s helpful to have a potential financing partner present when making these deals, even if that’s not the capital provider you’ll end up using.

[31:51] 2020 was good for independent sponsors: As unusual 2020 was, the COVID-19 pandemic and subsequent financial crisis allowed independent sponsors to show how a hands-on approach to financing businesses can really help these companies weather tough situations.

[39:03] Leverage the community: The independent sponsor community isn’t competitive, they want to help you. You can count on the community to help with the questions you’re bound to come across in your journey.

Contact

Connect with us on Facebook, Twitter, Instagram, YouTube.

This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

McGuireWoods is pleased to announce that the pre-eminent gathering for independent sponsors and capital providers returns to Dallas this October.

Don’t miss the opportunity to gain knowledge and insights during our panel discussions, including results from our largest proprietary deal points study to date, and our much-anticipated networking events. Connect one-on-one in our efficient speed-dating segment, which produced more than thousands of meetings during our 2019 conference. For information, please visit here.

Episode Summary

As an independent sponsor, there are a lot of variables that come into play. Which businesses are worth acquiring and working with? What’s the best strategy to go about that? And is it worth the risk?

On this episode of Deal by Deal (yes, we’ve changed the name!), Greg Hawver and Richard Grant, Partners at McGuireWoods, tease out the lessons from investor success stories.

As Columbia River Partners’ Poneet Goel puts it, “cost structure perspective, as well as an operational efficiency perspective” are key. Understanding what is needed for growth, be it new technology or carving out a specific division of the company, can be the difference between failure and rapid success. It can also be the difference between being a stalking horse or just not being able to raise the capital needed.

Whether you go to traditional independent sponsor backers or your network of investors, there is always a new tactic to learn, and honesty about the good and the bad will strengthen your position in the end.

“I think maybe there's an important lesson there,” Richard says, “which is the importance of going out to the investment community … in any deal and being candid and frank about risk versus opportunity, upside, downside, where all the skeletons are.” No one will succeed with skeletons in the closet and being frank about the risks versus the upsides is discussed in a candid manner, much like how it should be discussed with clients and investors themselves.

The second half of the episode features Brad Harrop of Capstone Headwaters and McGuireWoods’ Brian Coughlin discussing debt finance. Be it negotiating M&A and upstream equity documents or working on the credit agreement, understanding this part of the deal process is critical to overall investment knowledge. Also discussed is the effect COVID-19 has had on the market.

“[T]he terms that we might've expected at maybe a slightly lower leverage or slightly higher EBITDA are now starting to show up where they're slightly higher leverage or they're slightly lower EBITDA,” Brian explains.

Tune in to this episode of Deal by Deal to hear the intrepid and unique ways independent sponsors are taking the investing world by storm.

Meet Your Host

Name: Greg Hawver

Title: Partner at McGuireWoods 

Specialty: Greg is focused on independent sponsors, private equity-sponsored M&A, and complex business transactions both domestic and cross-border. 

Connect: LinkedIn

Featured Guests

Name: Richard Grant

Title: Partner at McGuireWoods

Specialty: Richard’s work involves private equity transactions, mergers and acquisitions, as well as corporate joint ventures and...]]>News

McGuireWoods is pleased to announce that the pre-eminent gathering for independent sponsors and capital providers returns to Dallas this October.

Don’t miss the opportunity to gain knowledge and insights during our panel discussions, including results from our largest proprietary deal points study to date, and our much-anticipated networking events. Connect one-on-one in our efficient speed-dating segment, which produced more than thousands of meetings during our 2019 conference. For information, please visit here.

Episode Summary

As an independent sponsor, there are a lot of variables that come into play. Which businesses are worth acquiring and working with? What’s the best strategy to go about that? And is it worth the risk?

On this episode of Deal by Deal (yes, we’ve changed the name!), Greg Hawver and Richard Grant, Partners at McGuireWoods, tease out the lessons from investor success stories.

As Columbia River Partners’ Poneet Goel puts it, “cost structure perspective, as well as an operational efficiency perspective” are key. Understanding what is needed for growth, be it new technology or carving out a specific division of the company, can be the difference between failure and rapid success. It can also be the difference between being a stalking horse or just not being able to raise the capital needed.

Whether you go to traditional independent sponsor backers or your network of investors, there is always a new tactic to learn, and honesty about the good and the bad will strengthen your position in the end.

“I think maybe there's an important lesson there,” Richard says, “which is the importance of going out to the investment community … in any deal and being candid and frank about risk versus opportunity, upside, downside, where all the skeletons are.” No one will succeed with skeletons in the closet and being frank about the risks versus the upsides is discussed in a candid manner, much like how it should be discussed with clients and investors themselves.

The second half of the episode features Brad Harrop of Capstone Headwaters and McGuireWoods’ Brian Coughlin discussing debt finance. Be it negotiating M&A and upstream equity documents or working on the credit agreement, understanding this part of the deal process is critical to overall investment knowledge. Also discussed is the effect COVID-19 has had on the market.

“[T]he terms that we might've expected at maybe a slightly lower leverage or slightly higher EBITDA are now starting to show up where they're slightly higher leverage or they're slightly lower EBITDA,” Brian explains.

Tune in to this episode of Deal by Deal to hear the intrepid and unique ways independent sponsors are taking the investing world by storm.

Meet Your Host

Name: Greg Hawver

Title: Partner at McGuireWoods 

Specialty: Greg is focused on independent sponsors, private equity-sponsored M&A, and complex business transactions both domestic and cross-border. 

Connect: LinkedIn

Featured Guests

Name: Richard Grant

Title: Partner at McGuireWoods

Specialty: Richard’s work involves private equity transactions, mergers and acquisitions, as well as corporate joint ventures and venture finance in the healthcare, food and beverage, and renewable energy industries.

Connect: LinkedIn

Name: Nathan Chandrasekaran 

Title: Partner at Columbia River Partners

Specialty: As a private equity investor, Nathan’s work includes mergers & acquisitions, financing, strategy, and management.

Connect: LinkedIn

Name: Pooneet Goel 

Title: Partner at Columbia River Partners 

Specialty: Being a private equity investor, Pooneet has been an entrepreneur and investing in the technology sector for over 20 years. 

Connect: LinkedIn

Name: Brad Harrop

Title: Vice President at Capstone Headwaters’ Debt Advisory Group 

Specialty: Brad specializes in corporate debt placement, credit analysis and auditing. Throughout his career, he has underwritten and advised on many private debt investments. 

Connect: LinkedIn

Name: Brian Coughlan

Title: Partner at McGuireWoods 

Specialty: As a Partner in McGuireWoods’ Debt Finance department, Brian advises major financial institutions, hedge funds and finance companies in complex commercial financings. 

Connect: LinkedIn

Acquired Knowledge

Top takeaways from this Deal By Deal episode 

★    Take a calculated leap of faith. When venturing into the private sponsorship world, in order to win big, you have to risk it big. Pooneet and Nathan demonstrate that through their acquisition of various companies and turning them around. Their rapid growth illustrates that unique approaches to investing with sound strategy can be incredibly successful.

★    Be candid in your honesty about risk. While it may be tempting to omit deal breaking risk analysis from your investors, it will always come back to bite you. Honesty about what may not happen is just as, if not more important, than the projections of success. Intricately laying out the downsides and risks of investing is key to creating a strong relationship with clients and investors. 

★    A changing lending market. The landscape of the lower to middle markets is showing some change, both from COVID-19 and the influx of smaller deals. The competitiveness has gone down, with larger lenders coming down in the market and equity co-invest becoming more prevalent in the lower end of the market.

Episode Insights

[01:08] New name, same show: This podcast is no longer called Carried Interest, but instead has been renamed Deal by Deal, as best to not clash with another podcast on iTunes.

[01:52] The conference returns: After being canceled in 2020 due to COVID-19, Greg announces the McGuireWoods Independent Sponsor Conference will return in October 2021, providing like-minded investors an opportunity to connect.

[04:53] Jumping into independent sponsorship: Pooneet Goel and Nathan Chandrasekaran from Columbia River Partners break down how they switched from the venture and private equity world to independent sponsorship.

[07:30] The Sagetech Deal: Richard professes his admiration and curiosity over Columbia River Partners’ acquisition of aerospace company Sagetech. How did Pooneet and Nathan engineer it?

[13:17] Conversations are critical: The importance of communication with clients and management teams cannot be overstated. Nathan outlines an example in his investing journey where conversations changed the trajectory of the deal.

[15:46] Leveraging it all: Complex deals can have an even higher risk of failure, especially when it comes to having to go through a receivership bankruptcy process.

[19:36] The importance of the downside: Investors don’t want sugar-coated pitches. Pooneet illustrates the importance of being honest with investors, while also still making progress in sealing a deal.

[23:01] Adjusting to your audience: What are the pros and cons of the independent sponsor investor model and how do you explain those to different sorts of companies?

[28:57] Looking ahead: What’s next for Pooneet and Nathan at Columbia River Partners?

[31:39] Debt finance markets: Greg is joined by Brad Harrop of Capstone Headwaters and Brian Coughlan from McGuireWoods’ San Francisco office to talk about debt finance.

[34:40] COVID-19 and its effect on capital: 2020 was an interesting year in the investing world, with lenders turning internally and watching numbers closely until about June. Brad lays out the trends and projections from last year and going forward.

[40:02] Healthcare at the forefront: The healthcare vertical is at the forefront of growth, leaving other industries in the dust. Why is that? Brad and Brian discuss and debate.

[44:33] Equity dilution and co-investing: Brad talks about equity when marketing deals and describes how investors at the higher and lower ends of the market minimize equity dilution. “Typically, at least at the higher end of the market, they definitely want to be more weighted towards credit,” he says.

[47:42] Diversifying your financials: Bryan and Brad discuss the importance of a diverse business and gap compliance.

Contact

Connect with us on Facebook, Twitter, Instagram, YouTube.

This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

How can you, as an independent sponsor, understand “what’s market” for the three fundamental building blocks of the independent sponsor economic package – management fees, closing fees and carried interest? 

These questions and others pertinent to independent sponsors and professionals who employ the independent sponsor model are the kind of topics to be explored on Carried Interest, a new podcast from the legal experts at McGuireWoods. 

The inaugural episode of the podcast opens with McGuireWoods Partners Greg Hawver, Rebecca Brophy, and Jeff Brooker sharing lessons learned working on middle-market private equity M&A at the ground level. Later on, McGuireWoods Partner Bryan Bylica joins the podcast to share important updates about the expansion of the PPP program.

As the episode kicks off and the partners trade “war stories,” Jeff highlights an incident when an LOI wasn’t consistent with the waterfall calculations (and how it was ultimately resolved).

“We really did spin our wheels with a bunch of changes, trying to draft an LOI that didn't reflect the business deal,” he recalls “And then the LOI was not as advantageous to the independent sponsor as a traditional carry would have been,” he says on the podcast.

The lesson? Don’t try this (drafting an LOI) at home. Legal assistance can help a deal move more smoothly and there’s a huge advantage to having efficient documentation from the start.  

Tune in to this episode to learn the three components of a conventional independent sponsor deal, to gain an understanding of recent trends in the PPP loan program, and hear other lessons learned “in the trenches” of middle-market M&A.

Meet Your Hosts

Name: Rebecca Brophy

Title: Partner at McGuireWoods

Specialty: Rebecca focuses her practice on corporate transactions, including mergers and acquisitions, equity and debt offerings, venture capital financings and strategic collaborations.

Connect: LinkedIn

Name: Greg Hawver

Title: Partner at McGuireWoods

Specialty: Greg focuses his practice on private equity-sponsored M&A and other complex business transactions.

Connect: LinkedIn

Name: Jeff Brooker

Title: Partner at McGuireWoods

Speciality: Jeff focuses his practice on private equity and venture capital funds and institutional and strategic investors in connection with mergers and acquisitions, early- and late-stage private equity and venture capital investments, leveraged recapitalizations, management buyouts and secondary transactions.

Connect: LinkedIn

Featured Guest

Name: Bryan Bylica

Title: Partner at McGuireWoods

Speciality: Bryan focuses on...]]>What happens when a letter of intent (LOI) doesn’t accurately capture the economics of a deal?

How can you, as an independent sponsor, understand “what’s market” for the three fundamental building blocks of the independent sponsor economic package – management fees, closing fees and carried interest? 

These questions and others pertinent to independent sponsors and professionals who employ the independent sponsor model are the kind of topics to be explored on Carried Interest, a new podcast from the legal experts at McGuireWoods. 

The inaugural episode of the podcast opens with McGuireWoods Partners Greg Hawver, Rebecca Brophy, and Jeff Brooker sharing lessons learned working on middle-market private equity M&A at the ground level. Later on, McGuireWoods Partner Bryan Bylica joins the podcast to share important updates about the expansion of the PPP program.

As the episode kicks off and the partners trade “war stories,” Jeff highlights an incident when an LOI wasn’t consistent with the waterfall calculations (and how it was ultimately resolved).

“We really did spin our wheels with a bunch of changes, trying to draft an LOI that didn't reflect the business deal,” he recalls “And then the LOI was not as advantageous to the independent sponsor as a traditional carry would have been,” he says on the podcast.

The lesson? Don’t try this (drafting an LOI) at home. Legal assistance can help a deal move more smoothly and there’s a huge advantage to having efficient documentation from the start.  

Tune in to this episode to learn the three components of a conventional independent sponsor deal, to gain an understanding of recent trends in the PPP loan program, and hear other lessons learned “in the trenches” of middle-market M&A.

Meet Your Hosts

Name: Rebecca Brophy

Title: Partner at McGuireWoods

Specialty: Rebecca focuses her practice on corporate transactions, including mergers and acquisitions, equity and debt offerings, venture capital financings and strategic collaborations.

Connect: LinkedIn

Name: Greg Hawver

Title: Partner at McGuireWoods

Specialty: Greg focuses his practice on private equity-sponsored M&A and other complex business transactions.

Connect: LinkedIn

Name: Jeff Brooker

Title: Partner at McGuireWoods

Speciality: Jeff focuses his practice on private equity and venture capital funds and institutional and strategic investors in connection with mergers and acquisitions, early- and late-stage private equity and venture capital investments, leveraged recapitalizations, management buyouts and secondary transactions.

Connect: LinkedIn

Featured Guest

Name: Bryan Bylica

Title: Partner at McGuireWoods

Speciality: Bryan focuses on private equity and venture capital transactions, mergers and acquisitions, and securities and corporate finance. He routinely works with independent sponsors and capital providers, including family offices, in all levels of the capital stack to put together lower middle market deals across a breadth of industries.

Connect: LinkedIn

Investment Insights

Top takeaways from this Carried Interest episode

★    Get familiar with the three components of an independent sponsor deal (and how to account for carried interest). Conventional deals include three components: The closing fee, an ongoing management fee (usually based on EBITDA) and then the carried interest. Jeff explains: “The carry is typically the biggest piece of independent sponsor economics, and that is the independent sponsor gets a percentage of the profits that would otherwise be paid to the capital provider. That carry will typically take the form of a series of hurdles with steps based on IRR [Internal Rate of Return] and/or multiple of invested capital. And at each set of hurdles, the carry percentage will be higher.” 

★    Always be on the defense when it comes to NDAs. If you have a lockdown company as an independent sponsor, Rebecca and her McGuireWoods colleagues highly recommend making sure that your NDA includes non-circumvention language in advance of talking to any capital providers. In addition, checking your NDA to ensure it has the right provisions is something easy for attorneys to do on the front end. 

★    Be aware of PPP trends and changes. Congress approved a second round of PPP funding, and Bryan says it's a smaller round than the first (the maximum loan size is $2 million). It’s important to understand the improvements, some of the pitfalls (such as how they've narrowed the scope of who can apply) and that forgiveness applications for round one are starting to get processed “because if you've got an unresolved PPP loan from round one, you'll be able to apply for round two.”

Episode Highlights

[01:11] Introduction: Get to know podcast the co-hosts and the new initiatives at McGuireWoods, including the firm’s annual independent sponsor conference.

[2:46] Podcast goals: Carried Interest will help create community among the independent sponsor community.

[11:16] Out on the battlefield: The hosts (starting with Jeff) share recent “war stories” from their work in M&A transactions, especially those involving independent sponsors.

[16:00] Deal or no deal?: Jeff explains the three components to a conventional independent sponsor deal: the closing fee, an ongoing management fee (usually based on EBITDA) and then the carried interest.

[21:09] Eye on the prize: Greg touches on numerical hurdles and why they sometimes distract us from the more critical components that have much greater effect than whether it's 3.5 or 3.0.

[23:57] Cover your bases: Rebecca explains why, if you have a lockdown company as an independent sponsor, McGuireWoods highly recommends making sure that your NDA includes non-circumvention language in advance of talking to any capital providers.

[28:00] Get it while it’s hot: Bryan Bylica introduces himself and provides an update on additional expansions of the PPP program — how the scope of who can apply has been narrowed, how it’s a smaller round than the first, etc.

[32:51] The sequel is never quite as good: Bryan explains why we’re seeing (anecdotally) fewer lenders in the market for PPP round two (what has a lot to do with decreased incentives for banks).

[37:05] Front page news: Bryan offers his opinions on how PPP loans were portrayed (and who was doing the digging) in the media and how it could affect companies.

[39:47] There’s always a downside: Bryan explains the biggest pitfall of the program, which comes about when the PPP lender doesn't want to serve as the escrow agent, meaning you're not technically compliant.

Contact

Connect with us on Facebook, Twitter, Instagram, YouTube.

This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

Through a mix of educational episodes and interviews with seasoned independent sponsors, our hosts will provide substantive guidance on deal work for independent sponsors and professionals who employ the independent sponsor model.

McGuireWoods is a full-service firm providing legal and public affairs solutions to corporate, individual, and nonprofit clients worldwide for more than 200 years collectively. Our commitment to excellence in everything we do gives our clients a competitive edge in everything they do. Our law firm, over its 186-year history, has earned the loyalty of our many long-standing clients with a deep understanding of their businesses, and broad skills in corporate transactions, high-stakes disputes, and complex regulatory and compliance matters.

To learn more about McGuireWoods or to contact us, please visit our website at mcguirewoods.com.

This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.