Insights and Reflections on Debt Financing in the Lower Middle Market

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.