Private Equity Spotlight: The Independent Sponsor Model with Doug Song and Erik Ginsberg

[00:00:00] Sean Mooney: Welcome to the Karma School of Business, a podcast about the private equity industry, business best practices, and real time trends. I'm Sean Mooney, BluWave's founder and CEO. In this episode, we have a great conversation with two of the OGs of the booming independent sponsor world. Doug Song, Managing Partner with Prodos Capital and Erik Ginsberg, Managing Partner with Slate Capital.
Enjoy.
So, I'm very excited today. We have a really, really interesting conversation here with my friends, Doug and Erik. Doug and Erik, thanks for joining us. So this will be a good one. The topic that we're really going to talk about today is I think one of the fastest growing trends in private equity. Is this whole emerging world of independent sponsors.
And it's something that I think anyone who's been P is known about it for, you know, 20 years it's been developing, but it's something that's becoming a bigger and bigger thing for all sorts of really good and important reasons. So I think this is going to be a great conversation for anyone in private equity, but also for those who are aspiring to become into this industry through one of the numerous avenues into the world of investing.
Before we jump in to our conversation here, I'd love to get just a little more about the story of both of you. So our listeners can understand, you know, kind of the rest of the story, if you will. So Erik, can you tell us a little bit about kind of your backstory, how you got into private equity?
[00:01:43] Erik Ginsberg: Sure.
Happy to. It's a long story cause I'm old, but it goes back. I came out of school. I was a JD MBA at the university of Chicago. So I had planned to be an attorney when I came out of college cause I didn't know any better. And I started as an attorney at Kirkland Ellis, but even before that I had been a summer associate at a couple of firms and I started to do private equity work and started to learn about this industry and got interested in it.
So I went to K& E and focused specifically on private equity work, but my long term plan was, you know, maybe I'll meet a client and they'll like me, and then I can go over to the business side because I had spent time doing these deals. Was fascinated by the work, fascinated by these business owners that had all these companies that not only had I never heard of companies, but I'd never even heard of the industry.
I didn't know these things existed. I just started to become fascinated with the whole ecosystem in the United States of all the different businesses. And I wanted to be a part of that. So that was my plan. Of course, it didn't work out that way. I had a good experience, but I ended up through a friend who had a contact with somebody in private equity firm had nothing to do with my work.
Okay. Introduce me one day and started talking to me about what do you want to do and I started telling him about my interest in private equity and long story short, I ended up joining sterling capital and that was in the mid nineties in Chicago, spent a couple of years learning deals, having no idea what I was doing on the business side.
And they had a very interesting model back then they were what is now called an independent sponsor. Although nobody used that term back then they would do a deal a year and they would get very involved in the operations. That was very attractive to me because I needed operations experience. So I spent two years in Chicago working on deals, and then we bought a couple of companies in Baltimore.
And that was my turn to go help run a company. So I moved to Baltimore and helped run those companies for a couple of years. While I was in Baltimore, I met Bruns Grayson, who was running Alex Brown's Venture Capital Group. And since I was still in the skill building phase of my career. I thought, yeah, I'll give venture capital a try.
Small businesses would be interested. I ended up doing that for four years, software investing, and decided that was not a good fit for me with skills. I wanted to get back to what I was doing at Sterling. But I was in Baltimore at this point. There wasn't really a lot going on in private equity in Baltimore.
So I ended up meeting Rick Corcoran. Who was out of BCG and had done a number of other things entrepreneurial along the way. We just started comparing notes and we decided to hang out a shingle. We called ourselves Slate Capital. This was back in 2004. And we were off to the races. And we were what was, it wasn't even called fun list sponsors back then.
I think it was just called guys looking for a deal. But we were basically copying that old Sterling model. And the first deal we did actually was a food business that Rick and I ran ourselves for several years. So we started out almost, yeah, we have a private equity firm, but really we're small business owners.
We did that for a few years. Eventually I pulled out of that, Rick continued to run it. And we started to focus on what we want to do long term, which was take majority stakes in business services companies. We did our first LBO in 2009, majority LBO. And then our third partner, Parker Davis joined us in 2010.
And we've been doing business services investing ever since.
[00:04:53] Sean Mooney: I love that story, and it's one of the common things that's so fun about this podcast is there's this kind of serendipitous journey where people kind of just find their way for reasons that weren't always even mapped out. It's just kind of like this natural draw based upon who you are and the skills you have.
And you went from starting off at some really good places, you know, that people would have probably said, Oh, I can't believe you, you left Kirkland and Ellis or Sterling, and you kind of found an entrepreneurial way to doing things that you all do so well at Slate and really operationalizing and kind of being one of the early kind of successful investors from this independent model that we're going to talk more about today.
So maybe if we turn the page here, Doug, how about yourself? What's kind of your backstory? How did you get into this?
[00:05:39] Douglas Song: My story is not dissimilar to Erik's. I started my career in investment banking in the late 80s at Chase Manhattan Bank. I was in the M& A group in the late 80s. And then I transitioned into the workout group at Chase in the early 90s.
And if you all remember, that's when bankruptcies and restructurings were red hot. And so as a young banker back then, we did not have much of a private equity and hedge fund industry. Not like it is today, for sure. So at Chase, we're the lead creditor, typically in the largest creditor in all of these credits.
And when we had problems, which we did, we ended up converting our debt to equity and we ended up controlling these businesses because we had nobody to sell these businesses to. So as a young banker, I was sitting on the boards of directors of all of these companies and actively managing them. And I loved that part of the business.
And if I look at the M& A business versus restructuring workouts, M& A, I view as a very macro business and workouts and restructuring and as an extension being a principal, you have to be really detail oriented. You have to know everything about the industry, the management team, what makes the business work, your competition, et cetera.
That was my first eureka moment when I really wanted to go into private equity. And I had another stint at Smith Barney, investment banking and another firm. But I also discovered something about myself. And this is going back to the origin story. I'm an immigrant from Korea. My family, they're all entrepreneurs.
I was raised around that. So I'm an entrepreneur. And so I really wanted to work with entrepreneurs and smaller businesses. In a place like Chase and Smith Barney, you're dealing with large fortune 1000 companies. But I didn't feel like as a banker, I was adding value, right? So I really wanted to transition to being a principal and working with entrepreneurial, smaller companies where we could have more impact.
And that's really how I transitioned to the principal side. Now, prior to founding, co founding Proto's Capital, I was with another merchant bank called Barris International. We had Citigroup as one of our partners. As an example, we never had a fund. We had the balance sheet of Citibank and we were doing deal by deal back then.
Um, And then when I co founded Prodos Capital, I think I was maybe just one year earlier than you, Erik, in 2003. I co founded it, but I co founded it with a gentleman named Arnold Dietrich. And Arnie had two 20 year careers. His first 20 years was management consulting for Booz Allen, Touche, places like that.
So the second 20 years was as an independent sponsor. The first 10 years was at, in the 1980s, he was Sam Zell's first corporate partner. And he went in as an operating partner for Sam, right? They did tremendously well together. But what was great about that is he also had a balance sheet and that was Sam Zell's balance sheet.
So he never had a fund. And then after that stint, he had his own, what we call now an independent sponsor firm. So the reason I partnered with Arnie is I was more of a deal guy and he was more of an operating strategic hands on guy. So it was a perfect compliment. He was an older gentleman as well, far wealthier at the time.
So he was there to help guide me. He didn't want to run the firm, he let me do that, but he was there to guide me. So that's how I sort of started Proto's Capital with Arnie as my partner.
[00:08:51] Sean Mooney: No, I love that. And one of the things I also really appreciate is you starting off your career in kind of workouts and restructurings that you kind of develop in dog years so quickly.
And that was where I started my career was in Hylian Loki's financial restructuring group. And similarly in the kind of mid late nineties. And it was insane. The things that I was tasked with doing, you learn about pain. Oh, absolutely. And this thing called cashflow, which is coming back in vogue out here.
And the other thing that is common with all three of us, just to give a bit of a shout out for is we're all kind of uniquely and independently drawn to Nashville. And you want to talk maybe a little bit about what brought you all here. So how about you?
[00:09:28] Erik Ginsberg: Oh, that's a long story. It was half personal and half professional.
So on the personal side, my wife and I had been living in Baltimore for 24 years, loved it, raised our family there, but we were ready to do something different, just recharge the battery. So we'd been talking about what do we do either on a part time or permanent basis. And then COVID happened and all of a sudden we stopped going into the office, like many people.
And after a while, you know, we did a couple of deals, my partners and I, and they were going really well. So we looked at each other and said, do we need to have an office anymore? This seems to be working. So we gave up our office. And once we did that, we started talking about. Well, if we aren't going to the office every day, do we all need to be in the same city?
We started thinking it might actually be useful for the business to have boots on the ground and other jurisdictions. You know, we had the mid Atlantic pretty well covered after 20 years, or we were about 18 years as slate in Baltimore. So I ended up moving to Nashville. Now, another reason why we picked Nashville is my oldest son graduated from Vanderbilt about four years ago.
So we'd been visiting Nashville for nine or so years. And just loved the town, thought it was really fun, great weather, all these other exciting things to do. So we said, that might make a good choice. So my wife and I decided, let's do it. At the same time, my co founder, Rick, he got divorced a couple of years ago and met his new partner who lived in Cincinnati.
So he said, well, I'm going to go move to Cincinnati. And we thought Parker's still holding down the fort in Baltimore, but we thought, well, maybe we'll get some more deal flow. So it turns out the first deal we did after all this happened was in Cleveland. And what the management team told us is one of the reasons they picked us was because we were quote local to Ohio.
So, I mean, a plan doesn't always work out that well, but it was at least a nice start to our new lives. I love that story. Doug, how about yourself? What brought you here?
[00:11:18] Douglas Song: Yeah, we didn't have that kind of connection as Erik did. I used this answer for the first time with Senator Frist. He asked me, I met him at a luncheon and he asked me, I'm always curious, why did you move here?
And I said, well, Senator, I could give you the laundry list because there's a lot of things. There's a lot of reasons you would move to Nashville and Tennessee. But I said, it really came down to these two things. I wanted to go somewhere where I felt like I could protect my family and my business and flourish.
And I think when you look at the landscape, when you look at North AmErika, this is one of the states where I feel like we can accomplish that. All those other reasons boils down to that. That's why we moved here. And so far it's been great.
[00:11:57] Sean Mooney: Yeah. I love that rationale as well. And I think both of yours is similar to why I moved here.
And so I think we've maybe shared some of this on these episodes before, but I was in private equity as a partner. I had this crazy business idea. I was like, you can't start a company in New York. It's going to be twice as expensive. And I was like, every dollar I have to raise of capital is like more dilution that's going to make this thing even crazier to do.
And so I said, well, you got to change the equation. And so I did this really, really pretty extensive market study. And I filtered my algorithm. My wife made me put fun as one column. And so she's like, this is double insane. Like now we're going to move to.
[00:12:33] Erik Ginsberg: The famous Sean spreadsheet. I had one of those too.
I
[00:12:37] Sean Mooney: didn't
[00:12:38] Erik Ginsberg: do
[00:12:38] Sean Mooney: that. Well, I was like, I don't want to see your spreadsheet. It was like, let's just get on a plane and see which ones we like. Cause like, well, we'll do that too. We're going to use and not or, but the top of my algorithm was Nashville and we had to give away our home in Darien, Connecticut. It wasn't a great time to sell, but we did okay with the one we bought here.
So, so I think this is good. So let's round out a little bit more of kind of the human side of both of you. And then we'll jump into some of the meat of the conversation. One of the things I'd love to ask on these podcasts is just to get more of the uncommon common knowledge out there about each of you.
So, Erik, if there were one thing that we would benefit from knowing about you that we wish we knew but didn't, what would be one of those?
[00:13:15] Erik Ginsberg: Well, as all my good friends will tell you, I am, I think this is a fair statement, I am part of the least successful sports fan group in the United States of AmErika.
Let me explain that to you. I grew up in New York. So I was rooting for all New York teams, but I made a series of very bad decisions as a child. I could have been a Yankees fan, I chose the Mets. I could have been a Giants fan, I chose the Jets. I could have been an Islander fan, I chose the Rangers. And then the Knicks were pretty much the only choice back then.
So, the first season I remember is 1974, as a child. And it's 24 now, so that's been about 50 sports seasons. And if you just take the three major sports, I'm sorry, it's 50 years. That's 150 sports seasons. I have one championship, the 1986 Mets. That's it. Now, if you want to include hockey and you want to include the four sport, I have two out of 200 seasons.
And so I actually started thinking about, I did the math maybe a couple of years ago, and that might be as pathetic as anybody that exists. I started thinking, well, Detroit, you know, they haven't done well, wait a minute now they have the red wings. They had their run in the Pistons, so they're way better.
So Cleveland, right? That's everybody has Cle No, LeBron won his championship, and they didn't really have They had a hockey team, I think, for two years in the 70s. So they haven't suffered like I have through the Rangers, so. And if you think about it, the Rangers won in 94. So that's 30 years of bupkis.
Squaddush. I have zero championships in 30 years. For all four sports. Well,
[00:14:47] Sean Mooney: that's probably one of your secrets to success in private equity is that tenacity, that grid, the ability to bounce back. Loyalty. Yes.
[00:14:54] Erik Ginsberg: In fact, my family makes fun of me because every year I'm like, well, no, but this year it's going to be different.
I, I have that optimism. So.
[00:15:00] Sean Mooney: As a child of two parents from Cleveland who basically compelled me to be Cleveland sports fans growing up in Texas, I can empathize.
[00:15:08] Erik Ginsberg: You feel me, right?
[00:15:09] Sean Mooney: No, but at least you had all those victories from the University of Chicago.
[00:15:14] Erik Ginsberg: Yeah, right, right.
[00:15:16] Douglas Song: Do they have
[00:15:16] Erik Ginsberg: sports at University of Chicago?
The first Heisman Trophy winner was from the University of Chicago back That's where Monsters of the Midway comes from as you may know. Okay. Not the Bears. Math team probably crushes it. Yeah, chess
[00:15:27] Douglas Song: club.
[00:15:27] Erik Ginsberg: Yeah, now that's my grad school like so let's be fair my undergrad. Oh, wait, this isn't anybody. I went to Brown.
We don't win anything. Nevermind.
[00:15:37] Sean Mooney: You got Hermione Granger. Yeah, but I think she left. All right, Doug. What is one of the things that we would know you better if we knew this about you as well?
[00:15:45] Douglas Song: Well, I already mentioned that I was an immigrant. I think coming to Nashville, I wanted to have impact. I'm a big advocate, not only the independent sponsor model, which I think ties into being an entrepreneur and innovation, because I really think of myself first and foremost as an entrepreneur.
Not as a private equity investor or a principal as an entrepreneur, because every day, literally, I'm thinking about the business. I'm sure you do the same. So as part of that and having impact here in Nashville, one of the first things I did was I was introduced to the Beacon Center, which is a libertarian think tank here.
But I didn't join it because of politics. I joined it because they formed a Entrepreneur and Innovation Council consisting of 12 entrepreneurs across Tennessee from different disciplines. And our mission was to put together a set of proposals that were going to be presented to governor and the state Congress.
We presented, after 12 months of work and subcommittees, half a dozen proposals, and they range from tax, regulatory, and others, to promote, again, entrepreneurship and innovation across Tennessee. And I'm proud to say that four, I think, are half passed or close to being passed, and the other two are under consideration.
So that to me is having real impact in a city and state. I'm very proud of that. And I'm going to continue to do that and continue to promote entrepreneurship and innovation in Nashville and Tennessee.
[00:17:07] Sean Mooney: I really appreciate that. And that's one of the things I think that drew all three of us here is it's the easy place to live.
They make it just as easy to kind of build your careers and your companies. In a way that creates an economic engine for all. I think everyone who comes here and like when Alliance Bernstein was coming and talking with friends there who involved with that move, we all know they're saying if they just made it so compelling and so easy, there's all these other cities and they just made it happen.
And so we moved here. And I think it's the same reason why we're seeing so many private equity professionals also move here. I think we came early, so we probably are better.
[00:17:42] Erik Ginsberg: I came the last of the three of us, so I am the least smart.
[00:17:45] Sean Mooney: Yeah. I don't know. I'm not falling for that. It's one of the reasons why I think it's that exact mindset.
And so that's really important because it's not only helpful in terms of why we came, but it's setting the stage for why we all want to stay. The only thing that's the downside is occasionally you got a tornado. Occasionally. Yeah, I don't like those. I think the odds of those things are pretty small. So, all right, let's jump into the meat of our conversation here.
And I think it's a really interesting topic. It's this kind of evolution of the independent sponsor world. And one could argue the independent sponsor world has existed for multiple thousands of years, right? Someone has an idea, they get capital, and then there's a sharing of the economics. Maybe as part of this, we'll talk about kind of the modern era of this world that's really finding kind of this renaissance and the latest iteration.
So, Doug, can you walk through kind of your thoughts on how this modern era of the independent sponsor world came to be?
[00:18:40] Douglas Song: And I absolutely agree with you. J. P. Morgan, when he started out, he started out as a merchant bank, which means to me that you're both an advisor and principal. And in many ways, JP Morgan was that.
I think in essence, that's what we are as independent sponsors, we're principals and advisors to our companies. In essence, that's what we are. When Erik and I started in the early 2000s, our firms, Erik is correct, there was no name for what we do today. We just called ourselves a merchant bank because we had nothing, not a better name.
I think it was apropos at the time. And then there were probably a handful of us that were doing this at that time. I don't think there were many. And then the term fundless sponsor came into being, I can't tell you exactly when that was sort of the first official name for this subsegment or asset class and currently as independent sponsor, as we all know, what I could tell you is in the beginning, in terms of evolution, it was extremely difficult because we had to convince everybody in the deal ecosystem, whether it was capital providers, investment bankers, lenders, sellers, and advisors of all types.
What we're trying to do and their question was, wait a minute, you're trying to be a private equity investor without a fund. How does that work? It was not easy to explain that in the beginning, but fast forward to today. The last sort of estimates that I've heard is there are 2 to 3000 independent sponsor firms in North AmErika alone.
[00:20:07] Erik Ginsberg: That's amazing.
[00:20:07] Douglas Song: That is just amazing. Think about that over 20 years. That's amazing. And what I see now is I see that this asset class is accepted by all of the constituents I just mentioned before. And what I see now is institutional funds, investment banks, sellers, vendors, all now buying for a piece of this market.
And if you go to any of the conferences, you'll see this in spades. And so now I think it's a very accepted asset class, and it's obviously grown tremendously. I'll just say two more things, and I'll turn the mic back to you, Sean and Erik, but what I've also noticed is I've seen the quality of independent sponsors go up tremendously.
I'm seeing a lot of Former PE professionals, management consultants, operating executives, combination of all three looking to become emerging independent sponsors. And so I see the quality really increasing. And the second thing is one of the things I've noticed also is a lot more collaboration because there's so many of us now that it's almost impossible to not run into an independent sponsor in any kind of process.
What I see now is more collaboration. And I think that's here to stay. And I think that's only going to increase and we'll get into that, but I'll, I'll stop there and yield the mic back to Sean.
[00:21:25] Erik Ginsberg: Yeah. Erik, what are your thoughts on this? A lot of thoughts on that. So I mean, agree with everything Doug just said.
And when we first started, it was quite a challenge, right? Cause it was much less accepted and, you know, investment bankers would look at us funny and say, well, why am I going to tell my client to go with you? How do I know you have the money or you can get the money? And really that was a challenge for us for five or six years.
Until we really started doing deals and having a track record behind us, we stopped getting that question eventually, but early on it was tough. These days, I don't think that's a problem because it's so, well, maybe it's a little problem, but not like it used to be. As I mentioned, my co founder Rick and I, we always joke that the greatest trick we ever pulled was starting a private equity fund with no money, right?
And somehow this worked for 20 years. But on the topic that Doug brings up, collaboration, I think that's really, there's a lot going on there. And one of the things I love about this industry is so many good people in it and you meet another independent sponsor, you automatically like that person because you know, you feel like you're in it together.
There's not a sense of competition. The US economy is huge. There's a lot of businesses, plenty to go around. You always kind of want to help each other. And I think there's that feeling throughout the industry, whether you're young or old in it, we all kind of help each other out. I'll give you one example.
We did a deal, I want to say three or four years ago, which turned out to be great. It was actually a very small company. We bought only about 2 million of EBITDA when we bought it. And this year it's going to do close to 20. So it's been just a home run for us. But shortly after we did that deal, I got a call from an independent sponsor in New York, who I didn't know.
And he called and said, Hey, I just want to introduce myself. Well, it turns out he had found that company before we had and had a deal to buy it, but it fell out of bed. He didn't get it done. And he said, I saw that you got it done. Just want to congratulate you. And I just thought, Hey, you know, we're independent sponsors.
We should say hello. And he was a very nice guy. I enjoyed talking to him. I said, well, let's keep in touch. He told me a little bit about his firm. Well, shortly thereafter, we found a GovCon business that we were very interested in. So we started raising money for it. But I remembered from the conversation that he had some very interesting contacts in the GovCon space.
And I called him up and I said, you know, one of the things that's great about being independent sponsors, you can put together your investors for each particular deal. So you can bring Instead of just one fund and it's the same investors every time. So we always try to do that. So when I threw the deal by him, he said, I would love to be a part of that.
And yes, I can bring in person a person B. So we brought him into the deal and he took a minority piece. He brought a couple of his contacts in and they added a ton of value. And that ended up being a great success, that deal. So we ended up doing an HVAC deal a year and a half ago. We called him up again and said, Hey, if you want to participate and he took a minority piece of that deal.
And that one looks like it's going great as well. So it's been great for him because he's a one man shop and much newer to the industry. Great for him. Now he's got two deals that look like they're going to be very successful. Great for his track record, but also great for us because he brought some value.
He's been very pleasant to deal with. And now he's told us he is super motivated to find us a deal, right? He wants to pay us back. Now, whether that's ever going to happen or not, time will tell. But I'm certain he wants it to happen and he's trying. It's just an example of a collaboration, which I think has been good for everybody.
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[00:24:57] Sean Mooney: I really like what both of you shared. It resonates a lot and you know, there's an agility to what you all can do and a collaborativeness that in some ways it's harder to do in kind of the more traditional mode. You know, when I'd come up, A, you feel like you are beholden to the five years to put the capital out, the 10 years to return it, your fundraising every three to four years.
There's just a machine and a momentum that you are beholden to versus the other way around. When I was in PE, because we were also competing so heavily with each other, I felt like I lived in the world of a zero sum game where it's just, I win and 200 people lose or one person wins and I'm part of the lose.
And so I say the word yes with no, I'm like, no, you're right. Or no, and so I think what you're suggesting is one, you can be more agile. You're not beholden to these constructs, but you can also collaborate with each other. And I think the other thing that I've seen in the model that I think you all referenced here is the quality of the independent sponsors out there has gone up much more than I think it ever has.
I mean, knowing both of your firms and working with both your firms, we know that you every bit run your PE firm just like any other PE firm we work with. What I used to see though, much more so as people maybe who are new to the market and they thought any deal that you could get under LOI was a deal.
And they just knew that they would come to you saying we're buying it cheap. And so, well, what are you going to do with it? Like, and they say, we're buying it cheap. So maybe talk about a little bit about that. Cause I think now when we work with a lot of independent sponsors. They're coming in and they've got the value creation plan and they know what they're going to do and here's the strategic rationale.
It's not we're buying it cheap. Maybe that's part of it, but that's not it.
[00:26:37] Douglas Song: I think that the market, the M& A market has become much more efficient over the last two decades as well. Now you have an ability because of technology. And thousands of private equity firms and other types of investors.
Now an investment bank on the sell side, come run a process and show the deal literally to hundreds of potential buyers with the push of a button. I think that's a very different dynamic versus 25 years ago, when I was an investment banker in M and a chase, I assure you, we didn't run those type of processes, it was way too efficient back then, inefficient.
So I think the days of buying businesses, although it happens every now and then, maybe Erik might tell his story, but it does happen every now and then, but I think you have to face the fact that you have to add value. And I think, Sean, that's the gist of your question. So I think unless you are able to bring value, unless you have an angle, unless you are able to bring value to a particular situation, you have no business being in that deal.
Whether you're paying six times or eight times, you really need to bring that. Why? Because why would the investors, your LPs, pay you economics otherwise? It can't be just about the deal, is my point, because it's too efficient of a market. Especially now with rates the way they are, right? There's more pressure on returns.
So you really need to come up with a game plan up front. If you don't have it, you have no business being in that deal. And why would the LPs pay economics? That's one of the advices I give to emerging independent sponsors typically. You got to have that game plan or partner with somebody like Erik that's been there, done that, and he could bring that value added to the table.
Don't worry about your economics right now. We'll talk more about this later, but that's really the key, I think, to being successful.
[00:28:18] Erik Ginsberg: It's funny that you can't get deals done just because it's a good price. Yeah. We find that it is almost money to us. We will get sometimes proprietary, semi proprietary opportunities, and there are some reasons we can get something at a pretty good price.
But when we go to the investor base and say, here, we have this price. The first question is, okay, what's wrong with the company, right? You almost don't get credit for the fact that you found something at a good price. So you have to point to something and something more than words, right? It track record helps.
Well, look, we've done several companies in this space. This is what we've done. We've taken them from here to there. You have to be able to prove to the sellers. And to your financing sources that you know what you're doing, and you're going to be a good steward of the asset, or you have a real uphill climb.
[00:29:03] Sean Mooney: I think those are both really good points. And it's you think about the industry, not only independent sponsor market, but private equity, you know, when I started working with the first private equity firm, I started working in the late 90s.
There was an arbitrage, you know, buy low, run a direct deal, then call our investment banker friends and sell through them. Today though, if that's your plan, there's just no chance to beat Economics 101. And so one of the things that I get most excited about is, there's this societal, there's this economical benefit of the industry.
Because the only way that you all win is by creating value, which means lots of jobs, which means better process, which means bringing products and services to places where they haven't been before. That's something that I think it's exciting and makes the industry truly additive to stuff that we're doing in the United States and beyond.
So let's talk about, maybe as an extension of this, you're talking with a business owner. It's not such a new thing anymore. You're a known quantity as an independent sponsor. The model is a known quantity. But like anything, what, no matter what posture you're coming from, there are things that you have to share about yourselves to any business owner, but I'm sure also as an independent sponsor.
So how do you think about communicating with business owners about the benefits of partnering with an independent sponsor? Maybe some of also like was things you should probably think about in terms of maybe why you wouldn't want to do that. And what are some of the unique opportunities and the like?
[00:30:25] Douglas Song: Yeah, absolutely. Our model is to focus on sellers that are very concerned about what happens to their business post close. What I mean by that is the type of businesses we're targeting are entrepreneur owned led businesses, typically first, second generation, 30 to 60 year old businesses, typically not a succession plan.
In some cases we see one, but many cases, majority of cases we don't. What we provide for these owners is what I call an elegant exit where we're providing them liquidity, but in a partnership setting, and I think the benefit of this independent sponsor model is we can say sincerely to the business owner and their representatives.
That we have a tremendous amount of flexibility. So if the business owner cares about the culture, the heritage, the people, community at large, many times that they've built and nurtured over multiple decades, sometimes generations, they really want somebody that has that flexibility. They want that flexibility and that kind of partnership approach.
And I think that's what we can bring because we don't have any shackles. We have a tremendous amount of flexibility in how we can structure the deal. The partnership dynamics, and very importantly, the investment horizon. We don't have to go into a situation with an automatic three to five years, and we have to exit like an institutional approach.
We can do that if it makes sense, but we can go into a situation and literally hold it forever if that made more sense. And the beauty of this model is we can mix and match the capital base to meet that goal, right, whatever that is. Thank you. So, what I mean by that is, if I know it's going to be a very quick build, a buy and build strategy, I'm going to put out a lot of capital in a short period of time, do a lot of acquisitions, let's just say, over three to five years and exit.
We may populate that deal with more of institutional capital base. But if I know going in that the strategy is great cash flow, let's pay down the debt over time, do some recaps, pay dividends, and continue to grow the business, maybe this is a 10, 15, 20 year old. We may populate that deal with longer term investors, which I define as family offices, as an example.
So, an independent sponsor has that flexibility that many other investment funds don't have. So, I think that's really one of the benefits. The other benefit is, every deal stands on its own. Every deal for an independent sponsor is very meaningful. Our mentality is we have to make every deal work. This is not a, we have 10 deals and, we have maybe two that don't work out and that's still a good portfolio.
It's not like that. Every deal has to work for us and every deal stands on its own. So it's a very different model. And I think a lot of sellers want that kind of flexibility and kind of this is important to them. This is not just another number. This is not just another deal.
[00:33:11] Sean Mooney: Erik, how about yourself?
[00:33:12] Erik Ginsberg: Yeah, all that's right. And often you see with in event sponsors, they've been operators too in the past. And I think that matters when you're working with people who've had to make a payroll and know what you're dealing with. And we talked about that with our sellers. These are some advantages. The truth is that we have a lot of friends who are private equity funds and who do a wonderful job.
We have a lot of respect for and are good partners in the right situation. So, I mean, I think if I were advising a friend who was looking to sell his or her business, I would say either can be good. And what I would recommend is do heavy reference checking on whoever you might be dealing with. We've got a long list of CEOs and other folks we've worked with in the past.
We just open up our Rolodex and say, you can talk to anybody, just ask them anything you want about what we've been doing. And we just closed a deal. And. Four of our ex CEOs invested with us in that deal, which we take as a compliment, that's our biggest selling point. And I think whether you're an independent sponsor fund, that's what you want to do.
You want to say, how have these guys behaved in the past? Talk to as many people as you can, and I think you'll figure out soon whether it's a good fit for what you're trying to do.
[00:34:20] Sean Mooney: Yeah. I like both of those perspectives. And one, it's the agility of the model and the customization of the model is inherently something that you can kind of segment and smooth.
Much more efficiently than kind of more of the mechanized version. And I really like your advice as well, Erik. And I think this is kind of universal advice that business owners don't do enough in general of backchecking your partners because no matter who it is, whether it's a traditional fund or an independent sponsor, you're going to be in a marriage with these people for years.
And to ask people to speak with those that you've worked with before is so important. I was always amazed how very few people would ever reference us. And I was like, thank God, just kidding. We probably would reference, but it was enough. People didn't do that. And I don't think that's exclusive by any means to the independent sponsor model, but it's great universal advice as well for any business owner.
When you're thinking of getting into a relationship, talk to those who have Kind of worked with them before because when you get that kind of right partnership, right, it's magical.
[00:35:21] Erik Ginsberg: The best deals we've done, we've lived the win win and win win's a cliche, but sometimes people don't really focus on what that means.
Win win, the word win shows up twice and there's a reason. The best deals we've done are ones where we are a hundred percent committed to having the management team win, but they are also a hundred percent committed to having us with, you know, what we found these CEOs we've been lucky to partner with in the past, we'll get months after the deal.
And, you know, they'll look at us at one point and say, I'm going to make sure you guys do well here because I care about that. Yeah. And we found that it's just no coincidence that when that relationship is established, the deal, not only does it tend to go better, it's just so much more fun.
[00:36:05] Sean Mooney: Oh, I think it's a thousand percent.
And it's in some ways, this business of private equity has the ultimate alignment of interests just through the economic structures. Everyone does well together or they don't together, and that's terrifying when it doesn't, you know, because it's like you've wasted, you know, 5 to 10 years of sleepless nights and many, many hours of work.
That's what's so great about getting it all going in the right direction. Maybe turn the page a little bit here. Erik, I'm curious. The next time your phone rings and it's an emerging independent sponsor, what's one of the top pieces of advice that you would give to this person?
[00:36:39] Erik Ginsberg: so I tend to do the touchy feely stuff when I talk to folks, because I think it's not given enough attention, right?
People think private equity is all about getting the strategy right. And getting the spreadsheets, right. And the financing, right. And all that's important. Those are tools you have to have. They're table stakes. But at the end of the day, this is a people business and I think you succeed because you're convincing entrepreneurs who have, maybe they've founded their business or running for 20 years.
They're not just looking for a payday. They care very much who gets their baby and things just go a lot better if they trust you. And they like you and that's just has to do with treating them with respect and trying to earn their respect with what you're bringing to the table. So I'd say it's number one, never forget every business is people business and private equity is no exception.
So, all right, here's the other thing I was thinking about. This goes way beyond private equity. This is sort of one of my things, especially in recent years, every problem in this world can be solved and improved. If we all show a little bit more respect. And a little bit more humility. we certainly see that in our political dialogue right now, which gets more depressing by the day.
And we can see that in all aspects of our life, but it's true of private equity. And usually that's not a problem for independent sponsors. We come with natural humility because, we don't have funds and, you know, we're trying to earn our way in the door, but it's something to keep in mind. It's easy to feel confident and strong when you've got a half a billion dollar fund behind you, but I think it's important to realize that every single entrepreneur that we've met, where we've been interested in investing in their business, they have made miracles happen.
They have taken something that didn't exist, they've created a business, and brought it all the way to the point where we're interested in buying it. That is an extraordinary act, almost an act against nature. And way more interesting, impressive, and profound than anything we're going to do. So I talked earlier about a business that we were fortunate to buy 2 million of EBITDA.
Now it's going to do 20 and that sounds great, but I promise you what we've done there is nothing compared to what the original entrepreneur accomplished to get that off the ground. And I think we all have to keep that in mind. And I think my partners, we're all of the same mind here. We show up when we meet with a company with just profound respect for what's happened here and a feeling of obligation.
If they're going to invite us into this, we have to be worthy of that. So I think if you have that mindset as a private equity investor, you will do better in the long run.
[00:39:11] Sean Mooney: I think that's such great kind of foundational advice, not only for business, but for life. Right. And as you think about kind of what you share, the humanity of business and every day we hear more and more about chat GPT and the robots taking over.
And I'll tell you every day there's more headlines about chat GPT. We get two times as many phone calls about, we need people to do these things. And with that in mind, just like that appreciation of humanity, but also the appreciation of a founder, it was so easy for me when I start off my career just to say, oh, we're going to show this person our sophisticated ways.
And then as you would peel back the onion more and more, you're like, this was really hard what they did. There was a reason, in most cases, for things they haven't done. Not the least of which was really smart allocation of finite resources that can then be unleashed a little bit when you're able to kind of take the burden off their shoulders and bring extra resources to the building and growing.
But even as I reflect back when I started, I thought it was like, Oh, I got this. This is going to be great. And it was pure terror for at least two years. It was a heart attack a day. I was like, what have I gotten myself into? It was the most stress filled period of my life in a career filled with stress.
And so what you're talking about is not only I think spot on, but I personally and viscerally feel when you're saying that it's like, Oh, when you get something going, it's really hard. And so I think that's great advice really for anyone, particularly those coming up in private equity where the people who had founded these things, like there's usually a reason for the way they do stuff.
So don't discount that. And then use that as the basis to supercharge what's going to happen next. So, Doug, how about you?
[00:40:51] Douglas Song: Yeah, as you both know, I'm a big advocate of this model, the independent sponsor model. I have been since the beginning. And I have a great many emerging independent sponsors approach me, and they find me many different ways.
I get introduced. They find me on the web, et cetera, but as we talked about, this is a very collaborative industry and I am happy to help. And when I say help in any way, currently I have half a dozen emerging independent sponsors that I'm mentoring in one way or another. And in some cases partnering on deals.
But my general advice for emerging independent sponsors and just going back to my earlier statement, the quality is higher, right? So these are real professionals. They have real capabilities. But my general advice is give yourself at least a two year runway. Unless you get extremely lucky, get a deal done in your first six months, it could take up to two years.
And I can say that from experience, make sure you have the balance sheet and the understanding spouse that understands what that means. And I think that's extremely important. Just make sure you have the runway. The second thing I say to emerging independent sponsors is make sure you get the right first deal done.
Don't worry about the economics. Make sure you get the right first deal done because that's going to pave the way for everything else. If you have a bad first deal, your career as an independent sponsor is extremely impaired. And in many cases, I suggest you may want to think about partnering with somebody like Erik, because he's experienced, he's got credibility, he's got the network of capital providers.
Don't worry about splitting the economics right now, worry about getting the first deal done right. And in many cases that means partnering with another, maybe perhaps, a more seasoned independent sponsor. Obviously the people have to all match and etc. I always say also, be clear what your goals are. What do you want to be in 10 20 years?
Be clear now. Just don't do this because it's the latest thing to do. What do you want to become in 10 to 20 years? Many cases, these emerging independent sponsors, they want to build a track record and raise a fund. I hear that often. Some cases, they just want to have a great portfolio and build businesses in whatever setting, whether that's a holding company setting or some other type of setting.
So it really depends on what you want to do. Do you want to create your own family office at some point after you have, you have success and be more of the principal? Instead of putting up 5 to 10 percent of the equities check, maybe you're putting up 50 percent of the equity check. That is a very different model compared to most independence monsters.
So, I asked them to be very clear on what they are trying to achieve. This model is extremely difficult to start. It's extremely difficult because you don't have a track record typically. You don't have cash flow coming in. You don't have credibility. All the things. I think there's an inflection point.
Once you get to two to three portfolio companies, I think there's an inflection point where you now have a track record. You have credibility. You have cashflow coming in, right? It's a totally different model and it's a superior model once you get to that stage and beyond. So that's my advice typically to emerging independent sponsors.
[00:43:55] Sean Mooney: Once again, I really like that advice. It's kind of a great mix of you're going to go farther, probably together. You might go faster alone, but you're going to go further together. Go into this with eyes wide open. They'll prepare for success. I certainly felt that I remember when I started this thing. I got that two year advice, and I was like, no way, no way am I going to have to wait two years before I can pay myself.
Sure enough, it was two years. And I was just like, I think my wife was just watching our cash go down, down, down, down, and I'm like, well, things are going great, honey, I swear. She was like, don't look at the bank account. But then also, not only go into it tactically, not only like have this mindset that we've talked about, this really people first mindset.
But then also think strategically, what do you want to be five years from now, 10 years from now? Like what's your long term vision of your business going to be? I think those are all super, super spot on.
[00:44:44] Douglas Song: Yeah. And I'll just say one last thing, which is by definition, the independent sponsor model, we have to partner on every deal by definition.
It's a standalone deal by deal basis business. So by definition, you need to partner. And also, because we're an independent sponsor firm, you don't have management fees coming in to build infrastructure. So typically what you see is between one to five person shops. And so if you want to do more than what you're capable of, given that infrastructure, you have to partner.
That's why I think collaboration is going to be extremely important. If Erik brought to me a 300 million transaction, he said, listen, great transaction. I want to have a partner because I need X, Y, and Z. I'll gladly work with and partner with him on that deal.
[00:45:29] Sean Mooney: That's great. Really good advice. And going back to like get going and each deal, they got to stand on their own.
Everything you can do to make it successful, the more successful you're going to be. And it's usually going to be a series of things. You know, it's this concept of expected value. It's outcome times, probability of success. And you can move both those levers to get the expected value up.
[00:45:48] Erik Ginsberg: By the way, on your cashflow point, which is a good one, it's even worse as an independent sponsor because you are expected to, and you want to.
invest in your deals. So you never have any cash. You do a couple of successful deals. You just write bigger checks in the next deal. I always joked about as our spouses were constantly saying, Hey, successful PE guys, where's the money? Cause you never have any cash. Right? So it's just another thing to keep in mind.
[00:46:15] Sean Mooney: That makes a lot of sense as well. I used to describe what I did when I was in a private equity, I'd say I'm a farmer. What do you need a farmer? It's like, well, everything I have is always in the ground. It looks good on paper on occasion, but it's never like something that I can eat.
[00:46:29] Erik Ginsberg: I know. I always say, well, see, honey, we've got these companies and we have these ownerships.
It's like, that's great. Can we go buy? No, not yet.
[00:46:35] Sean Mooney: Next season when the jets are good.
[00:46:40] Erik Ginsberg: It's going to be next season. You heard it
[00:46:41] Douglas Song: more than one season.
[00:46:42] Sean Mooney: Yeah. So maybe it's around things out here. And I think on the topic of advice, this is another really good one. And as we all know, Really successful people are great consumers and borrowers of other people's hard earned wisdom.
And usually that comes through reading books, listening to podcasts, doing things like this, where you can kind of do the Walmart form of innovation a little bit. And so Erik, I'm curious, are there any things that you're reading or have read that you think have made an impact on you that might do the same for others?
[00:47:12] Erik Ginsberg: Yeah. I mean, sure. There's a lot of business books that everybody knows and reads. But there's one book that I often recommend to people and I send to people and it's very short. It's a book called Leadership and Self Deception by the Arbinger Institute. And the whole book is basically one insight, but they take you through the example of a small company and it's actually quite an interesting read.
But the self deception in the title is basically when we know what the right thing to do is, but we don't do it, we then deceive ourselves, and in fact betray ourselves, and then to justify that, we end up telling stories to ourselves that We heighten our virtue and we make other people the bad guy to sort of feel better about the situation.
And I read this book, I want to say it must have been 15, 20 years ago, really when my kids were young. And it's a business book, but it's also a personal book. And it's, you know, an example would be you're sitting on a plane and you put a bag next to you to try to save the seat. Right. And you know, you shouldn't be doing that.
Because the mistake you're making is you're overestimating the importance of what you need and you're not seeing other people as human beings worthy of the same kind of consideration. And the way to stop behaving this way is to stop doing that, is to see everybody. I'll stop there, but it goes into applications and implications for organizations and organizations often break down when people behave that way.
It's a very quick read, but I found it pretty profound, something I applied in my life in addition to in business. So I would recommend that to anybody.
[00:48:39] Sean Mooney: That'll be a one click Amazon purchase right after this. How about you Doug?
[00:48:43] Douglas Song: I love reading history, business books also, and biographies. I'm currently reading Elon Musk's biography.
But one of the best things I ever did for my kids, I think they were six years old, maybe seven, is I found a video. Online that was sort of like structured as a cartoon, but it described compound interest because I wanted them to understand the power of compound interest at an early age and why they should think about that now, right?
Because it sets them up for the future. So that was one of the best things I ever did. And I think every year or every other year I asked them. And what's the difference between basic and compound interest, right? What would you get if you put in 10 today, if you do compound interest in 30 years, right? I asked that question once in a while, and there's a spreadsheet and all the rest of it, but that was one of the best things I ever did.
[00:49:33] Sean Mooney: I ask great advice. And that reminds me that I've been talking to my kids all year about this. Opening an account for them so they can do a little bit of investing. And now it's getting to be late in the year and I haven't done it, but it is, it's such a great universal truth. And it teaches so many things.
[00:49:48] Douglas Song: It's the most powerful thing about investing truly.
[00:49:50] Sean Mooney: Not only the long term benefits, but delayed gratification and seeing the power of the decisions you make early on that will pay off in years ahead. Another great piece of advice. And I think right after this session here, I'm going to have to call Fidelity and
[00:50:05] Douglas Song: Open up that account.
[00:50:06] Sean Mooney: This is, this has been awesome. So Doug, Erik, really appreciate my friends here for coming by. We're actually doing this in person in Nashville. So it's also doubly fun to do it here together. And so want to thank you. Thank you. Thank you for spending time and sharing some of the wisdom that I wish I knew before, but I'm glad to know
[00:50:24] Erik Ginsberg: Thanks this has been fun.
[00:50:25] Douglas Song: Yeah, it was great. Thank you for having us. Absolutely.
[00:50:31] Sean Mooney: That's all we have for today. Special thanks to my friends, Doug Song and Erik Ginsberg for joining. If you'd like to learn more about them, Prodos Capital and or Slate Capital, please see the episode notes for links. Please continue to look for the Karma School of Business podcast anywhere you find your favorite podcasts.
We truly appreciate your support. If you like what you hear, please follow, rate, review, and share. It really helps us when you do this. So thank you. Thank you. Thank you in advance. In the meantime, if you want to be connected with the world's best in class, private equity grade, professional service providers, independent consultants, interim executives that are deployed by the best business builders in the world, give us a call or visit our website at BluWave.
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Private equity insights for and with top business builders, including investors, operators, executives and industry thought leaders. The Karma School of Business Podcast goes behind the scenes of PE, talking about business best practices and real-time industry trends. You'll learn from leading professionals and visionary business executives who will help you take action and enhance your life, whether you’re at a PE firm, a portco or a private or public company.

BluWave Founder & CEO Sean Mooney hosts the Private Equity Karma School of Business Podcast. BluWave is the business builders’ network for private equity grade due diligence and value creation needs.