The interview below is part of a series from McGuireWoods that features interviews with impressive independent sponsors as part of our ongoing commitment to the independent sponsor community. To recommend an independent sponsor for a future interview, email Jon Finger at firstname.lastname@example.org.
Q: Why did you decide to become an independent sponsor?
Tom Wells: We formed 10 Point Capital to help founders create dominant franchise brands. It's a very targeted focus that brings together our real-life experience in franchising — members of our team have been franchisees and worked for and founded franchisors — and our deep private equity experience investing in franchise transactions. The independent sponsor model allows us to be disciplined in where we invest while also bringing greater flexibility to transaction structures and hold periods, which furthers alignment with founder objectives.
We are unique in that we have no plans to raise a fund in the future. Our core team is in place, and given our deep involvement with brands, our goal is only one transaction per year. The independent sponsor model is perfect for our approach.
Q: How long have you been operating as an independent sponsor and how long did it take you to close your first deal?
TW: We were fortunate to close our first transaction with the launch of 10 Point Capital in early 2018. Our team had been investing together in the franchisor space prior to 10 Point Capital. The launch of 10 Point Capital was an opportunity to focus solely on this area of expertise.
Q: What are some of the most impactful reasons you think the independent sponsor model has grown so robustly and what changes do you envision in the future?
TW: As capital providers look for strong returns, they are increasingly realizing that many independent sponsors provide a tremendous amount of value due to industry expertise. There are sponsors like us across a variety of industries with both deep transaction and industry expertise. For many capital providers, sponsors can provide proprietary deal flow from their connections and the ability to operationally help portfolio companies.
We have also seen that many larger capital providers prefer the ability to diligence each transaction and actively select where they invest, which is not possible with a traditional committed fund.
Finally, an increasing number of independent sponsors don't have plans to raise a traditional committed fund. These sponsors are often great investors and capital providers are willing to invest in their deals.
Q: What are the most common misconceptions about the independent sponsor model?
TW: I think the two major areas that often surprise people are the level of sophistication of independent sponsors and the industry expertise and operation support that independent sponsors bring.
The perception can be that independent sponsors are only putting a deal together without adding expertise to the target company. Counter to that, we see a large core group of independent sponsors that are highly focused on specific industries, enabling them to find proprietary deals and drive strong returns through operational support.
Q: Recognizing every deal is different, what are some of the most important considerations for you when choosing a capital partner for a deal?
TW: The most important consideration for us is the cultural fit with our capital partner. Our goal is to find partners with whom we can build a long-term relationship and work on multiple deals together over time. We find that the independent sponsor model requires an immense amount of trust on both sides as well as an appreciation for the value provided by both parties.
Additionally, part of our investment thesis prior to closing a transaction is to form a very clear strategy for each portfolio company. This centers around what we call the "Franchise Acceleration Plan" — our refined approach to accelerating the pace of growth at our portfolio companies. We spend a lot of time making sure our capital partners and the target company's management team are fully aligned with this plan.
It also goes without saying that the ability to diligence and fund quickly are critical to the partnership.
Q: How do you differentiate your firm to perspective investment targets? How do you convince them to do a transaction with you instead of with a traditional private equity firm?
TW: Our deal flow comes from our network in the industry. The team has collective operational experience working for four franchisors and as a franchisee of seven brands. Our initial conversations with target companies focus on their operations and growth plans. This provides the management team with comfort. They learn that we deeply understand their business, the challenges and the opportunities. As they spend time with us, our hope is that they view us as much more than capital. It has also been tremendously helpful to have targets speak with our portfolio company management teams and founders very early in the process. We can tell targets how great we are, but they prefer to hear what we are like from people who have worked with us.
We also stand apart in the franchisor market by being highly flexible in how we invest. As opposed to most of the buyout firms we compete with, we are willing to take minority stakes and are comfortable with longer hold periods, if needed.
Finally, we have great investors and never had an issue with raising capital to close a deal. We can point to this track record and are able to get targets comfortable with the process needed to raise capital.
About Tom Wells
Tom is a co-founder and managing partner of 10 Point Capital, a private equity firm focused on helping founders create dominant franchise brands. Wells has invested in several great brands, including Tropical Smoothie Café, Slim Chickens and Phenix Salon Suites.
Previously, Wells was on the investment team at BIP Capital, where he invested in the franchise, technology and healthcare industries. Prior to BIP Capital, he worked for Century Park Capital Partners, a Los Angeles-based private equity group focused on the lower middle market. Wells began his career in the San Francisco office of Harris Williams & Co, a leading middle market investment bank.
He received his MBA from the University of Chicago Booth School of Business and an undergraduate degree in management from Boston College.
To contact Tom Wells, email email@example.com.