May 25, 2022
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?
Drew Bagot: There's an alternate universe where I am a full-time operator of a business I founded, but I decided to go into private equity so I could touch and learn about a lot of different industries, companies and founders. Entrepreneurship and being interested in business have been in my blood from a young age, so I feel lucky to have fallen into this model.
Careerwise, I went straight into private equity out of undergrad at UT (University of Texas at Austin) and operated in the fund structure for a decade. The last private equity group I was working at merged strategies with one mainly backing independent sponsors, and that is where I first learned about the independent sponsor ecosystem. I woke up one day realizing the place I belonged was close to that day-to-day operator role, but with the ability to focus on a few companies rather than solely running one business or trying to manage over a dozen. Being an independent sponsor is a great balance that I think works well for marrying those desires of operating, investing and constantly running into new and different business models.
Q: How long have you been operating as an independent sponsor, and how long did it take you to close your first deal?
DB: After spinning out of the fund structure under my initial independent sponsor platform, I got a potential deal signed up within the first few months. This deal got all the way to the 11th hour, and right when it looked like I was going to close it in under six months, we uncovered something in due diligence and had to go pencils down. It was the right thing to do, but that essentially reset the clock, so it took around 21 months from start to finish to get the first deal done. Things have gotten smoother and easier with successive deals, to be sure.
After launching my sponsor platform, Serata Capital Partners, in the third quarter of 2020, we closed our first two platforms in under 18 months, as well as a major add-on, and it’s been exciting to be part of that.
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?
DB: At an economic level, the independent sponsor model has improved because of the well-known dynamics driving how much dry powder is sitting on the sidelines trying to find a home. However, I think there's another, more interesting reason for independent sponsor growth. Private equity doesn't always have the best reputation in the eyes of business owners and, candidly, for some good reasons built up since the 1980s. While things have improved on the private equity management side, I think the independent sponsor model injects considerably more alignment, hustle and flexibility as an option for owners in selecting a partner.
If a seller just wants to punch out for the biggest number to the most impressive private equity brand name they can find, there's certainly a strong market for that owner. But there are a lot of other situations where sellers are not interested in selling to a private equity firm that has dozens of companies and maybe not quite as much time to lend to individual businesses, plus that fund can afford for that specific business to die on the vine. For someone who wants to stick around and solve challenges for another bite at the apple, that potential outcome for their business can be frightening, so I think the independent sponsor model provides a truly superior alternative that can deliver real alignment with founders.
Going forward, I would expect there to be a bit of a washout of some of the independent sponsors that are relatively new that probably have heard about the success of the model overall but aren't prepared for the cycle it can take to execute a deal, as well as the difficulty to make those deals successful. I think you'll also probably see firms that are more specialized in their role, and/or see the industry be successful and grow precipitously, at least in the midterm.
Q: What are the most common misperceptions about the independent sponsor model?
DB: From experience, both backing independent sponsors for a while and then becoming one, I think the idea that all independent sponsors are roughly the same is probably the biggest misperception. There's a huge range, from those who can invest seven-figure checks and help operate the business at the drop of a hat, down to essentially buy-side brokers who feel there are better economics to calling themselves an independent sponsor. But there's also everything in between, which represents the traditional bell-curve distribution. By painting independent sponsors with a single brush, you're really missing that critical spectrum between those two ends that drive unfair expectations of sponsors in both directions.
Q: Recognizing every deal is different, what are some of the most important considerations for you when choosing a capital partner for a deal?
DB: This may sound like a commonsense answer, but I think success boils down to doing your diligence on the integrity of and building trust with your capital provider, who is really your primary partner in the deal. I've seen and heard of independent sponsors, especially in the beginning, trying to get their first deal or a few deals done taking a capital partner that gives them the best economics or certainty to close, and they overlook some of those key qualities.
Ultimately, missing on trust and integrity can make your deal unsuccessful if any speed bumps result in sharp elbows and big egos winning out, rather than letting the best solution reveal itself through an honest, open partnership. I've been really fortunate to find great partners all around in Serata's deals thus far.
Q: How do you think you distinguish yourself from other independent sponsors?
DB: The fact that I've been a backer of independent sponsors is a key differentiator that I hear from capital providers. There's no confusion about governance rights or other issues since I used to be on that side of the table.
I also started a business from scratch and scaled it. For some independent sponsors, that's the route they take to becoming part of this ecosystem, but I think it's still somewhat rare to have someone who's operated and started a business from scratch who also has a solid private equity background.
As a firm, we're dedicated to maintaining low egos, hustling hard and being transparent at all times. We want to build trust, work hard and be totally aligned with co-investors and management to create a "best-idea-wins" mentality, and I'm hopeful that philosophy will sustain us over the long term.
Drew Bagot is the founder and managing partner of Serata Capital Partners. Bagot has been a private equity investor for more than 15 years, having also founded and operated entrepreneurial businesses. He concurrently manages a private equity portfolio in Calidant Capital, of which he is a founding partner.
Prior to fostering his own private equity investments, Bagot was an associate director at ORIX Corp., an international financial conglomerate with more than $150 billion in assets, deploying $10 million to $30 million into growing middle market companies across myriad industries. Bagot was a senior analyst with Pharos Capital Group, a $1 billion private equity fund that concentrates on the business services, healthcare and technology sectors. He previously served as the lead underwriter at Shoreline Capital, a private equity-focused family office.