March 1, 2023
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?
Rick Perkal: I ran the retail consumer vertical for Irving Place Capital, the successor entity to Bear Stearns Merchant Banking.
We had about $4.5 billion under management, but I saw an opportunity when I was there to create a small fund underneath me to invest in branded consumer companies in the lower middle market. This was an independent sponsor called Star Avenue Capital. It was a partnership between Irving Place and Creative Artists Agency (CAA) in Los Angeles.
The idea of that vehicle was to leverage the expertise of the consumer lifestyle group at CAA that brought marketing, branding and digital content expertise together with the deep bench of Irving Place, which included six operating partners from my firm's retail consumer vertical, to help lower middle market consumer brands get to the next level by investing in their companies. We weren't buying the whole companies. We were buying around 40% to 75% of these companies. The first deal we did together was with J BRAND Jeans. Then we did three more deals. We transacted on a deal-by-deal basis, utilizing equity sources outside our fund.
In 2014, CAA was bought by a private equity firm, Texas Pacific Group, and Irving Place started to wind down. In 2015, I decided to step down as a full-time partner but continued to manage several investments for Irving Place, helping to sell them off over the next three years. At the same time, I wanted to recreate the Star Avenue Capital independent sponsor-type platform.
I thought about raising a fund, but I had done a lot of fundraising in my life and didn't want to go coast to coast trying to raise a fund — spending two years raising capital. I'm a deal junkie. I wanted to just do deals, and I had enough resources and commitments from raising money for the independent sponsor in my prior firm.
Starting in 2016, while I was managing a number of investments for Irving Place, I looked for a way to essentially replace CAA. I found a marketing branding firm in New York called YARD NYC. The short story is that we developed that same relationship we had with CAA, where YARD was bringing marketing, branding and content expertise to portfolio companies we would invest in. It's a unique platform because they invest side by side with us. They participate in our carry and work with our portfolio companies for free.
All of this is a long-winded way of saying that I wanted to go down-market. I had experience in the lower middle market from my small deal fund, Star Avenue Capital. I think there's more opportunity to add significant value to companies in the lower middle market. I like being more involved with companies, helping them evolve and bringing the expertise I've acquired over the years. I didn't want to run around the country raising committed funds. I had enough relationships.
I found YARD, and I partnered with Patrick Collins, who came out of JH Partners, and we were off and running with Firelight Capital.
Q: How long have you been operating as an independent sponsor, and how long did it take you to get your first deal closed?
RP: We've been operating for about six years, although given my responsibilities to my prior firm, I have only been doing this full time for about four years. Our first investment happened right out of the gate. We invested in a company called Three Dog Bakery, which was a small, proprietary deal. The company needed our help to take their position in the pet treat category to the next level. We partnered with the shareholders of Three Dog Bakery.
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 for the future?
RP: I think the independent sponsor community has grown dramatically because people like me, with a lot of fund experience, decide they want to have a smaller group. You don't find 50 people in an independent sponsor. It's more entrepreneurial, which is fun, and less bureaucratic. If you come with the expertise and existing relationships with limited partners (LPs), funding on a deal-by-deal basis is less cumbersome and more efficient.
I think there will be more independent sponsors going forward. I think the whole community is going to continue growing. The industry will continue to evolve. I think we may see a hybrid model, where you're not completely raising money, deal by deal, agnostically. I think you may find people are getting a stable of five to seven backers — essentially LPs that are quasi-committed. Maybe they pay a small management fee, but it's still a nonbureaucratic, entrepreneurial situation. I may pursue something along these lines down the road.
Q: What are the most common misperceptions about the independent sponsor model?
RP: A common misperception about independent sponsors is that they're finders. They want to get paid a lot of money and equity for turning a deal over to a firm. There's a stigma that still probably exists around this model because independent sponsors used to be called "fundless sponsors."
I think the other misconceptions about the independent sponsor model have come about because there are all different kinds of independent sponsors. At Firelight, we have a real team. We have six people. I have an assistant. We have offices. For every deal we do, we do extensive diligence, culminating in a lengthy investment committee memo. We operate like a committed, middle market fund.
To me, this approach reflects the top 25% of independent sponsors because they're run by people who came out of private equity funds, know how to run a fund and know how to operate like a real private equity firm. When they raise capital, they manage the investment. They bring added value. The only difference is they don't have committed capital. Everything below that top 25% varies greatly, which is what contributes to the various misconceptions out there about independent sponsors.
Q: Recognizing every deal is different, what are some of the most important considerations for you when choosing a capital partner for a deal?
RP: It varies by deal, in terms of what you're looking for. In our case, relationships are so important because very few deals go exactly the way you expect, every day, every month, every year. First and foremost, if a partner is going to have any kind of input, you want somebody who thinks like you. You want somebody who can potentially bring additional value, has been through bad times and, most importantly, understands how to be collaborative.
There are different kinds of partners that can really bring value. In our second deal, we invested in a women's handbag company. We partnered with a terrific firm that brought additional consumer expertise and value around digital e-commerce. Given what we do, that type of partner was great for this deal. In other situations, if you're working with a consumer brand that's looking to do add-on acquisitions, which require more equity, you may want to make sure you have a partner that has no additional capital constraints. The partner you choose should be the right partner for the particular deal you're working on.
Rick Perkal is chief executive officer of Firelight Capital. He is formerly a senior managing director of Irving Place Capital, where he focused on investments in the retail and consumer sectors. There, he led or co-led investments in a broad range of well-known consumer and retail firms. Perkal was instrumental in the founding of Star Avenue Capital, a growth equity firm focused on investments in retail and consumer branded companies. Earlier in his career, Perkal was a senior partner at Kirkland & Ellis.