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 [email protected].
Q: Why did you decide to become an independent sponsor?
Franklin Staley: It is an expedient way for experienced deal professionals with adequate access to “deal-by-deal capital” to get started without the painful process of fundraising for a committed fund, which can take years. Also, first-time funds face a meaningful handicap in raising capital and the terms received.
Doing deals “independently” enables us to develop a team track record and get good deals done while we consider if a committed fund is a direction we would like to go. I previously raised and invested in a committed capital fund, so I have a clear-eyed understanding of the pros and cons of each model.
Also, in the case of Exeter Street Capital Partners, we established it as an affiliate of the Patriot Capital Group, a 20-year-old mezzanine investment firm, so there was a ready-built platform making it the best of both worlds.
Q: How long have you been operating as an independent sponsor, and how long did it take you to close your first deal?
FS: Exeter has operated in its current configuration since January 2020. We closed our first transaction in June 2021. Exeter operated as a merchant banking effort for six years prior to 2020, which included raising debt and equity capital on a deal-by-deal basis.
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?
FS: In addition to the factors I noted that motivated me to become an independent sponsor, independent deals are generally their own investment series, meaning the economics and carried interest follow the deal. Committed funds are generally pooled investment capital, so in essence there is a “cross default” across all investments made by any given fund. This forms a higher bar and materially longer time frame to experience carried-interest economics.
Also, from the investor’s perspective, independent sponsor transactions enable them to opt in to or opt out of any particular deal based on industry preferences and their own current liquidity status. Limited partners (LPs) in committed funds are contractually obliged to fund according to their LP agreements, regardless of industry preference or liquidity positions.
I expect we will continue to see more pools of committed capital being formed to fund independent deals as the market grows, with terms becoming more standardized for established independent sponsor managers.
Q: What are the most common misperceptions about the independent sponsor model?
FS: Two big misperceptions come to mind. First is that economics are less favorable to investors. My response to this is that independent sponsors typically charge a transaction fee at closing plus a percentage of EBITDA on an annual basis. This ties the annual management fee to performance, thus aligning incentives. Other than the transaction fee, there are no other costs to investors. A committed fund charges 2-3% of committed capital annually, regardless of investment status and performance of the underlying investment. When one actually runs the numbers, the answer to which is “cheaper” for investors really depends on the terms of the independent sponsor deal. It is never a slam dunk in either direction. For investors focused on aligned incentives, the independent sponsor model should be preferable and offer more flexibility.
The second myth is that independent sponsors lack experience and have limited access to capital. My response is that while this may have been the case several years ago, the growth, maturity and economic benefits of the independent sponsor model have brought a new wave of seasoned professionals into the market who come with long-term relationships and capital sources. Exeter builds off a successful 20-year track record of our affiliate Patriot Capital, and as Exeter’s leader, I bring over 25 years of private equity management and corporate advisory merger and acquisition experience. I also previously raised, invested and managed a committed fund.
Q: Recognizing every deal is different, what are some of the most important considerations for you when choosing a capital partner for a deal?
FS: We look for several qualities when choosing a partner. First is alignment of interests. We look for partners who are in it with us as equity partners, side-by-side at the table, and recognize that every deal is different — i.e., not cookie-cutter. Therefore, deal structures should resemble what we are trying to collectively achieve. As the manager, we don’t mind being the workhorse in the deal, but our capital partners must invest more skin in the game than just the capital.
We look for flexibility and trust. Every investment will face challenges at some point. We seek partners we can trust to work the problem with us within a given situation and not become another problem. We look to avoid a traditional “big bank workout group” mentality, which can be a tone-deaf, myopic and inflexible approach to problem-solving.
Finally, we seek fair economics and control. Exeter is an experienced fund manager that strategically raises 20-30% of the equity in its deals. This is a far cry from others in the market that may bring little to no equity capital. We avoid capital partners who look at independent sponsors as pass-throughs for additional deal flow for their own funds and will not value our contribution as a professional manager. We are very leery of “springing rights” and other veiled tripwire provisions that underscore a “loan-to-own” mentality. Ultimately, economics and control features must be aligned to keep us in the driver’s seat while incentivizing all parties to work together toward a higher outcome.
About Franklin Staley
Franklin Staley joined the Patriot Capital Group in January 2020 to lead Exeter Street Capital Partners, Patriot’s micro-cap buyout strategy that makes control equity investments in promising lower middle market businesses with $2 million to $5 million of EBITDA within the industrial growth and technology and business services sectors across North America. Staley brought more than 25 years of private equity, advisory and strategic operating expertise to Exeter Street.
Prior to Exeter Street, he spent over nine years with DC Advisory LLC (formerly Signal Hill), where he founded the firm’s sponsor coverage effort and was a managing director in the business services practice area. Prior to joining Signal Hill, Staley spent nine years as a principal and founding member of Meriturn Partners, a private equity fund focused on buyouts of lower middle market companies in basic industries. Among other duties, he was responsible for all aspects of sourcing, evaluating, conducting diligence, structuring and leading transactions, managing strategic capital events within the portfolio, as well as other portfolio monitoring activities and fund oversight duties.
Previously, Staley was the chief financial officer and vice president of strategy for Axcellis, an early-stage software developer in the security alarm and systems integration industries. He has prior investment banking experience with Cowen & Company, Lehman Brothers and Chase, and serves as a director of the Josephine B. & Allen P. Green Foundation, an organization focused on development initiatives in the rural mid-Missouri region where he grew up. Staley has a B.A. in economics from Kenyon College and an MBA from The Amos Tuck School at Dartmouth College.