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?
Matthew Kaufman: I spent 18 years investing in private equity and distressed situations at large institutional firms, focusing on industrials, manufacturing and service opportunities. I occasionally had the opportunity to work with lower middle market companies. I was energized by the smaller companies I worked with, where I could roll up my sleeves with a handful of key managers to share ideas and make collaborative decisions. Working as a small team was fun and rewarding. It felt distinct from my experiences with much larger companies, where board size and management team depth created a different environment. In addition, lean teams who were eager for support allowed me to utilize the skill set and network I had developed over my career to positively impact the business. So, I formed Validor Capital to pursue my passion of working closely with management teams to create enduring companies of significant value.
In addition, it was important to me to build my team with individuals who had significant operating and managerial experience. While I certainly feel I have had a lot of experience working on many in-depth operational issues — whether lean, strategic growth, automation, etc. — I wanted to ensure we were a truly value-add partner. This meant providing guidance and support, if and when needed, on the myriad challenges that the business leaders confront, particularly for smaller businesses where there is not otherwise a construct for that type of support.
Q: How long have you been operating as an independent sponsor and how long did it take you to close your first deal?
MK: We closed our first deal in 2012, approximately a year after I formed the company.
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?
MK: Growth in the independent sponsor model has been driven by three things.
One, the inefficient nature of the deal market. Even with technological advancements and online tools connecting buyers and sellers, the deal market remains inefficient, which creates an opportunity for independent investment professionals with credibility and deep relationships to creatively source and aggressively pursue attractive opportunities.
Two, the availability of capital. When I first started, it was more typical to pursue asset-based financing or nontraditional, cash-flow-based loans. As the independent sponsor model and lower middle market space became more mainstream and lenders saw success with their investments, they aggressively pursued and embraced independent sponsors, enabling more deals to get done.
Further, equity investors saw the independent sponsor model as a way to drive differentiated deal flow and generate outsized returns. The transparency inherent to investing on a deal-by-deal basis is also attractive. From high-net-worth individuals to family offices to even some large institutions, many sophisticated equity investors are focused on working with independent sponsors.
Three, I think many independent sponsors — whether former operators, founders/entrepreneurs or professional investors — started with specific experiences and skill sets and pursued transactions that lent themselves to those skill sets. That led to success and credibility for the entire space.
In terms of the future, the challenge will be how to set oneself apart with myriad new entrants and potentially greater competition for deals.
Q: What are the most common misperceptions about the independent sponsor model?
MK: I think the industry at large understands the model and that every player is different in its experience and approach. It is more complex when engaging business owners who may have their own views of private equity — whether good or bad — and lump independent sponsors into that viewpoint.
The independent sponsor model generally offers greater flexibility in approach than a large institutional private equity firm. When working with independent sponsors, you are typically working with a small team. Just like anything else, you need to understand what that team brings to the table and what their approach will be to the business. It could be vastly different from a large funded sponsor or another independent sponsor.
Q: Recognizing every deal is different, what are some of the most important considerations for you when choosing a capital partner for a deal?
MK: From the equity standpoint, our investor base leans more toward high-net-worth and family office investors. We do not sign up a deal and then go seek out a capital partner. Instead, we consistently go back to the same investors, who have continued to support us.
For the debt side, we carefully consider whom we choose as a capital partner. We believe any capital partner should: (i) understand our thesis, plan and strategy; (ii) have a good grasp on the industry and inherent risks and opportunities associated with the business; (iii) have the experience and/or network to be value-add partners; and (iv) like us, be looking to build long-term relationships, as we believe a strong capital partner should be supportive when times are good as well as when you encounter some speed bumps.
About Matthew Kaufman
Matthew Kaufman is the founder and managing partner of Validor Capital. He is a senior private equity professional with more than 20 years of principal investing experience. Over the course of his career, he has led the execution of more than 30 equity, debt and merger and acquisition transactions and has significant experience managing portfolio companies and turnarounds.
Kaufman was previously senior managing director with GSC Group, where he was a member of the investment committee of the private equity and distressed debt group. Prior to that, he was director of corporate finance with NextWave Telecom and worked in private equity and mergers and acquisitions at The Blackstone Group and Bear Stearns.
Kaufman has served on the boards of directors of numerous corporate and not-for-profit entities and has held steering committee positions in several bankruptcies. Select board memberships include chairman of Pacific Aerospace & Electronics and Aeromet Holdings (both in the aerospace and defense industry), Burke Industries (commercial flooring), Day International Group (printing press consumables and chemical products), Safety-Kleen Corp. (environmental services) and Woods Equipment Co. (agricultural and construction equipment).
Kaufman graduated from the University of Michigan, with B.B.A. and MAcc degrees.