Q: What led to the decision to raise your initial fund? What were the indicators that you were ready?
Kevin Condon: I took the entrepreneurial plunge of starting a new investment firm along with my co-founders — Steve Gord and Todd Morrissey — in late 2020. We saw an opportunity to fill a void in the market by providing flexible capital to management-owned small businesses.
Throughout our careers, we’ve found that these founder-owned companies are too often ignored by traditional capital providers who are unwilling to tailor their offerings to the unique needs of these companies.
While raising a fund in the early days of the pandemic may have seemed crazy, we were confident that our differentiated investment strategy and prior success in senior roles at other private equity firms would allow us to raise our inaugural fund. But it would be disingenuous to say we knew it would all work out. Raising a first fund requires a leap of faith. Thankfully, we generated support from an amazing investor base and raised an approximately $250 million fund.
Beyond the foundational criteria we had in place, one of the biggest personal indicators that I should take that leap was the support and encouragement from my network and family, particularly my wife.
Q: What did you consider and prioritize when developing an investment strategy for your initial fund?
KC: Over the course of our careers, my partners and I had each identified and focused on an underserved niche in the market — a funding gap between the often-rigid investment approaches of traditional credit funds and the overly dilutive, controlling approaches of growth equity and buyout funds. We felt that a new firm would need to differ from the standard options already in the market. The world did not need another traditional credit platform or middle-market buyout fund. We formed Hidden River to be different from — and in between — those two bookends.
Our hybrid debt-equity investing approach is targeted to small business owner-operators looking for a supportive capital partner. We strive to structure our investments in ways that create more alignment and flexibility than one would get from a traditional lender while being less dilutive than equity-only alternatives. This typically results in management and founders continuing to own and run their companies alongside a relationship-based capital partner who has bought into and supports management’s vision for future growth and value creation.
When crafting our investment strategy, it was important to us that our approach remain relevant across economic and credit cycles. Our experience has been that small, owner-operated companies have capital needs for growth, add-on acquisitions and internal recapitalizations that don’t necessarily cycle up and down with the typical drivers of the mergers and acquisitions and financing markets, such as purchase price multiples and interest rates.
Q: How did you think about assembling your team?
KC: My partners and I bring different and complimentary skill sets to our organization. Steve and I worked together at a prior firm, and, before that, had co-invested in deals together. The continuity of having worked together, combined with Steve and Todd’s longstanding relationship, gave us a strong cultural foundation as we built out our broader team.
We’ve grown to nine people and are proud of the team we’ve assembled. Our goal in hiring was to find talented individuals who could work independently and collaboratively in an entrepreneurial, team-driven environment.
Our first hire was Graham Bachman who runs business development with a focus on building our brand in the market and sourcing investment opportunities. We knew our success would in part be contingent on our ability to find our type of hybrid debt-equity deals, which are less common than control buyout deals or traditional debt financings. We also added three investment professionals focused on new deal assessment, transaction execution and portfolio management and a back-office team that supports everything we do.
Q: What were the most important considerations when choosing limited partners (LPs) to pursue for partnership?
KC: Given our approach of investing debt and equity, it was important to target LPs who could get comfortable with a hybrid strategy. Many LPs bucket fund managers into distinct categories — for example, senior debt, mezzanine debt and control buyouts. When fund managers don’t neatly fit into one of these allocation buckets, LPs sometimes struggle with what to do with them. These dynamics create roadblocks and resistance with some prospective LPs.
Those that were able to step back and understand the appeal of our strategy found the return profile we are targeting compelling, especially considering the risk profile of our investments. Ultimately, we generated interest from an attractive cross section of LPs, including university endowments, fund of funds, banks, family offices and high-net-worth individuals. We are grateful for their trust in us and what we are building at Hidden River.
Q: What is the best advice you received when raising your first fund?
KC: The best advice I received when launching Hidden River was to be persistent and patient. Raising your first fund is not for the faint of heart. The process will take longer than you expect, and more people will say “no” or not respond than you can imagine. Having the persistence to keep pushing forward without getting frustrated is key to getting your fund off the ground.
The best advice I could give those thinking about raising their own first fund would be to build a career’s worth of goodwill and strong relationships to tap into when the time comes. Whether it is for a warm introduction to a potential investor or advice and guidance, one’s network and reputation will play an outsized role.
About Kevin Condon
Kevin Condon is a co-founder and partner of Hidden River Strategic Capital. Hidden River typically invests between $7.5 million and $20 million into U.S.-based small businesses generating at least $2 million of EBITDA. The fund provides flexible, partnership-oriented debt and equity to support the growth needs and strategic initiatives of management-owned companies.
Condon has spent 15-plus years investing in lower middle-market businesses. Prior to starting Hidden River, he held senior positions at Boathouse Capital and OFS Capital where he similarly focused on structured capital investing. Earlier in his career, Condon worked at private equity firm The Edgewater Funds and investment banking firm Robert W. Baird. He has an MBA from the University of Chicago Booth School of Business and a BBA from the University of Wisconsin.
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