00:43:10 · James Bohannon
[00:43:10] S1: Yeah, so I think this is a big one. It's a really important topic and it gets very personal very quick. And I think that's actually a good thing because the, you know, the the independent sponsor is is beginning sort of hero's journey. Their their Bilbo Baggins leaving the Shire to go slay the dragon for the first time and and you're right there, you know, helping them. You wanna really understand what they're putting on the line. You're giving... You're writing a $10,000,000 check, and I won't talk about the incentive on the LP side for a moment. But that $10,000,000 check is going to this independent sponsor. You wanna know that they're gonna bleed when you bleed, and you also wanna know that they're gonna get rich when you get a five x. That's the simplest way to describe it. And then within those bands, I think you wanna understand that they're not just gonna like put up an okay medium return and like be sort of cushy and have like a cushy comfortable outcome because that's not what you're paying for. Right? You're taking a certain level of risk by backing an independent sponsor. And so there is sort of a minimum return that you're expected from that, whether that's two and a half X and up or a three X sort of debatable, but let's just say, you know, if an independent sponsor delivers you a 2.2 net, you know, do you want them to be like, you know, people can get persnickety on how much they're getting paid for that? Because you're like, look, I took a risk on you for that. I could have invested in Apollo twenty seven or whatever, or a more middle market version of that on one of the investment banking platforms. It took a risk on you because we were actually going for some more juice. So understanding those incentives are really important. I think, look, salaries are always a topic to come up. Like how much you're getting paid as the independent sponsor in the deal. Are those monitoring fees? Is that a closing fee? Is that a management fee? Is that capital coming off of? Is it committed capital or is it only once the money's in the ground, etcetera? There's all those dynamics and it's kind of give and take. And I do think it's conversational and case by case.
00:45:33 · James Bohannon
And I think from the independent sponsor side, it's important to be sort of transparent because if you like numbers aside, if someone, you know, I've got two little kids and I've got a mortgage and my living expenses are $405,100 grand a year. Like I'm not trying to get rich, comfortable on just a management fee, but like I have some bills to pay and I'm gonna put in like most of my life savings. And that's like the qualitative situation that translates to this amount of management fee. I think most, like pretty much all LPs are understanding around those dynamics if you, like, describe the, like, the scenario. And so, like, GP commit, like a $1,000,000 GP commit, that could either be 99.9% of someone's net worth or even 150% of someone's net worth, or it could be, you know, one twentieth. And so that even though it's the same numerical GP commit, it means different things to different people and how they're gonna operate and how they're gonna behave and how they're gonna be thinking about things. Because I think you can never think about incentives enough and alignment enough. And so again, I think like to make it very blunt is, you know, you want... If someone if someone delivers an outsized return, you want them to do extremely well and you want them to be super hungry to get that and you want them to every day show up and be, you know, shooting for that. And then if things don't, you know, go well, like, you want them to kinda feel the pain to some degree as well. Now, like, obviously... And in the interim, you want them to not be eating maybe ramen noodles, but you don't want them eating at the the, you know, Four Seasons on their management fees as well. That doesn't even exist anymore. It's now the grill, which is amazing.
00:47:28 · Mikk, James Bohannon
[00:47:28] S0: When it comes to post acquisition, first acquisition done, or just simply guys building those platforms, how involved you want to be or how involved you are when it comes to value creation? Like what are the decisions those sponsors should remain theirs and which you guys expect to add your thoughts as well when it comes to day to day operating a business, now the deal is done. [00:47:57] S1: You mean how much is the LP getting involved at the business Yes, [00:48:01] S0: in your case, being a family office, being an LP in this particular thesis.
00:48:07 · James Bohannon
[00:48:07] S1: In our case, I think we're look, it depends what the operational expertise of said family is, right? Are our principle as a media background, obviously, it is a big deal in the media space. So if there's a media related asset, like, or even an area where we have a lot of expertise, like, course, we're going to wave, know, we're going raise our hands, you guys were here to be as helpful as we can. We'll sit on boards, we'll take calls. You know, we can add real value. So it would be silly for the sponsor to not take advantage of that. We don't want to meddle either. Like the sponsor is getting paid to run that business and etcetera. So it's sort of case by case dependent. I also think it depends on the check size. We've made investments where we bought 100% of a business, right? That's different, it's direct. But almost like we're not huge checks usually on independent sponsored deals. So we're not going to come in and tell these people how to operate. We're mostly there, hey, we're here to be helpful. Let us know, call us, we'll show up to every board meeting, we'll do like whatever we want to do. We want to be supportive, we'll introduce you around town, we'll speak highly of Your own sponsor journey will help you there because we built those businesses. And so we're obviously not there to meddle and we want to be supportive and helpful because your reputation as an LP is very important too because when these very sought after sponsors come up, they have their pick of the litter who they can go with. And especially if you're not writing huge checks like us, how are you gonna win? Right? You're gonna win because, you know, hopefully, people are like, oh, yeah. Like, I know the Belzberg guys are awesome. They're super helpful. They're supportive. They didn't, like, you know, get like, they didn't get in the way. They were just helpful when I called on them. Like, you want that good reputation because the reputation is everything on both sides of the street here. Maybe some firms are more involved. Like, if you write a check and you're half the capital, it's a little different, right? And there's a threshold where governance is warranted based on the check size. So if it's a $50,000,000 round, you write a $30,000,000 check, you're like, yeah, this comes with some governance. I want like a board seat and I want like a say in some of these.
00:50:21 · James Bohannon, Mikk
Maybe I want a veto right on some M and A. That's like a conversation with the GP LP. And I think there's leverage on both sides there. So if you're the GP and you have an LP who's 30 or 50, that LP has got leverage. So that's why a lot of GPs would be like, look, I want 10... I want $510,000,000 checks. You don't want them too small. You don't want $51,000,000 checks because that's a huge pain. You're herding cats. You got a bunch of people calling you all the time if anything happens. Don't You want one LP because then guess what? You work for them and, you know, ideally having like five. So it's like the same like customer concentration or supplier concentration dynamics. Like on the LP side, like having $510,000,000 checks is nice because then like no one's real, you know, no one... Like you're in control. So there's leverage in having a nice distribution of the LP base. [00:51:11] S0: Something really special you've said previously is there are some partnerships which have lasted like thirty to forty years. And it's just remarkable, just showing how quote unquote flexible a family office can be, but on the one side, on the other side, how special one business relationship can really be because thirty, forty years could be one's professional life.
00:51:33 · James Bohannon
[00:51:33] S1: The, I mean, some of the early pioneers of the private equity industry and let's just think about KKR in whatever, 1970 or '60 or '70 or '80, whenever it started. Their original backer was a family and Blackstone had families sort of early on, etcetera. And so family capital backing these early pioneers, those are for a forty, fifty year relationship looking back, like those are gonna be like some of the original pioneers of the space, both on the GP and the LP side. But the journey is long, right? Because every one of these assets can be, look, I mean, can be seven years. And so if you do a deal and an independent sponsor does deal one, someone just asked me this yesterday, how long before they can go do the next asset sort of dependent on communication upfront. But let's just say every, you know, they do their second platform two or three years later, that's starting the clock at seven years again, right? And so you have these like long tenured relationships that all seven years stacking upon each other. And if there's success, you know, then a lot of times there's this sort of like ipso facto understanding if you like have an outsized return with the sponsor, like you're gonna probably invest some of that in their next deal. And then of course, if there's great success, everyone says they don't wanna launch a fund. 98% of people, if could and have great success in their early deals are going to launch a fund because I don't recommend people doing it off the rip, but when you get to a level of success where the capital is available to do it, of course, it's just an easier construct. The capital is just there. The market knows your money good. And so the natural progression of independent sponsor of like first platform, bunch of add ons, second platform, bunch of add ons, Third platform, maybe first platform is ready to sell then. Fourth platform, fund. The family office partner, like their job is to deploy capital with people they trust. They've just found someone they trusted and they found someone who can compound their money at above average rate. Like they're gonna hang on there. And they're also gonna have a lot of goodwill built in. They're gonna have a really good line of communication. Their team's gonna know this team.