00:10:54 · James Bohannon
[00:10:54] S1: Yeah. Mean, there's... You can either like fully outsource everything where you're using an MFO. You can partially outsource it where you're using sort of a consultant or advisor that kinda runs your alts or a fund of funds. Or you can then do funds in house. Or you can do co investments alongside sponsors, or you can do direct investments. I think that's the full menu of options for family capital. I think a lot of people, especially recent, they like to say they go direct, but what they really like is doing co investments alongside either funded sponsors or unfunded sponsors, I. E. Newly branded independent sponsors. Why do they like that? Because it's you really get to dig in at the asset level, the alignment is really strong, the returns are juicier, and your capital is sort of not locked up. And so you can sort of underwrite a deal, industry, and then you can underwrite a jockey and then sort of, you know, make a decision from there. So like the process or the decision of do you go direct, do you outsource it, do you do fund to funds, do you get like a family office sort of consultant or an ICO platform? Or do you do it yourself? Or do we just go fully outright buy a business? That comes down to a few different things. I think primarily it comes down to bandwidth, expertise, and desire. On desire, what kind of business do you want to run? Do you want to run a holdco investment firm where you're hiring like really good investment professionals, like private equity investment professionals who could do a control deal, who are gonna spend 40% of their time like on one single asset, you're basically running a private equity fund, right? Not private equity fund, a private investment firm. You know, it's hard. Winning a deal is hard. Controlling the board, having a majority position in a private business is hard because things can go wrong. And all of a sudden you gotta spend 140% of your time on that deal. And that's a whole different ballgame versus moving a little farther left on the spectrum, co investments alongside independent sponsors or funded sponsors. That's a nice mix, right?
00:13:06 · James Bohannon
Where it's not as much work, you're outsourcing the sourcing, you're outsourcing the day to day sort of management of that asset, but you get to dig into the diligence, you get to have a say, maybe you sort of take a board seat and observer seat or being sort of involved. So it's sort of a nice mix. And a lot of family offices are just hiring ex private equity professionals. So for them, it's like a good mix of like we still get to use those skills. The returns can be juicy and nice, but it's sort of a nice balance. So that's a pretty good sweet spot. And it's also a perfect match. I mean, we're coming from Maguire Woods. And so the independent sponsor conversation is worthy of having. It's a great fit. Like Family Office Capital is a great fit for independent sponsor deals. They're both looking for each other and like that's an ideal sort of fit and it's a harmonious relationship for the most part and it can continue. It can be a long relationship and it can blossom into an LPGP relationship, into a fund and those things. So I guess understanding like where you want to be on the spectrum of how direct, the real question is how direct to the asset do you want to go? Meaning like fund to funds, I say, oh, you're very far from the asset. You're like four different layers. If you own the business outright over here, you're very close to the asset. I. E, you default on a loan, your name is on it type of thing, right? Like you're very like attached to the business. The employees, if they're not getting paid, they're coming to you. So like understanding how close to the asset you want to get depends on those things. Expertise, we talked about, do you have the right people, investment professionals in place? And then the last most important thing is bandwidth. So the mistake that or challenge that a lot of people have is they want to do direct, but their family office is set up where, you know, they're also they're doing privates, doing publics, and they're doing planes, right? They're doing the art, the planes, the houses, the rich people stuff, the services, the capital calls, the day to day management of the family, the inbound investment from the principal who runs into his brother-in-law at a cocktail party and wants to invest in his company, you have to all of a sudden like underwrite that and get back to that distant cousin in a timely manner.
00:15:33 · James Bohannon, Mikk
Like all that takes a long time. So if your bandwidth is spread, it's particularly challenging to do very like close asset deals, like I. E. Direct investments. And that's why some people will sort of look to outsource it. So I think making all those decisions of how you want to invest requires those considerations on bandwidth, expertise and preference. And again, it's a learning process, I think, for the principal. Because as you set these things up, sometimes it's difficult to unwind these decisions because you're... You know, you've hired a team and you've invested deeply in these assets. And now all of a sudden you've got a business to manage, right? And mouths to feed and you've got money in the ground and these are not liquid assets. So those are some of the things to kind of think about. And I can answer any follow-up questions to this if you want. [00:16:27] S0: Yeah, no, when it comes to those managers, sponsors, when does that flexibility create like a real advantage for the business? Yes, we know there is this. It's a great asset. Let's keep compounding. But what about its manager and what needs to be maybe agreed upfront about the distributions follow follow on funding and eventual exits when before starting building all this?
00:16:54 · James Bohannon
[00:16:54] S1: Yeah. So I think look, there needs to be alignment and shared vision from the get go. So someone has to say to you like, look, our plan is to buy this $5,000,000 EBITDA business. And then we wanna do a bunch of add ons. And we ideally wanna hold the business for seven years. And then when it gets to 30,000,000 of EBITDA, we wanna sell it to either another sponsor or a strategic. Let's just say that's the standard vision. I think going into that, there needs to be sort of a shared, you know, there needs to be a shared vision, but also like strong economic alignment on how everyone's getting paid. And I say everyone meaning the sponsor, the management team, the team at the family office, and obviously the principal of the capital, like what the actual alignment of financial incentives is, is very important. And the flexibility really comes in when things don't go according to plan. And maybe they go awry in a good way or maybe they go awry in a bad way. And we can talk about two for an example. So let's just say in that example, all of a sudden a monster asset comes up that's like 23 of EBITDA. And that independent sponsor is like... Goes to the family, their biggest investor, the L pack or a couple of families. Like, guys, guess what? Like, I just found out I can get, like, the gorilla in the in the room, like, at a deep discount. This is, a huge opportunity. I know that this is sort of off mandate. It's not really part of our plan, but, you know, this is a big opportunity. Let's do it. A flexible and aligned capital partner will be like, hell yeah, let's do it. Like, this is why we're doing this to find opportunities like this. Whereas an investor maybe that's very confined to their exact plan, more sort of plain vanilla. They just wanna get their three x net or two and a half x net MOIC and, you know, hit a sort of 14% IRR. They're gonna be like, look, I I don't really wanna swing for the fences here. I just wanna get my number, you know, take my ball and go home. That's like in a situation where the flexibility in a good situation can be a huge add. On the negative, right, like there's sort of the opposite scenario. Things don't go well, etcetera. I think just having alignment about the conversation sort of upfront is crucial. And I will say like these paths are rarely just linear.
00:19:22 · James Bohannon, Mikk
Like it's never like the story I just told of you buy the $5,000,000 EBITDA business for 6X and you do add ons at 3X and you sell the whole thing for 10X. Like that story, it rarely plays out that simply. Like, either it's like there's a crazy bonanza situation, a Lollapalooza event as whoever says, which is so funny. And you just get these, like, crazy growth stories or, things sort of go away to the right. Like life and these business journeys are not so linear, right? And there's opportunities along the way. And I think having like partners that are really well aligned financially is crucial because there could be opportunities that go up. We're in a business in the media space that acquires post production visual assets. And there was a incumbent in the space that sort of had a bankruptcy and one of the core assets was available for us to take over in almost like an aqua hire fashion. And that was something that like we were super stoked to get the call on and super stoked to be a part of. And you know, like, it was... It wasn't in the it wasn't in the plan. But, like, we were glad it happened because, you know, man makes plans and god laughs at at it or or whatever the saying is. So yeah, anyway, go ahead. [00:20:41] S0: What are some of the like there are pros and cons of doing this? What about the cons when it comes to being so flexible, doing different industries? Because there is this world focus we keep hearing in the world of in investing circle of competence. You try to do so many things, it can be tough.
00:21:02 · James Bohannon
[00:21:02] S1: It's a great question. I think, look, bandwidth focus are crucial. Those are like sort of the things that everyone is is going up against in this world. And I guess if you have very rigid constraints, it's... You're able to be very, very focused. Right? And maybe you miss a lot of opportunities, but maybe you just do the exact right thing. You know, you're looking for this exact T. O. Box. I think you... In the in the family in the family capital ecosystem, I think to do that would be... You know, you'd miss out on a lot of great stuff, and you like wouldn't get to take advantage of one of the greatest weapons and attributes of family capital, which is the flexibility of sort of duration and style, etcetera. But you make a great point. The other side of that coin is, you know, lack of focus or the ability to do anything. Like, I don't think you can just say, hey, we're gonna do anything. I think you say like, this is kind of what we're looking for. This is what we're good at. And you leave some sort of buffer on both sides to be flexible. I think everyone sort of has their core deal box. When family have these families are always talking to each other or sharing their deal box. Everyone's like, yeah, this is what I'm doing, this is what I'm doing. And that's like sort of, it's like an eightytwenty, like 80% of what you're doing is falling into that box and then there's sort of like on the fringes, sort of more flexible things that come up. But yeah, I mean, I think there is definitely some truth to merit that if you're not mostly focused on what you're good at, you're gonna just be spread too thin, you're gonna have bandwidth constraint, etcetera, etcetera. And we face that at our firm now and we're always asking ourselves, are we focusing enough on the things where we're good at? And I think like within the world of what we were just talking about in those examples, like that still all falls in lower middle market private right? So you can be flexible. I don't think you can just say, look, we're gonna do quant funds and we're gonna do opportunity zone real estate and venture like that lack of focus you're gonna get smoked because you're competing against people that are 100% focused, a 120% focused. And I'm not suggesting that in flexibility.