Independent Sponsor Spotlight: Stephen Leist of Piedmont Partners Group VenturesMarch 12, 2020
Q: Why did you decide to become an independent sponsor?
Stephen Leist: I spent 16 years inside large investment banks in the listed equity divisions as a research analyst, salesman and division head, and I have always been fascinated by corporate capital formation and investment management.
After leaving Wall Street, I was a chief operations officer for a number of absolute return investment management firms, but by 2005, I could see that outperforming the market for hedge funds was becoming increasingly rare. I could also see that the private equity (PE) business had far more available alpha.
In 2009, I started to work on an investment project with Warren Hellman, co-founder of Hellman & Friedman. He asked if I would be interested in joining his firm. When I hesitated — after all, I had spent most of my career inside big organizations — he suggested that I start my own investment group and his firm could invest in opportunities that we identified. Hellman was a mentor and my hero, so that's how Piedmont Partners Group Ventures (PPGV) came about.
Q: How long have you been operating as an independent sponsor and how long did it take you to get your first deal closed?
SL: PPGV launched in 2010 and it took over two years to close a transaction. We got to within a signature of closing on our first deal in that first year, but complex deals can fall apart at any point. That was a painful lesson.
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?
SL: In 2000, the United States had roughly 8,000 listed companies. We now have about half that amount. A number of factors have caused this, such as the Sarbanes-Oxley Act and several severe market corrections, but it is also important to recognize factors like the growing creativity and flexibility of the private debt market and the massive expansion of capital and range of focus to the PE market. When PPGV started about 10 years ago, the number of serious investors who invested on a deal-by-deal basis could be counted on your fingers and toes. Today, I expect there are several thousand institutions that take this approach.
Q: What are the most common misconceptions about the independent sponsor model?
SL: There are so many misconceptions. Where do I start? Many of the large PE firms have changed their stripes as the amount of capital they have under management has mushroomed. Most now expect the deals to come to their door by way of a black car accompanied by a banker and followed by an auction.
As an independent sponsor, we don't take the meetings with bankers or hear roadshow presentations. We go out to visit with more than 300 companies a year from our offices in Oakland, California, and in Denver, New York, London and Tokyo, with a goal of finding 15 good ideas in companies that we can help. We don't expect that we will be successful in working with more than two or three of them.
The biggest misconception: C-suite executives who think they will find meaningful resources focused on them inside investment banks or big PE firms. I-banks are coin-operated, and chances are you don't have enough money to interest them. Big PE lacks the time to problem-solve for the small- to mid-cap corporate community. Most are best served by working with a good independent sponsor team.
Q: Recognizing every deal is different, what are some of the most important considerations for you when choosing a capital partner for a deal?
SL: The biggest issue for us is trust. Big PE and so many other capital resources are under the illusion that assets under management and visibility will bring quality transactions to their door. They could not be more wrong. There is more money sloshing around in the system than there are good ideas. Counterparties that keep their word and respect their deal partner's intellectual property (IP) get our first call. We come back to dependable, reputable firms again and again. This is the main reason why Hellman & Friedman is still the gold standard.
By contrast, if you keep us busy for a month marking up the nondisclosure agreement with your expensive outside counsel, chances are we won't show you a deal again. If you wine and dine us to get access to our deal flow and then take off for a three-week trip to Italy when it comes time to pull the bid together, we won't be calling on you again. If you start to treat our IP as your IP, or threaten to circumvent us, you will not be top of mind for our best ideas.
Q: What do you envision as the future for the independent sponsor model?
SL: I think PE as an investment sector has a long way to go. PPGV expects to see further declines in the number of listed equities, not just in the United States but in international markets. We hope that services to the independent sponsor industry continue to grow as the industry expands. There is currently too much focus on services to the blind pool funds community and not enough focus on independent operators. Banks and lenders have done a pretty poor job in connecting with this market and serving small- and mid-cap companies as their focus remains on the brand-name PE firms.
Meditations on Empty Airports and Hotels and a Day in the Air
• Published on March 3, 2020 on Linkedin – Stephen H. Leist, Managing Partner, PPGV •
Yesterday my alarm went off around six AM in NYC. I ubered to JFK to find the Delta Terminal all but vacant and the TSA agents chatting among themselves. But as my plane lined up for takeoff the day really got started with the Fed’s ‘surprise’ 50BP cut in rates. Lord knows why they did it. CNBC’s talking heads said they didn’t want to look like they were “getting behind the curve” ... whatever that means. Investors remained impressed for the first 120 seconds when the Dow peaked up more than 300 points— but then reversed a brutal 1300 points before a tepid bounce into the close. With Fed Funds now in a range of 1 to 1.25% there is a diminishing store of ammunition left in the Fed’s arsenal before rates are as low as they can go. No red-blooded American wants to really talk about the unpleasantness of negative rates.
The current problems of financial markets and the global economy demands creative fiscal responses to current policies. Cheaper money isn’t going to encourage people to come to the airport or fill up empty hotels around the US or anywhere else. Luxurious lodging in NY this past weekend could be had for just $100/night. While I love a room upgrade as much as the next man, the seriousness of the predicament for the world markets and economies is not lost on me. There is a wide range of responses a government can develop to counter a shock like the looming pandemic but inoculation by money supply is likely to have limited impact. While places like Hong Kong has taken a number of thoughtful measures, the US congress is still just pondering the possibility $8BN stimulus, a fraction of the stimulus post Katrina. Measures to address the liquidity and integrity of parts of the economy most impacted: hotels, airlines, and supply chain infrastructure, strike me as ideas worth considering. How about paid emergency sick leave for those whose jobs don’t have that benefit and are inclined to bring their illness to work? I tend to agree those who feel that the consensus to take action in monetary policy among the world’s central banks is a reflection of the desire to appear ‘active’. They aren’t offering any real hope beyond brute force that they can offer economies the flexibility and clarity-of-mind needed to address this global crisis.
Meanwhile in DC, the Trump administration rattles on about its beloved wall instead of all the meaningful places dollars could be spent to stimulate and improve US infrastructure, such as roads, bridges, tunnels, rail, even schools. These would have long-term effects of improving US business competitiveness, though the investments now amount to deficit spending. The clumsiness of the response to the potential pandemic has been comic: less than one million test kits in the US, pathetically undertrained care workers endangering themselves and potentially spreading disease. The White House is still more concerned about censoring John Bolton’s book than it is in effective crisis response.
It seems to me that balloons can’t burst unless they are filled with air. In this case, most forecasters expect a lackluster year of profits, at best. As market’s rose faster than profits over the last few years, even after days of damage, we are surely closer to over-valued than to a bargain price. Tariffs and trade wars have had meaningful negative international economic impact. According to data from the World Economic Forum, global merchandise trade by value declined by 2.9% when most of 2018 is compared with the same period of 2019. No one is enriched when trade shrinks. Today the US is run by a man who behaves in a manner more like the real-estate-developer-in-chief than a commander-in-chief. Like a property speculator, he has borrowed money, such as $1TR deficit last calendar year, to keep the economy humming, albeit at below 2% growth. But unlike a RE developer, the federal government will not be able to shelter in bankruptcy when the debt bill comes due. Inevitably, as the response to 2008 shows us, the US will be forced into a Keynesian posture when the economy fully grinds to a halt. That could mean a single year may be coming soon in which the deficit soars as high a $2TR due to the need for stimulus. On the positive side, the banks are in much better shape than last time around, so at least the shock is unlikely to be amplified by a collapse in the banking system.
In my mind, it would be best to rule out the V-shaped rebound. With the spread of the virus in the US still in front of us, not behind, a quick rebound seems overly optimistic. Those who own or are partners in small businesses, like me, will keep getting on planes and checking into hotels. But the corporate class is staying home according to reports of Ford, Nestle, Amazon and dozens of others. After boarding, the woman in the row behind me vigorously wiped down her seat disinfectant wipes, and took one last call from the office about margin calls. And as we taxied away from the gate most seat- back entertainment units turned to CNBC to watch the chaos of bond markets making new highs and share markets breaking down. Headwinds were strong and the pilot announced that it would take most of seven hours JFK to SFO on my half-empty flight, normally full to bursting. As we took off, NBC news announced that many schools in Westchester sent students home for fear of spreading the Coronavirus and it seemed that half the airplane groaned. Well thanks for the upgrade I thought as I took it on board that there is likely a lot of turbulence, and probably downside, for markets and travelers ahead.
Stephen H. Leist, Managing Partner, PPGV Tuesday March 3, 2020
Sheryl is on her book tour.... Tightrope: Americans Reaching for Hope. Released Jan. 14, 2020 and already on the bestseller list!
https://www.nytimes.com/2020/01/13/books/review/tightrope-americans-reaching-for-hope-by-nicholas-d-kristof-and-sheryl-wudunn-an-excerpt.html. Here is an excerpt of the New York Times bestseller,
Tightrope, co-authored by Sheryl Wu Dunn, Partner at PPGV