Private Equity Spotlight: Crafting the Independent Sponsor Model with Grant Kornman of Align Collaborate

So I'm really excited to be here with Grant Korman. Grant, thanks for joining us today.

But the only difference was that I am widely accused of having the worst midlife crisis in the history of PE and completely left to do a startup. Grant did a startup that's at least more in line with his prior career. So I think there's a little more intellect and logic to Grant's kind of pivot to solving a problem. You're too kind, Sean. But we're going to dig into that in a little bit before we get too deep into kind of the solving the problem story, which is really interesting.

I want to first get into a little bit more about the story of you, Grant. So I'd love to hear a little bit about you, how you came up, how do you got into the PE industry in the first place, etc.

He came to speak in one of my classes and somehow I convinced him to let me intern my senior year. And that's where I got my first taste of lower middle market private equity. And, frankly, I just fell in love with it. I'd been pretty entrepreneurial growing up. And the idea of helping these smaller businesses grow into bigger businesses just seemed like a really fun career and a really fun way to spend my time.

And, Grant, did you jump into private equity?

And that sounded like a terrible combination. My friends were going to be gone and I was going to leave schools too soon. And so I decided to take the spring semester of my junior year off. And I drove out to Palo Alto and kind of called myself a sweat equity venture capitalist. My pitch was I'd go into startups that were kind of early seed funding type businesses and say, hey, I got nine or 10 months to dedicate to this business.

I'd love to work for free. I'd love to get some equity for doing it. And ended up joining a company called Asadra that was ultimately bought by a very high flying stock in the 90s called Vertical Net. And I was fortunate enough to make a little money from that. And I think that experience really spoke to the founders of Sterling.

They had done something similar at a similar age.

They expect you to have a lot of the hard skills figured out through investment banking and other career paths. And so I was kind of riding the bike as I built it. And I think that's probably a common theme throughout my whole career. It's something that I really thrive on.

Don't sit too long. Just get in there. You'll be terrified.

That's right. So you started off at Sterling. And I'd be curious, how did you make the jump from Sterling into kind of this independent sponsor model, which maybe years and years ago is how all private equity started. Then it was less known. And now it has this renaissance going.

But maybe before we go to that, I'd love to hear about kind of. how did you jump from Sterling?

But they'd done, I don't know, going back 20 years, 30 plus platforms over about a 20 year period before they raised their first fund. And so that was a model that I'd kind of seen them pioneer. And they were mainly raising capital from high net worth and family offices back then. And I left Sterling. I became a partner in a vertically integrated real estate business called the Lane Company.

We were buying and building apartments and condos all throughout the Southeast. From there, I started working shoulder to shoulder with my business partner, Michael, who's also my brother. And we built a couple of lower middle market companies from scratch. And the way we became an independent sponsor was really by accident. I'd been out of the private equity industry for a bit of time at that moment.

And we decided we wanted to add another portfolio company. We had two businesses we'd built from scratch. We wanted to add a third. We didn't want to start something from a blank piece of paper again. We felt like we had this really interesting skill set from our respective careers and being entrepreneurs that we could unlock a lot of value in a lower middle market business.

So let's buy a company with a couple million dollars of EBITDA and take it from there. We definitely didn't have all the money you needed to do that. We just figured we were a couple business guys. We'd find a good business. And if it took more money than we had, we'd raise it somehow.

And we were running down that road and talking to different folks. And I think it was an investment banker said, oh, you're a fundless sponsor, which is kind of the term for it back then. And we said, what's a fundless sponsor? And they explained, well, it's someone who operates like a private equity firm, but raises capital deal by deal. And Michael and I kind of looked at each other and said, I guess we're a fundless sponsor.

then. That's exactly what we're doing. And thankfully, Richard Baum at Consumer Growth Partners about that time had come up with the term independent sponsor, which is a way better term to use and has really taken hold since then. I love it. And you and your brother.

And so it allowed us to really see value where others may not.

And you have so many things in these small companies coming at you. We've never showed up to a company and found teams just sitting around going, gosh, I have so little to do and too much time to do it. They're always under-resourced. They're always trying to figure out what's going to drive the biggest result per unit of effort. And I think that's part of what made us successful was helping those teams focus on those key issues.

To your point, Sean, you can't do everything every day. So what are we going to do today to drive the ball forward? And I think, because of our experience as executives, we really probably understood that?

How do you prioritize things? One of the questions I really like to ask, Grant, is this idea of we'd know you better if we knew this about you. So what is one of the things that we'd know you better if we knew this about you? Gosh, this is probably a little.

And I couldn't imagine enjoying it with a better ride or die. That's phenomenal. And where did you meet her? What was the circumstance? So I met Valerie when I was living in Miami, Florida, and I lived there from about 24 to 31..

And if you live in Miami during that time period, you have about a hundred percent chance of falling in love with a wonderful Latina from South America. And her mom and dad are Colombian, but grew up in Ecuador, and we met in Miami. Oh, that's great.

And I'm sure there was an existential crisis in her family when you were brought home the.

So you survived that. Thankfully, her dad is a.

The old country food is not as good as you. probably had. One funny story about that.

And I'm not a big popcorn guy. So I just kind of pass it along to the next person. And they start kind of screaming at me in Spanish to take the popcorn. And so I take the popcorn, I put it in my bowl. And then the ceviche comes and they start putting the ceviche over the popcorn.

And for me, that was just, I couldn't put two and two together. that Ecuadorian ceviche is served over popcorn. It just seemed possibility, but apparently that's a thing, and it's delicious. And it was something I learned to really love. Oh, that's good.

That's right. I love that backstory. It's interesting things that I never knew about you. And so I appreciate you sharing kind of a lens back into the Miami Vice version of Grant back in the day. And so I probably had more hair in the Miami Vice version.

I think we all did.

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As we kind of maybe turn the page and come back to where we started in our conversation about. you created the segment. And so I'd be curious to hear a little bit more about what you're up to now and why it came to be. I'll leave it as this open-ended kind of question.

As an independent sponsor, you're raising capital deal by deal. You're going out and finding the business to buy and then raising the capital to buy it. And there's a lot of advantages to that model. It's something that worked really, really well for us over the years. And we met lots of wonderful investors throughout that journey.

But I used to joke being an independent sponsor was like putting together a jigsaw puzzle where the pieces don't all fit together. And so over the years, we've been comparing notes with other really good independent sponsors looking for maybe the perfect mousetrap. What is the perfect equity solution for great sponsors like ourselves? And if you haven't been able to find it, it sometimes begs the question, you should go build it. If there's a big market need and not the right solution, we find that to be a very compelling business opportunity.

And in those conversations with other independent sponsors, we've all kind of kicked this around. Hey, one of us should go out and raise a fund that only invests equity into transactions led by really great independent sponsors in the lower middle market. I think when we sat around and thought about who should go do this, we all were kind of thinking it's a great idea. There's a huge need. But we all spent 10 years building our firms.

And so the idea of going a different direction was kind of a scary one. But for Michael and I, it really became such a compelling opportunity. It was like, there's no way we can not do this. And so that was really the genesis of Align Collaborate. I think that's.

That's another 10 hats. Now you got to go and talk to 50 family offices and blah, blah, blah, blah, blah, blah, blah. So how does your new instance here kind of solve this? And what is it involved?

And that's probably the biggest bucket. Each one of those pools of capital has some real advantages and some disadvantages. And so when we were creating Align Collaborate, we sat down and we said, what's the best part of each of those models that we can pull together to have the best value proposition for independent sponsors out there? And so we're a very flexible equity partner. We can write a check from 5 million to 30 million of equity.

We can be 25% to 100% of the equity needed in the transaction. A big part of what an independent sponsor needs is flexibility on when a capital partner gets involved. We're happy to work early, maybe even before you sign a letter of intent on a target. Or if you prefer to do your diligence and have your investment memo fully baked and then syndicate the equity more towards closing, we can work on that timeline as well, or anywhere in between. We also work across a pretty broad set of sectors.

So manufacturing, distribution, services, software. We do want healthcare and consumer to be a part of our portfolio as well. And we have value-added resources. One of the things we loved about Blue Wave, Sean, is as an independent sponsor, you're out there competing with these bigger funds and firms, and you got to figure out how to compete against it. It's a little bit of a David and Goliath approach.

And one of the things we love about Blue Wave is your model enabled us to have a lot of those same resources in a cost-effective way to compete with those firms. In the same way, at Align Collaborate, because we're part of the Align Capital family of funds, we too have a lot of resources that we could offer our sponsor partners. So if you'd like to work with our talent partner, he's available. Our CTO, he's available. We have debt capital markets capability.

But if you also have those resources internally or have third-party resources, you prefer, you can choose to work with ours or yours. It's really about maximizing the return of the investment. And so we're flexible investors working across a broad array of sectors. that's value-added and we're engaged in supportive.

if you think about an independent sponsor versus maybe a committed fund sponsor, where they can just move fast. How do you kind of bring that to bear for the independent sponsor world?

We try to be incredibly responsive. It's not unusual for our team to be talking to sponsors over the weekend. If they have an LOI signed and they're on the shot clock, we're going to move heaven and earth to be responsive. And we can't say yes to everyone, but we definitely are going to say no quickly. And when we do, we want to be able to refer you to other capital partners.

There's a couple of big trends.

Connect the dots for me there. Today, independent sponsors represent a very large and growing segment of lower middle market private equity. Intermediaries are getting smarter about how to sell to independent sponsors. Independent sponsors are sourcing a lot of very interesting proprietary transactions. It's no longer an unusual model.

It's an accepted model today. So that's one trend. The other trend is it's very hard to raise a first time fund. If you look at the stats, I think capital raised by emerging managers is down something like 80% this year. Institutional LPs are telling the next great generation of GPs and sponsors, go do two or three deals as an independent sponsor, and then we want to look at your fund.

And so those two things are driving the growth in our industry, as well as the quality in our industry. 10 years ago, independent sponsors were a little bit more financial entrepreneurs. Today, they are really the next great young generation of investors in private equity.

That's right. So I'd be curious, Grant, with that in mind, where we've kind of learned things over and over, and I think you probably learned them faster than I did. But eventually I kind of figured out a bit of a yardstick to help make the world a smaller place and make the world move just a little more slowly. And so I'd be curious, what are a couple or few of the most important traits that you look for when thinking about the operational excellence of a business and its related potential?

How efficient the business is with capital, whether there's recurring demand or persistent demand. drivers of the business model, whether it's a leader in its niche or segment, and finally, the growth potential. Those five things we call core attributes, and we can't change them. So we're looking for businesses that score well across those five attributes. We then put things like people, process, systems, go-to-market strategy, and what we call the fixable flaws category.

Those are things with time, money, effort, and experience you can improve in a company. And so if we're buying or investing in fundamentally good businesses with good core attributes, and we have a great sponsor that can improve people, process, and systems, that usually is a great formula for strong outcomes.

Are they valued in the industry? And, at the end of the day, does the business grow?

So I'd be curious, Grant, if you think about this, I think a very elegant yardstick that you described. How has this mindset informed how you look at incoming deals, opportunities that are being brought to you from independent sponsors? And thus, what should they be thinking about before they even bring you a deal so that it aligns?

I think the mistake a lot of first-time independent sponsors make is you're so focused on buying or investing in your first company, you get kind of target blindness. You're just focused on the deal. I need to find a company. I need to buy it. Well, that's really getting you to the starting line.

What you do after that is what's going to drive wealth creation for yourself and for your investors. And so I think the independent sponsors, who are very successful in this business and very successful in attracting capital, they spend more time talking about what they're going to do post-close to grow the business and generate a return on equity than they do about, hey, I'm just buying it five times, or whatever the answer may be on the valuation. And so when you think about that value creation strategy or plan, when you compare it to the deal you negotiated, those two should really fit hand-in-glove.

You could be paying five times for a, four times business. Exactly. And then, B, what's your perspective on it? It's 1, why do you like it? And 2, what are you going to do with this thing?

And so I would always encourage them to say, you're in a competitive market. You need to come to me or come to other sponsors or to family offices, whoever your capital source is, or go to Grant. And you've got to have a really buttoned up assessment why this company is really good and how you're going to make it even better. And if you're calling to someone like Grant and his partners with it's cheap, that's going to be a really quick conversation. And this is by no means even a meaningful minority of the industry, but it's big enough to where you notice that a lot of it's like, hey, I got this cheap company.

We're part of the sausage making process and that's great. We're happy to get involved early, but we all got to be focused on how do we grow this business, not just get a deal done. And I think they're really great sponsors, whether funded or independent, they have a maniacal focus on what we're doing post-close to drive this to be a winning investment. And not all of it's going to work. So you got to have a few tools in the toolbox to use in your value creation plan.

If it's kind of based on one thing, maybe that's not a great risk reward.

And we've seen that and we feel that. And I lived it when I was in PE, but the way that I think that the industry has beautifully responded is this, this idea of value creation. And we see that every single quarter goes up, whether it's an independent sponsor or a committed fund sponsor, the notion of value creation and the number of levers they're pulling and the lens going into the deal is not, it's a good company period. It's a good company and it's going to be even better. And here's why.

And so I think you

And if you can't articulate why that business is going to be a big success and what your plan is for its growth, you're not going to be able to recruit that talent or the capital needed. And so it's core to what we do and what independent sponsors do. Once again, a hundred percent, as I look back.

As much as people think the robots are taking over, the people seem to matter more and more. every day. Everyone seems to think the hardest.

one of the biggest challenges of family offices and control equity funds is, who does what here? from an ownership perspective? I think we really get the joke on how to be great partners. We do not want to be the first chair here. That's really the sponsor's job.

We want to be supportive capital, which means being an engaged partner. So if you have a challenge that you're trying to solve, you have a problem you have to figure out, you're not calling people who have just been reading quarterly board decks for the last few years. You're calling someone who knows what's going on in the business and can hopefully help you figure out a solution to those challenges, or, frankly, be a great sounding board for your solution, whatever it may be. So I think we're really good at playing that role of a.

I'd be curious, as you look at right now, this kind of lens that you're coming through, what are some of the opportunities that you're thematically looking at as you're ramping up your firm right now? Obviously, everyone's very.

We really want to invest in businesses that have very consistent demand drivers, regardless of economic cycles. I do think in 12 to 18 months, those cyclical businesses could be a very attractive place to be investing. It just depends on what happens over the next 12 to 18 months.

You're like, how did I not know that? And so there's all sorts of things that I would have told my 22-year-old self had I discovered a way back machine. And so, Grant, if you could go back and meet your 22-year-old self, what would be one of the things that you?

And so I think if I was 22, and I told myself, hey, in the next 20 years, there's going to be these moments of luck or serendipity, they're going to make a big difference in your life, I probably would have had a little bit of a meltdown back then. What I would tell myself is, the harder you work, the more you get out there and talk to people, the more you kind of bounce around and interact with industry or executives and relationships you build, what maybe feels like luck actually becomes somewhat predictable, and somewhat reliable. I think that's really good.

And there's a lot of reasons why we came up with the name Blue Wave. But that was one of the things that always resonated with me is, there's a lot of hard work, you're paddling out, you've got a series of waves that are coming in, and you're not going to catch everyone. And when you first start, it's going to be really, really hard. But as you get up enough, and you put yourself in front of that wave, you're going to start catching them. And then still, it's not going to be easy, half the time, you're still going to get tumbled underwater.

But eventually, you're going to learn in the idea that I had for our company is like, we can give you things that are going to make the odds of you riding that wave right into the beach a lot more seamless. And so what you said kind of resonated. And that was kind of how I intuited the name that we chose, after going through literally probably 500 names that were either taken in Delaware, or the URL was gone.

And then I realized, as I said, after that conversation, that I named a company after a geological feature and a color blue wave. So I was like, all right, yeah, I'm not strayed from my upbringing at all.

All right. So Grant, this has been a wonderful conversation. I've learned a ton. I've taken reams of notes here that I'm going to add to the stuff I wish I knew before. So thank you so much for sharing the time, wisdom, insights here with us today.

Special thanks to Grant for joining. If you'd like to learn more about Grant and Align Collaborate, please see the episode notes for links. Please continue to look for us anywhere you find your favorite podcasts, including Apple, Google, and Spotify. We truly appreciate your support. If you like what you hear, please follow, rate, review, and share.

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Onward.