Nathan Dey – Saltspring Capital

Interview with Nathan Dey of Saltspring Capital

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Basic info:

  • Fund: Saltspring Capital
  • Search type: Classic search fund
  • Partnered/solo: Solo
  • Stage: Search
  • Location: Chicago, IL
  • Alma mater: Chicago Booth (MBA), Michigan State (BA)

SUMMARY

Nathan Dey is a year into his national search at Chicago-based, classic search fund Saltspring Capital.

Highlights of this interview include:

  • The virtues of a solo search
  • The virtues of a self-funded search (Nathan is not self-funded)
  • How to manage seller valuation expectations

INTERVIEW

Editor: What’s your personal background?

I’m originally from Michigan where I studied finance at Michigan State. While in college I decided I wanted to be an investment banker and got my first banking job at Banc of America Securities (now BAML) where I worked for three years in the New York and London.

Working as a bulge bracket banker was a terrific learning experience. At the time I was there, BofA ran an international mobility program that allowed third-year analysts to spend a year working abroad. I took the opportunity to move to London and arrived in late 2007 just as the credit markets started going crazy. BofA eliminated the international program shortly after I arrived, and with mass layoffs occurring weekly I saw the writing on the wall and decided to seek other opportunities.

I wound up taking a job with a firm specializing in sell-side M&A for lower-middle market companies. This experience was awesome because I enjoyed working closely with clients and really liked my team. My experience at the boutique was far more broad than my experience at BofA – I acted as more of a consultant to CFOs and CEOs on all sorts of capital budgeting decisions and got a first-hand look at running a company in the lower middle market.

I realized after a few great years at the boutique bank that I wanted to become a business owner and run one of these lower-middle market companies myself. I wanted skin in the game, and my role as an intermediary wasn’t scratching my entrepreneurial itch.

What brought you to search funds?

I first learned of search funds at what I believe was the first ever Booth search fund conference. I realized immediately that my skillset was well-aligned with what searchers were doing – I had good experience in the middle market, experience as a principal investor, and leadership experience (though admittedly not in great quantity) at a small company.

I recognized more generally that I was an entrepreneurial person who didn’t have a great business idea, and search funds seemed like a great fit.

How’d you use business school to support your search fund ambitions?

I talked to a lot of search fund entrepreneurs and investors who are connected to Booth and I interned at the lower middle market PE fund High Street Capital. I also led a team that became a semi-finalist through Booth’s New Venture Challenge.

Alex Hodgkin has done a great deal to enhance the school’s search fund community – he’s known as the keeper of “the list” of qualified search fund investors that every searcher contacts to raise funds.

Aside – I think prospective searchers should get funding commitments from personal networks before they start tapping that list. It is still the “holy grail” of search fund investors, but one might need to get some outside capital as well.

Why did you decide to search solo? Did you consider taking on a partner?

I wouldn’t have been opposed to searching with a partner as I think a partnership can be very effective when built correctly, but I didn’t find anyone among my peers who had a background and interests complementary to my own. I have a strong financial skillset and was looking for someone with extensive experience in sales, operations, or business strategy.

A partnership is something to be considered very carefully. First, on a personal level a partnership is like a marriage – you’ll be with this person more than your spouse for (hopefully) 5-10 years, so you’d better be sure you get along during good times and bad.

Second, taking on a partner will fundamentally impact your search strategy. If you think searchers can provide the most value to owners of sub-$5M EBITDA businesses then you have to be willing to buy a smaller company, but if you have a partner then you have two mouths to feed which might be harder to do with a smaller business (splitting executive salary allocation, splitting equity). When you’ve got to people working together I think you’ll find yourself gravitating toward larger businesses which will of course lead you into the teeth of tough competition from lower middle market PE funds.

What do you think about the idea of self-funding one’s search rather than raising a classic search fund?

If you get a great company under LOI you’ll have no trouble raising money to buy it, and if you’re approaching investors under those circumstances then you could potentially get better terms on your capital than you would via a classic search fund. So if you’re a guy coming out of business school and going into a lucrative field like banking, private equity, or consulting then a rewarding strategy might be to save every penny you earn for a few years in that job and then go out and run a self-funded search. The primary benefit of doing so would be that you’d wind up with a higher ownership percentage post-acquisition than you would as a traditional searcher.

What you’d miss out on is the support of your investors –  qualified search fund investors can be helpful during the search, diligence, acquisition, and operating phases and you’ve got to decide if this support is important to you. I encourage folks considering a self-funded search to talk to experienced searchers and ask for their candid assessments of the extent to which their investor base added non-financial value. I’ve heard different investors are better about supporting their searchers than others – another reason why pre-funding diligence is important!

Switching gears to your experience of the search process itself – How have you leveraged intern resources?

Interns give a searcher operating leverage and help increase productivity. They can do the basics of digging up company names, filtering through these lists to identify targets, and tracking down owners’ contact info. I’ve also used qualified interns to help with financial modeling.

To what extent have you used intermediaries in your search?

I think search processes have to be proprietary for the most part because it’s so hard to be competitive as a searcher in auctions. That said, I still maintain relationships with many brokers.

How do you overcome high seller valuation expectations?

I think managing seller expectations requires one to be a good educator, particularly when there’s no banker involved to do what’s typically the banker’s job of explaining to the owner why his business is worth what it is.

I’ve tried to present myself to owners as an ally in the sale process. I say things like “Hey, I want to help you get as much money as you can for your business – help me make the case to my LPs that this company is worth $X, and I’ll be happy to pay you that amount.”

I’m also transparent with owners about my motivations. I explain that I have a return threshold that I need to clear before I can present a deal to my investors, and I’ll sit down with an owner and go line by line through my model to try to figure out a solution that works for both of us.

Given high valuation expectations, do you think now is a good time to raise a search fund?

I think it’s absolutely a good time for the right person! I don’t think the opportunities for searchers are as abundant as they were a few years ago, but I do think good businesses are out there for searchers willing and able to run an excellent process.

Let’s think about where the search fund “industry” is at right now:

  • Last year was the biggest year ever for search fundraising
  • We’ve probably got 200-300 active “classic” search funds searching right now around the country
    • This assumes 150 funds raised per year and each search lasting < 2 years

While things may seem a bit daunting, keep in mind that there are tens of thousands of businesses out there that fit a searcher’s criteria. I think that it’s always a good time to raise a search fund if you’re attracted to it for the right reasons. On the other hand, I don’t think it’s ever a good time to search if you’re doing it because you want to make a lot of money/work in quasi-PE but want to skip banking or consulting.

Thanks for your time, Nathan!

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