Looking for some help feeling out what a fair fee structure would be for a deal I am working on. Really leaning towards giving LPs the better end of the deal as they've supported us nicely through the last few years.
I am having trouble figuring out what "fair" is here because it doesn't cleanly fall into any specific bucket. IE not really a growth equity type asset, or traditional vanilla buyout candidate.
Background...
There's a company I love that is coming to market soon. Perfect size and transaction type for us. I know the founder quite well, great guy, extremely honest and has decades of solid operating history growing his company. It's in a "hot" space, very very M&A friendly.
He's wants to sell the company and pinged us first, but we don't have the bandwidth for a control transaction right now. I told him this, but mentioned we might be able to write a cheque to help him take some cards off the table. Given our relationship, I'd be very comfortable writing a cheque quite fast. We've actually run diligence on the company before as he was exploring a sale about 3 years ago - but he decided not to move forward. No big deal since he was honest up front and we had fun through the DD process.
Anyways, I am thinking of putting a small SPV together to tackle a minority equity investment. Probably aiming to buy 15% - 25% of the cap table.
-The company should keep growing EBITDA at ~20% - 30% each year - so it's not "high growth" and IMO not a venture outcome. Growth equity rules don't apply here. It grew very vast in the last 2 years, but largely a result of COVID and probably not a sustainable rate. We can definitely help accelerate growth - but still aren't going to magically transform it into some SaaS-beast growing 800%. That being said, there's very strong synergy between one of our portfolio companies and this target without any competitive issues...pretty excited to capitalize on that.
-We're OK writing about ~30% of the transaction ourselves (GP commit)
-My LP base isn't going to bug me much or ask many questions in all likelihood and I'd like to be fair around fees. In fact, I'd lean towards fees being in their favor. We place a high value on our relationship with them given their excellent support in our other deals. Building an excellent track record/reputation even if we are technically getting the short end of the stick is fine with me.
-Additionally we have no problem rolling "fixed" fees and have a strong performance focus. I do not like being paid if my deal isn't delivering what it was supposed to.
-Can't stress how much I love the founder/operator. He couldn't have been more honest with us in our previous dealings, and I am genuinely excited to learn from and apply what we learn to our other port cos. I assign significant value to this part of the transaction. LOVE the company too... it's not sexy to most people but it comes with a unique set of challenges that get my operating side excited.
Given the above dynamics, what do you guys think would be fair? I'm thinking of a small closing fee, carry, and a very very small monitoring fee?
Thoughts?
Again, deal is objectively proprietary as he's coming to us before going anywhere else, we've done diligence on the asset before, and he likes our potential minority equity play.
Based on experience, \f LMM (call it sub $75M EV):
i) 2% closing fee (but roll it into the cap table instead of cash, good signal for your LPs along with your 30% GP commitment)
ii) Given proprietary deal and in a hot space, charge a tiered carry structure (i.e. 20% up to 2x, 25% up to 3x, 30% over 4x, etc.) - can include catch up or not, your call
iii) given your value add, I'd attempt to structure the deal with the Company such that they pay you a management fee - don't know EV and checksize, so hard to say
This would be "market", but I've seen it all over the map in LMM - it just really depends on what your LPs care about. Some may be thrilled just to have access to LMM deals, some may just be solving to 3x net. Doesn't sound like you are proposing anything insane
Thanks! That sounds market for direct coinvest/LMM in general.
Given this is minority equity, do you think the same structure is warranted? I wouldn’t want to charge a monitoring/management fee because we wouldn’t be nearly as active as our control deals.
I would say yes, but less than what you would charge in a change of control deal. (I'm thinking 50-60% of what you would normally charge). It sounds like you have some plans to accelerate growth and would probably look to evolve into a control position when the bandwidths arise. I don't think your LPs would have issues.
What's the gross return profile and length to return capital and full exit?
Need to run dd yet. Probably 3x to 5x within two years. Lots of low hanging fruit.
No mobile site.
Need to implement lean+6sigma
etc
Really, it’s a few tweaks away from being an irresistible pick up for a strategic…
EBITDA margin? Net Debt / EBITDA?
I do single asset deals all day.
" I assign significant value to this part of the transaction." how do you quantify this, I would ask you this as an LP
Cash is good to go. LPs don’t really ask questions at this point beyond maybe being curious.
Got it thanks! All the best with this new venture and beyond!
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