Building Great Partnerships in the Independent Sponsor Market

Welcome to Capitala Conversations, a podcast series where we explore the ideas, trends and relationships, shaping the lower-middle market and the broader private capital landscape. A Capitala, our strategy has always been rooted in partnership, working closely with management teams, entrepreneurs, independent sponsors, and investors to help businesses grow and create long-term value. But beyond the transactions themselves, we realize some of the most meaningful insights come from the conversations happening along the way. That's really the inspiration behind this podcast. Capitala Conversations is designed to bring those discussions to a broader audience, sharing perspectives from business leaders, industry experts, independent sponsors, and members of our own team on which driving markets, building successful companies, and navigating change in today's environment. Whether you're an operator, investor, advisor, or simply interested in the world of private capital, we're excited to have you with us for these conversations. Welcome to Capitala Conversations. Welcome to the first episode of Capitala Conversations. I'm Sam Titswanarish, I'm chair of independent sponsor news, otherwise known as ISN, and I have the huge privilege of moderating today's episode. And this first episode is one I'll be looking forward to for a handful of reasons. We've got two very unique people today. People that between them have spent nearly two and a half decades in the independent sponsor space. I don't know, you're going to find many people that can say that, even in aggregate. And we're going to dive into everything important to the independent sponsor, deal origination, deal structuring, what actually makes the relationship between independent sponsors and capital providers work, and where's the market heading from here? ISN is the proud media sponsor for this podcast, and we built ISN to serve exactly this ecosystem, to fill avoid where there wasn't data, there wasn't news aggregation, and to be a convening force for all of the independent sponsors, service providers, and investors in it. And Capitala has been an amazing strategic partner from the start, so it's full circle being here today. So, to the start, I'm joined by two people who see this from complimentary sides of the table. Matt Bagan is managing partner and co-founder of Grove Court Capital Partners, a lower middle market, private equity firm, and independent sponsor investing across industrials, healthcare, communication services, and business services. And Randall Fonds, a friend and managing director at Capitala Group, which has been deploying private credit and private equity capital into the lower middle market for more than 25 years. Between them, we've got the sponsor view, the capital provider view, and a lot of shared insights and hard one experience, and what it takes to get deals done. Matt Randall, welcome to the show. Thanks for having us now. Thanks, Sam. Excited to be here. I should say welcome to your show. Randall, let's start with you. Tell us a little bit about Capitala. It's a platform and a business model we've come to love. It's quite unique. Tell us a little bit about it and why we started the podcast. So Capitala, Sam has mentioned, I spent around since 1998. Since that time, we've invested approximately 3.2 billion in the lower middle market, mostly domestically in the United States. We pride ourselves on having been early on the independent sponsor model. Of course, we didn't call independent sponsors and independent sponsors even 15, 20 years ago. It was in a lot of respects and individual that had a deal, whether it was a management buyout, a guy putting a deal together, et cetera. It was funless, funless. Yeah, it was funless. Funless deal putter together. We have originated those opportunities over the years. Obviously, the model has continued to evolve, but we pride ourselves on providing flexible capital, but that inequity to these independent sponsors. Then we do a lot with family offices and loosely call owner operator businesses, so just private businesses. What we steer clear of is traditional funded private equity business. So that's Capitala story. Thank you. Maybe equipment reciprocation, and you'll see me smile fondly when I say the words growth court. That was the same name as my family business. It feels like something of a coincidence, but tell us a little bit about growth court. This is not your first foray into the independence sponsor world, is it? It's not. Again, thanks, Sam. Excited to be here and participate in the discussion with you and Randall. My background is about 20 years lower middle market private equity investment experience. I started my career and so did my co-founder in investment banking in New York, and then each of us worked at much larger private equity firms before starting our own firm about three and a half years ago. So before starting growth court, I worked for the Watermill Group in Boston for about seven years. One of the longest standing independent sponsors in the US followed by working for Atlantic Street Capital, which is a multi-billion dollar private equity firm based in New York. My partner similarly started his career in investment banking, then ran M&A for a Blackstone portfolio company. So again, much larger institutional experience. Both of us were looking to go out and do deals on our own and spun out to form growth court in the fall of 2022. So we chase deals in business services and healthcare services. There really are two areas of focus within healthcare. It's pretty well defined. We look at deals in medical equipment, distribution and service, physician practice management deals, tech and able to healthcare services, and outsource provider services. Broadly is where we play on the business services side. It's mission critical services, both blue and white collar, ideally asset light and more recurring in nature. We are pretty seasoned in the architecture, engineering and construction, AAC space with two existing investments there. So today we have a portfolio of four platform investments and we've completed nine add-on acquisitions across the portfolio since we started. So it's been a busy three and a half years, extremely rewarding and a lot of fun so far. Thank you, Matt. And we're going to jump straight into a part of the industry that you guys come at from different angles. And we'll start with you, but that's deal origination and structuring. If you want deep on a thesis, finding the best companies at the right time and structuring them appropriately, you're never raising money. So how do you think about sourcing deals and how do you differentiate and create that advantage for your platform? It's a great question. We prioritize deal flow. That's number one for us. And in terms of sourcing deals, there's really two channels about half of our deals are marketed in some form or fashion with an investment banker or broker involved. We're not calling on the bulk racket investment banks, but more the regional boutique investment banks that are running more limited processes. That's really driven by the size and scale of platform investments that we're chasing, which are three to 15 million of divita. And then the other half, 50% are proprietary. So on the proprietary side, it's identifying opportunities through deal professionals that are around transactions, but not necessarily investment bankers. That really comes from networking with lenders, lawyers, accounts, high net worth advisors, executives that we worked with in the past, et cetera. And then lastly, on the proprietary side, we spend a lot of time on thematic investing. So identifying trends and markets that we deem as attractive and searching for businesses in those sectors, reaching out to entrepreneurs directly and trying to source proprietary deals. That's probably the most rewarding in what I enjoy the most. It is a bit more of a needle in the haystack type approach, but candidly, it's the most fun direct outreach. Matt, when you meet a founder and management team, what are you looking for? What are some of the things that make a growth core deal? There's always two things that we looked for. We are growth oriented investors. So there needs to be organic growth tailwinds in an investment. And then second, ideally, we're investing in fragmented industries. So we as an organization have plenty of experience in buying build consolidation strategies. So ideally, when we look for opportunities, they have strong organic growth trends coupled with fragmentation where we can go after a buying build strategy. Just two follow-on questions there. Organic growth, what kind of level do you like to see? And on the fragmented side, does that play into something of a densification strategy, where you like to focus in on a region and roll up and I kind of tied to local? Organic growth, what we like to see is outpacing the end market. So we'll touch on it later, but an investment that Randall and I have completed together, their end market outpatient imaging is growing about 10% annually, where the business that we've invested in premier radiology services is growing about 20% per year organically. So a business that is outpacing the market is important and toss. And in terms of that fragmentation consolidation strategy, it could be twofold. One is geographic. An example there is we own a traffic engineering business where we started with a smaller platform investment that was about 3 million of EBITDA. And we've completed four add-on acquisitions about to be a fifth. All traffic engineering firms in the state of Florida, the goal being to build the largest scaled platform in traffic engineering in the state of Florida. So concentrated geographic strategy there for premier radiology services, the business that, again, capital is invested in alongside growth court. We focus on consolidating outpatient imaging tele-radiology providers. So those that focus outside of a hospital setting, there is no geographic limitation. Although we only focus on deals in the US today, there certainly is an opportunity to go international at some point. But there it's more the service that they're providing in an outpatient setting that defines the M&A strategy as opposed to geography. And Matt, as we talk about a typical growth deal, what does the deal structure look like for you guys? You know, we don't mind paying market multiples as long as, again, we're strong believers that there is an organic growth opportunity and a way to blend down our multiple over time through a creative add-on acquisitions. So valuation is usually in line with market. If it's a proprietary deal, ideally, it's, you know, below market comps. And then we are fairly conservative on leverage. Again, focusing on the lower middle market, 3 to 15 million of entry, EBITDA, we're typically leveraging businesses around three times. Out of the gates, we do begin to push leverage over time as the business scales organically and organically, but tend to be conservative on the front end to make sure that we have plenty of runway out of the gates. And then we focus on seller rollover. That's really important to us. Typically, seller rollover is 20 to 40% of sale proceeds that's reinvested in the initial platform. Without that, you know, that can end up being a deal killer for us for platform investments. Randall, I mean, Capitola has this unbelievable network of partners that you work with. You guys are ubiquitous everywhere. How do you think about sourcing deals? That's a great question, Sam. The lion's share of our deal flow at this point is coming through independent sponsors, you know, many of whom we are now doing repeat business, which I think is really important. Again, over the 20 odd year period, I'd say we've closed 88 independent sponsor and non-sponsored deals of that, I'd say, about half our independent sponsors. So independent sponsor transactions. And I gather, it's probably 25% of those are repeats. So that's really important to us. You know, once you build some trust with an independent sponsor, you've seen how they work, how they structure deals, how they look at the market. It gives us a lot of confidence in the underwrite. And then the other channel, which is emerging as you are aware, Sam, certain of our funds are SBIC funds, which are investor-based, our LP bases, largely depository, domestic banks. And we've figured out how to originate deal flow from those banks. So there are a lot of circumstances where a bank is, you know, has a cash flow group, for instance, that their interest level starts at 15 or 20 million to be bettah, they have a business that's being banked in a business banking group that doesn't do cash flow lending. There's a cash flow need that emerges and the bank passes that along to us and we're able to do a cash flow alone while at the same time allowing the bank to retain the client, the customer in the form of a revolver and depository, et cetera. And hopefully these are gross situations. Many, many times they are. And you know, the customer of the bank can grow to a size where now they can actually lend to the business and take us out. So it's a way for the banks to retain that business. So the client should probably say 75% of our deal flow comes in through independent sponsors and related groups around independent sponsors and depository banks that are LP's. The rest of our deal flow, it's a hodgepodge, it's YPO network, friends of friends. We do see deals that are brokered by lower metal market and intermediaries. They were largely not doing those deals though. I mean, I'd say if we're doing well to 15 deals a year, maybe one or two or just straight brokered processes, we just have to be very careful there that we're not the lowest cost money and the highest leverage. That's how we go about originating deals in the marketplace. That's super useful. If I'm an independent sponsor, how should I be thinking about structure with Capitola? Well, I think the interesting thing about Capitola, especially on our most recent vintage vehicles, which are, we closed about a billion dollars in February of 2025. About half of that is in the form of a traditional fund. The rest is in the form of a various separately managed accounts. And that was very purposeful in the sense that some of our managed accounts are equity only. So we have the ability to over index into the equity. And that's one of the reasons we've historically focused on the independent sponsor market. We can do a 50/50 debt equity deal. We can do a 60/40 equity debt deal. We are very flexible. And I think that resonates with the independent sponsors. And at least in my mind, and I certainly could be wrong about this, but I feel like instead of an independent sponsor spending the lion's share their time between signing up a deal and closing a deal trying to raise the capital, we can provide a one-stop solution and allow them to spend their time on managing workstreams, doing diligence, really sort of refining the thesis instead of assembling the capital and sort of being distracted there. Doesn't always resonate with independent sponsors and some are well-funded independent sponsors and they don't really need our equity capital. And those situations in many cases trade away. But, you know, we did a deal that was previously mentioned with Grove Court Premier Radiology. We definitely over-indexed the equity and we're very happy with the results. And that's a strategy that has yielded good results over the years. Let's talk for a moment, Randall, about what makes an independent sponsor attractive to you. You're not underwriting a fund here. You're underwriting a deal, but you're also underwriting the independent sponsor. What's on the checklist as you work through a transaction? First of all, I mean, without a doubt, we have to like the deal. We have to like the company. We have to like the underlying company and the underlying market. I think what Matt said before about the organic growth characteristics of the business outpacing the broader market in which they operate is important. You know, we have to see longevity in that growth, especially like in an industry like healthcare, what are the reimbursement trends? What else do we like about the industry if from a 5, 7, 10 year perspective? But in terms of the deal, I think the setup is key. We like younger, hungry, independent sponsors in a lot of situations. They are guys like Matt and Alex over at Grove Court that cycled out of a larger private equity group. And we're really going at it for the first time on their own. And we're putting significant capital from their own balance sheet into the deal. We like to see seller roll over. You know, that's important to us. Continuity in the management team. And back to the sort of industry, a clear path to growth. It's not just that they have organic growth characteristics we think are sustainable. But what else can we do to juice the return? Is there a capital project where we can enter in a adjacent market that demonstrates similar growth characteristics or their acquisitions, whether they are geographic tack-ons or, again, industry adjacencies? What is it that we can do to add value? Because at the end of the day, capital, we're in many situations. Playing a passive, a more passive role than someone else that is providing the lion's share of the capital. We in many situations want to take just one board seed out of five or one out of seven. But the way we add value is we provide capital. And doing acquisitions, doing capital projects, things of that sort, or staying out of the way of the guys that we have underwritten is really important to us. And I think it's important to the independent sponsors that we do business with. That's also the independent sponsor. What makes an attractive capital partner for you? Is it as Randall says? It's a lot of what Randall described. But at the end of the day, middle market investing is a people business. So number one is relationships. When we look at our relationship with capital, I had known Randall for over a decade before we initially closed our first transaction together. So ultimately, you know, relationships matter. Again, if anything were to go sideways, you want to work with someone that you trust and have been around and respect. We also look to partner with seasoned investors. So a firm like capital that has done hundreds, if not thousands of deals over time, they can bring all that experience to bear in serving on the board alongside us. In addition to that, deep pockets is important for us. I mentioned that most of our deals have a form of M&A strategy tied to them, so making sure that we're bringing in institutional investors that can facilitate an M&A strategy is really important for us. Lastly, Randall touched on it, flexible capital that allows an independent sponsor to run the business day-to-day, where the capital provider isn't necessarily in the weeds, but available when resources are necessary. Matt, how do you think about that M&A capital? In terms of the core platform versus the follow-on M&A capital required, what kind of ratio are you looking at? It really depends on the initial deal size, but with our existing investment in Premiere with Kapitala, our view was that the equity investment would roughly double over the life of the investment. It was a relatively smaller deal to begin with. I want to double-click on a deal, the case study, an example that we can work through together, and kind of quick-fire format, keep it fast-moving and exciting. But before I do, quick answer from both of you. Where do you think independent sponsors in Kapital providers disagree most, Randall? Luckily, I think at the outset it's on economics. It's always on the economics at the outset, and in the good news is with so many repeat clients, we've usually ironed that out many deals ago, so I would say it's economics. I'd agree with that. It's really economics and governance. Who ultimately is running the day-to-day, but typically all that is negotiated up front prior to closing. But that's what you focus on out of the gates, economics and governance. Randall, of the deals you see, what quantum, what percentage of deals don't get done, that you think might get done because of economics or governance? I'd say 25% of the deals that we really want to pursue don't get done because of economics. That's sort of where I thought it might be. We're going to do a case study deal walk through now. What deal are we going to talk about? I'd say let's talk about Premiere for radiology, which is a deal we closed next month. It'll be three years ago with growth core. Time flats? Yeah, it's been fun though. It has. What made that deal interesting to you in the first place? Sure. It's a tele-radiology firm that was founded in 2006. What we do is diagnose medical images through a network of radiologists. Today we've grown in size and scale to about 250 radiologists that read on the platform. We are now the largest outpatient focused tele-radiology firm in the US. But the deal is grown about five times, both top line and bottom line since the initial investment. The initial platform looked very different than how it looks today. What attracted us to the investment were several fronts. The macro trends were incredibly compelling. There is an aging demographic in the US, as all of us know, the population of individuals aged over 65 is expected to double over the next 30 years. That population 65 plus requires two and a half times the amount of medical imaging in addition to that premiere focuses solely in outpatient. There's been a shift in providing healthcare services outside of a hospital setting to outpatient settings, which is really our customer base at premiere. And then lastly, there's a massive supply demand imbalance in the radiology workforce in the US. There's 40,000 radiologists today that are actively working in the US. There's only about a thousand radiologists that enter the workforce after graduating medical school and completing their residency programs. And there's about 2,000 open radiology positions in the US today. So that workforce is only growing about three and a half percent per year versus outpatient imaging volume growing 10 percent per year. So that imbalance is not expected to correct itself anytime soon. So for those reasons, we're highly attracted to premiere. We at Grove Court have also invested in several deals in medical imaging. So the end market we're extremely familiar with. And the management team was extremely impressive. The original founder of the business Drugo Day and the chief medical officer, they eat, live, and breathe, teller radiology have tons of enthusiasm for the business. They were meaningful role-over investors, rolled over about 25 percent of their proceeds back into the deal, really believed in the second bite at the apple. So for all those reasons, it was kind of a a perfect opportunity for us at Grove Court. And Randall, as you were unwritesing the deal, what did you have to believe to get the end of the right done? I mean, the first thing every investment committee asked when they looked at Matt's deal when he was putting it together with his AI. You know, what is AI going to do this business? And you know, we did do a market study and felt like AI was not going to displace radiology writ large. It was going to enhance radiology. And really, that was the big underwrite. We also had a little bit of customer concentration, which is not unusual in a business of this size. That was definitely way down. The number two was the customer concentration was way down the list from from AI being number one. Ultimately, we got comfortable with both. And both are playing out exactly as we go off. Exactly. As we had hoped. Yes. And Matt, let's still promote about the structure of the deal. What can you tell us about? Then you're comfortable saying there was 25 percent seller roll over into the deal. And we levered the initial platform at three and a half times. For all of the subsequent deals that we've done, we've insisted on seller roll over or earnouts to keep the shareholders motivated. We are very proud of the fact that all the sellers that have sold into the premier platform have stayed on board in operational roles. So again, having incentive, skin in the game, extremely important for us, whether it's platform investments or add-on acquisitions at Grove Court. I mean, as testament to you guys as a leadership team, that's awesome. And what role Matt, do you play on a day-to-day basis with premier? So we at Grove Court never aspired to be in day-to-day operational roles. We serve as strategic investors, and we're there to operate more to board level. When you think about Grove Court as healthcare investors, really what we focus on is patient care number one, and taking care of our providers, the doctors. We think if you treat patients like widgets, things will go wrong. And at the end of the day, quality patient care and keeping the doctors happy, if you're delivering on both of those fronts, everything else will fall online. So from our involvement, it's really at a strategic board level, helping to facilitate investments, build out processes, infrastructure, invest in technology. Randall mentioned AI. We've invested in multiple AI technology systems that have been embedded into our workflows to enhance quality and improve productivity with the radiologist workforce. And then lastly, identifying strategic M&A acquisitions. So coming up with the pipeline that stays true to premier's focus on outpatient imaging, and going out, finding those opportunities, reaching out to the sellers, ultimately getting them to an L.O.I. stage and leading the diligence of those efforts to ultimately bring them to the finish line, allowing the management teams to continue running the businesses day-to-day. That's really where we play overall. Awesome. Thank you. Randall, what role did you play? Holden Enda, board member. And then we through, it's the end of the firm, we identified a radiologist, a long-time radiologist in the Charlotte area. We actually got him on board and inserted him into a board seat. And he's been a very value-at board member, wouldn't you say? I mean, it has perspective. Yeah, he has perspective that a bunch of finance individuals wouldn't have. So at this point, we have two radiologists, two board certified radiologists on the board of directors, which is very helpful, because at the end of the day, this is a business where the supply demand imbalance is such that there's no lack of demand from a customer perspective, but what we need are radiologists. So these guys live in breed radiology and understand what motivates radiologists to come work with us. But my role is really to stay in the background, Sam, and provide guidance when necessary, when these guys were making an acquisition. How do we finance it? How do we expand the credit facility? How do we, do we need to raise more equity, the role over equity? Is it coming in at the right price? Things of that sort. But in terms of the day-to-day, we leave it to the management team where it was a great assembling additional managers to come into the business to help enhance your workflows and the stability of the business as it continued to grow. I don't think you should be underestimated what you just said, which is bringing in vocational medical professionals at board level. In private equity, we have a bad name for being people who manage companies behind spreadsheets. I think having the humility to bring experts who know the field and how that level alongside you speaks volumes to how you guys do deals. So, Kudos to both of you guys. It's a great point. It's one that's important to both Capitola and Grove Court. We're not involved in any clinical decisions. At the end of the day, premier has a chief medical officer. He's trained at HSS in a former life. He has a whole team of medical directors reporting into him. If Randall and I were ever asked to read a radiology case, there would be big issues there. So we focus on, again, how do we facilitate growth, support the management team with talent additions over time, and build out the infrastructure for scale? Awesome. Guys, we're going to wrap up just about here, but a couple of quick fire questions for you. Matt, what is, in your mind, the biggest misconception about independent sponsors? I think the biggest misconception is that we're inexperienced in lack resources. I described ProCort as small, but mayi. We've got a small investment team, but at the end of the day, between our team, we've closed hundreds of transactions and deployed billions of investment capital over time. So it's not really just the investment team members at ProCort that are partners to the management teams, but our networks that we bring to bear. So institutional investors like Randall, and then third party advisors, plus executives, kind of management team members that we've worked with across the course of our careers. And Randall, if you could give a message to any independent sponsors that are listening now on key takeaway about capital, what would that be? Well, I mean, the key takeaway, I think, is choose your partners wisely. I think the big difference between where we started 20 odd years ago, an independent sponsor market, and today is the availability of funding, but not all funding is equal. Someone who's going to stay out of the way, provide the resources you need to help you grow is the most important thing. And that's what we provide at Capitalla. Flexible capital, stay out of the way. When called, we answer the phone and connect the dots where you connect you to people to resources that can help you grow your business. Well, guys, thank you to both to everyone listening. I would strongly encourage you go find out more about both Capitalla and Grove Court. Their respective websites is a wealth of resources there. And as always, if you need data and news, IFN is there for you to Randall, Matt, a huge thank you. And thank you for letting me moderate the inaugural episode. - Thank you, Sam. - Thank you, Sam. - The views expressed are those of the speakers as of the recording date and are subject to change without notice. Statements regarding portfolio companies, investment opportunities, market conditions, or future expectations are based on current assumptions and involve risks and uncertainties. References to specific investments are provided for illustrative purposes only and are not representative of all investments made by the firm. Past performance does not guarantee future results. Nothing contained herein constitutes investment advice or an offer to buy or sell any security. Please read more about Capitalla in the description of this episode. 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