What happens when a consulting firm decides to start leading M&A transactions and, separately, writing checks into the very deals it consults on? Clint Simkins of DPO&Co joins host Greg Hawver to answer that question, tracing the firm's evolution from a strategy consulting shop into a fully integrated platform spanning consulting, QoE and transaction advisory services, principal investing, and a $100 million fund raise. Clint explains how scrutinizing value creation plans — including spotting internal contradictions that other LPs never get to — is the first place DPO looks when evaluating a deal. He also details how DPO's commercial HVAC roll-up has completed 20 transactions in just 22 months. Tune in for a rare look inside a firm that has built a compounding edge across every stage of the independent sponsor ecosystem.

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

You're listening to Deal By Deal, a McGuireWoods podcast. Deal by Deal invites you to conversations with experienced independent sponsors and other private equity professionals. Join McGuireWoods partners, Greg Hawver and Jeff Brooker, as they explore middle market private equity M&A to provide you with timely insights and relevant takeaways.

Hello, and welcome to Deal By Deal, a podcast for independent sponsors and other investors in the lower half of the middle market. My name's Greg Hawver, I'm a private equity partner at McGuireWoods, I'm based in the Chicago office. And I'm excited to be joined today by Clint Simkins at DPO&Co, we're going to have a really interesting conversation. What's neat about DPO&Co, for the listeners of this podcast, is that at the moment, DPO is doing a lot of really interesting things. They've got their hands in a lot of cookie jars, if you will.

DPO is out there investing in deals under the independent sponsor model. They are co-investing with independent sponsors and backing them on a deal by deal basis. DPO is providing consulting services and QofE services in the lower half of the middle market for independent sponsors, and they're also recently now raising a fund which will impart further back independent sponsor deals. So after connecting with Clint, it's been a couple months since we've had a podcast and I said, "Clint, this would be a great idea to get Deal by Deal back on track and talking about all the fun stuff that you're doing."

So with that, Clint, can you fill in anything that I missed about DPO at a high level? But then also tell us about your origin story and how your firm got to where you're at today,

Please.

Absolutely. And first and foremost, thanks for having me. The DPO and McGuireWoods teams have crossed paths and intersected many times over the last almost decade now. So, great to be here with you and excited to share some of the story of how we got to where we are today.

I think you nailed at a high level all of the different things that we've got going on. I'd love to maybe start at the beginning and explain, boy, that's a lot of things to be taken on at once. How did we get here? So, maybe we'll start there.

Great.

Well, for those that haven't met either me or Dan or other folks on the team here, DPO stands for Daniel Patrick O'Reilly. So, Dan started this whole thing almost exactly nine years ago. His background, he was an equity derivatives trader in New York, so very quantitative, analytical background. And then was after his MBA working at A.T. Kearney. And as he likes to say, instead of waiting around, he gave himself a promotion to partner by starting DPO&Co, after essentially hearing from too many clients that they would love to hire him and his team for their consulting services but just couldn't quite afford the bill. And so, he essentially brought over a small A.T. Kearney team to the middle and lower middle market and was pretty successful out of the gates in selling their services at a right sized price point.

I partnered up with Dan about seven years ago. So he was a couple years into this journey, there had been a few different folks in and out of the team, but always we had had a gentleman named Purnomo, very good friend of Dan's. They worked together at A.T. Kearney. Purnomo had recently relocated to his native Indonesia when I joined the team. I promise this is going somewhere and important, don't worry. And they had been running a pretty successful consulting operation. The first several years of DPO&Co's existence, we were mostly focused on just post-close synergies, margin expansion. How do I get into this adjacent market that I underwrote I was going to get into and now I'm two years into my hold period and I still am only selling into K through 12 education? Help me, I've done five add-ons to my platform and there's still a rubber band tied around it. I need to actually start connecting some dots, but I'm not sure where to go. Those were the types of prompts that we were solving particularly in those first few years out of the gates.

We, and especially Dan, has a say yes attitude, unlike maybe anyone you've ever met as a team of both, but also Dan as an individual. And so, that practice of just the post-close margin accretion evolved into also getting asked by the committed funds, by the independent sponsors, by the family offices that were doing their own control deals, to also do lots of pre-close work and diligence work on behalf of them and when they were getting things signed up under LOI.

And so, we've grown that consulting operation pretty successfully over the years. Today, it's almost a 50/50 split between that kind of post-close margin improvement work, and then the pre-closed market study, voice of customer, value creation planning, ops diligence style of work. And the story really started to take hold and land, especially in the middle and more lower middle market. So our client base and who we try to sell ourselves to has always 100% been private equity sponsors doing deals that tend to be, I would say, in the upper single digits to low teens of EBITDA. But our value prop has started even working its way even lower down into the true lower middle market as we define it.

Our first big evolution as a firm was going from just consulting to also being investors ourselves. We saw how much value we were creating for the companies that we were working with post close. We were doing a lot of the diligence work also on these deals, and we're seeing so many other, seeing so many other people's deals that we were picking up really well on what worked, what maybe didn't, where folks stubbed their toes. And so, we entered the independent sponsor space in late 2021 was our first transaction.

For those of you that maybe know DPO&Co, there's a separate entity called the Foxhole Group. So Dan partnered up with JB Moore, who was previous most recently before starting Foxhole Group at Platte River Equity. He had hired us as a VP at Platte River Equity to do a bunch of different projects with him and the team. He was going to go out on his own as an independent sponsor, and him and Dan made the decision to link arms to get the first several deals out of the gates done together, using JB's track record as a private equity professional who had done a dozen plus, probably 20 plus deals at that point in his career across a couple different stops, and Dan and the DPO&Co team's expert around all of the diligence streams utilizing that team as sort of an engine on the backside of an independent sponsor to add a ton of velocity to a true lower middle market platform and take it from there.

That's interesting, because I was thinking about, what are the challenges and pitfalls of moving from being focused on consulting to being an independent sponsor closing M&A deals? But sounds like you bridged that challenge by partnering with someone like JB, who I presume is an M&A person by training. Was that the plan?

Yeah. So, JB has the classic background. He started in banking, he got his MBA at Wharton, he went into private equity, did many deals, climbed his way up. And then like most independent sponsors, and honestly the independent sponsors that I think our value prop tends to land the most with, it's the folks that are the VPs and the principals at the big committed funds long path or maybe don't see the path to being partner at those funds and they're ready to go out on their own and use their track record. And so, Dan and JB assumed, I think very probably correctly, just based on the volume of deals that we've been able to now get done, that getting especially from zero to one was going to be a bit easier if we could lean on, "Hey, we've done a bunch of transactions if you include him in the pool." And he could say, "I've got this consulting engine on the backside that's going to be adding, like I said, a ton of velocity to what a two million, $3 million EBITDA platform would have access to out of the gates."

So, the first several deals, and I'm sure we'll get into a few of the specifics on the businesses. The first several deals that we did as an independent sponsor were co-managed between Dan and JB. JB now does his own deals. It's still using that Foxhole Group moniker and we're now doing our own deals under the DPO investing banner. So, I'm sure there's folks out there that are like, "Wait a minute, I've met these guys before." So a little bit of bifurcation, we still hang out with and see JB, and he's got another guy on his team named Brian, all the time, but just now going our separate ways and doing our own deals after getting that successful track record up and going.

Yeah, no, I think it's a small world actually within the independent sponsor space, and I think that's a great example of we see independent sponsors coming together for a deal or two and then going separate ways and doing different things. And so, it's just the interesting part of how flexible the model is and I think it's really neat that you paired the strengths, the complimentary strengths of two different groups. So, that's a cool story.

Totally. And we see it all the time with folks that we work with. That's not uncommon at all.

Great. Okay, so you're doing deals, you're doing a couple independent sponsor deals. And what did you learn out there as far as other challenges as you're moving from consulting shop to moving into this space?

Right. So the thought all along was, let's try to get a deal or two done and when the consulting team is not busy on a client engagement, they can go work with or add or on these businesses that we own and pull some levers and push some buttons on that side and help grow them, help diligence any add-ons that are necessary, and at much quicker manner possibly than just an independent sponsor who it's just you or it's just you and a partner can start really getting some of those synergies going and getting all of your value creation plan truly up and running faster. We were successfully pouring gasoline on that strategy for several years, but finding add-ons to these businesses, organically growing others. I think you mentioned it at the top, but we've done four platform deals of our own. We exited our first one a few weeks ago actually, we can get into that.

Congrats.

Thank you, thank you. Nice to get one on the scoreboard. Can get into that in a bit, but just so folks understand the volume of what we're talking about here, one of those platforms we did four add-ons. One of them was completely organic growth. Another one we did a small, contemplating a small ad-on and ended up not doing it. And then with our most recent platform, it's mechanical services roll-up, it's mostly commercial HVAC though. We've done 20 transactions in the last 22 months on that. So, we are really living that mantra of utilizing this now very large team that we've built to get so much more done than I think a typical independent sponsor could, just because we have the bandwidth and the expertise and the know-how that is not certainly sitting around if we're not hot and heavy on a deal.

You're doing deals. I want to talk about maybe some of the specific transactions, including the exit. But at some point in the evolution, you started backing independent sponsors on deals that they were doing. When did that happen in that chronology? And relatedly, I love asking multi-part questions, so apologies. But relatedly, what types of deals were attractive to DPO when you have your investor hat on?

I'll give a multi-part answer to your multi-question. Just to close out the story on our evolution and how we got to where we were today, the biggest evolution on the consulting side of the house is two years ago we brought in a guy named Steve Eroyan. Steve had done, I think, 13 years at Ernst & Young at the time. And again, this say yes attitude of DPO&Co, and particularly Dan and I, we were getting asked multiple times a month, "Oh wow, I love you guys on this consulting stuff and the diligences. Do you do QofEs too? I don't really like my QofE partner." We wanted very much to say yes to that, but that's really just not in our backgrounds, neither of us are CPAs. Met Steve through the grapevine and he was also an Evans Scholar, much like Dan and other folks on our team. If you're familiar with that, it's a Caddie Scholarship, it's Midwest centric, but they met partially through that network and then some other mutual connections, and in the same way-

It usually means they're much better golfers than I am, if you're an Evans Scholar, so.

They're at least very upstanding folks and have a great work ethic because they made it through the caddie ranks, and also very much earned that scholarship. It's a tremendous network of folks and they're all wired the same way, and we love recruiting out of it. So, if anyone sees Evans Scholar on anyone's resume, I would take a hard look at hiring that person.

Yeah. Well, you know what, that's interesting because I honestly always just assumed it was mostly about the golf, but that's good to know. Cool.

Absolutely. Long story short, in the same way that Dan started DPO&Co by bringing over a small A.T. Kearney team, we essentially launched our QofE Practice by bringing over a small Ernst & Young team. Now, Steve started as four people. There were two here in the US, there were two in Asia, but that team of people had been working together for like 10 years doing QofEs of all shapes and sizes and public take privates and carve outs and software businesses and all kinds of things that you don't normally see in the lower middle market. And so, we were up and off to the races. We were doing a lot of our own QofEs on some of our investing pieces. Our lenders and LPs were fine with us doing that, especially on the size of deals that we were working with. But going to market as a bit more of a full service or integrated diligence provider has been a tremendous kind of growth accelerator for us.

We now have 11 people dedicated just to that TAS practice, that's more than just QofEs, but that's a lot of what they do, and very often are getting hired both on the sell side and the buy side to perform a QofE, which then informs, "Hey, there's some holes here that people are going to poke, or we really need to look into this, or you've got to be asking all of your customers about XYZ when you're on voice of customer calls." That informs what a commercial diligence scope looks like and adds some very specific things to what a market study might look like, at least what a voice of customer might look like. And essentially, Steve's team then passes the ball to my team on the consulting side and it forms this very integrated advisory view and can accelerate the deal timelines tremendously.

So, that's the big evolution on the consulting side of the house and then a few things obviously kicking on our investing side, where as we continued to do more of our own platform deals, we were also working more and more with independent sponsors as our clients, rather than just the committed funds. And unlike with the committed funds, a lot of the independent sponsors started asking us, "Hey, I'm still on the fundraise path here. If you guys are interested, you could certainly co-invest in the deal." Being wired the way we are, we more or less said, "I would love to invest in this deal because I've done hundreds of hours of diligence on this market, on this business. I've vetted you as a sponsor. I know the terms of the deal that you have in place. I'm investing as an LP from a standpoint that literally no one else has, and we are the most educated LP you can think of when you're then looking to fundraise." We've solved all the problems that a "normal" LP would have when making that decision.

Yeah. I mean, I think it's brilliant. I think it's a brilliant idea. You're under the hood more than anyone else and can make super informed decisions and with zero extra capacity needed to underwrite those investments.

Our next turn of the dial on that side of the house is to turn the volume up on those co-investments as loud as we possibly can. Our typical LP co-invest, and we have 21 of these right now, co-investments into other independent sponsors deals. Average check size on those is about $500,000. Some are a little bigger, some are certainly smaller, so we're certainly nowhere near a large minority, certainly not a majority, and want to keep that aspect in play.

But as you hinted at the top of our chat here, we are in the process of raising a $100 million fund right now, and the goal to deploy that fund is that yes, some of it certainly will go towards funding our next two, maybe three depending on size, but probably our next two platforms. Somewhere like 20 to 25% of it maybe is going to go to that, but the vast majority of it is going to be to continue on the path we're on where in addition, of course, to continuing to serve all of our committed fund sponsor clients, continue to partner and link arms with independent sponsors as they're getting deals signed up under LOI, doing their QofE with them, doing any other commercial diligence, at least a voice of customer I would expect, but maybe there's some specific market work, some want a full-blown market study. Doing all of that diligence with them. Like I said, we're vetting the sponsor, vetting the terms of the transaction they've got in place, maybe helping them with a few things that aren't quite market that they're getting on their term sheets from lenders and other folks.

And then if it's checking all the right boxes and we're getting green lights on everything, we would like to deploy and be somewhere between we think probably a three to $5 million check into their deals, instead of just a $500,000 check. And that can be an even more of a solve for those sponsors because that is often a very hard check size to find, not to mention they've got a feather in their cap walking out of the diligence process because they've already got several million dollars accounted for when they go to raise that next 15, 20, 25 that they need to close it out.

Super interesting. I mean, just the synergies of it and the different problems that you're addressing and helping solve within the IS ecosystem, I think it's really great. I mean, I do see for sure those three to $5 million checks can be hard to get. The real anchors that are maybe writing some debt and also a three to $5 million check, like that's one type of investor. But for those others trying to write three to $5 million checks, it's hard to spin up diligence and deal team for those types of analysis. So, that's cool that you've got that in place.

I just want to jump back. To me, it would be interesting that you're seeing so many deals, you're led by other independent sponsors, and you're digging in the data and you're meeting the independent sponsors. You talked about deals checking the boxes. Without giving away your whole formula, what are, at a high level, some of the boxes that you like to check on deals to make you comfortable writing a check?

A couple things there. Yeah, I don't want to get into the full calculus of everything.

Yeah, yeah, yeah. Don't give us a secret sauce, but just high level, yeah.

First and foremost, and again, this goes back to just the volume of deals we are seeing, not just our own and all of the add-ons that we're doing and all of the brokers and bankers that we're connected with, but we are, of course, obviously under NDAs and all that. So it's our own internal information here, but we're seeing so many different deals and have a very good pulse on multiples and what different sectors and sizes should be fetching in the market. And right out of the gates, if it seems like the multiple being paid is well above market or it's then going to be very difficult to actually succeed five years down the road on an exit, that's the first one that might turn us off a little bit. Or before we even get involved with the sponsor, say, "You're at a seven here. These are usually more like a five and a half or six," and then you scale it and go up from there. So, that's first and foremost, I think that's kind of obvious.

The biggest one that we tend to really squint at, and again, I think this is because we're coming from a unique perspective, is going with a bit of a fine tooth comb through the value creation plans. And what's your goal or plan to triple the size of this business over the next three to five years? We'll often find that those plans are A, way too high level and I don't think the sponsor quite grasps how hard some of those are.

The classic one that we see all the time is, "Oh, I'm buying this business off this 75-year-old guy who's been running it for 40 years and he doesn't even have a sales team. It's just him and he answers the phone. I'm going to stand up a regional sales operation and have this whole commission-based sales team." That's really, really hard to do, and we know that because we get called in on our consulting side of the house all the time by someone who says, "Hey, I'm two years into my deal and I've been trying to stand up this sales operation and it's just not quite clicking and can use some help on sales and pricing strategy." Let's go from there. So I'd say that's A, the value creation plan is just a bit too high level and they haven't totally thought it through.

And the other one that we kind of have to talk through with sponsors from time to time is that you have things in your value creation plan that are contradictory to one another. So, let me give an example.

I saw this one somewhat recently where the first two things on their value creation plan, the first one was, "Well, we're super, super sticky with our customers and they love us and it's pretty hard for them to use someone else. So, we're going to take price up a little bit on our super sticky and incumbent customers." But then the second thing on the value creation plan was, we're going to make the sales operation a bit more sophisticated and we'll be able to win 15 or 20 more accounts every year. Well, you just told me that you're super sticky and your clients love you. The people that you're going to go try to sell this to are certainly buying this service or product from somebody. Why don't they love their incumbent and why aren't they super sticky on there? It's hard for both of those pieces of the value creation plan to be true. And so, that's one that maybe other LPs aren't even getting to the value creation plan when they're assessing these deals, and sometimes that's the first place we look.

I haven't really talked about this on this podcast in this level of detail, so this is fun. How many independent sponsors have a formal value creation plan? Is it 100% or less? And then, when in the process is that valuation plan dialed in? Is it before they're even talking to targets in a space, or what are you seeing?

All the above.

All the above. Yeah, no, no, it's something that never hits my desk as a lawyer, right? I never see the value of creation plan.

Yeah. I would say that they all have something in place. The sophistication of that plan varies, but sometimes it doesn't need to be sophisticated. We love the concept of rolling up a bunch of $1 million EBITDA businesses together, putting in the sweat and hard work to make it a upper single digits or lower teens of EBITDA platform, that then someone upmarket is going to love to take a look at but they don't want to or literally can't buy a bunch of $1 million EBITDA operators. So sometimes the value creation plan is as simple as, listen, there's thousands of these types of businesses out there. They're all mom and pop-y in nature, and we should be able to string enough of them together to get there. And that basically is the value creation plan. We'll do our best to do some back office synergies and whatnot.

But it's the ones where you're really more looking at an organic growth play that we tend to, you got to really think through and put the screws to those plans where it's more of, "Hey, we've already got a somewhat unique asset here. I don't think there's dozens if not hundreds of other operators doing this." So, it's more of the organic growth play that you want to have that a bit locked in.

This is something that LPs love about the independent sponsor space though, is that independent sponsors tend to have a background in the thesis or the space that they're investing in. There's some alpha that sponsors are able to bring to these deals. It's not just a committed fund buying a roofing business because they like the recession proof nature of when there's a hole in your roof, people fix it. Many people have been extremely successful doing roofing roll-ups, but I'm not saying every single sponsor that comes to us has some value creation plan that we blow up their spot on. They actually tend to have really good ones, but I just wanted to emphasize how important that is, especially for us, is, what does the path forward look like and are you maybe not totally thinking through how hard this is going to be?

Yeah, it's super interesting. Covering a lot of great stuff here, we usually go about 20 or 25 minutes, and now we're 30 minutes, which just shows that when you've got a DPO and your team that are in so many aspects of the ecosystem, there's just a lot to talk about, which is great, and I really appreciate your time.

I mean, before we go, I do want to touch a little bit more, if you're open to it, on your current fundraise and maybe just what you're seeing out there in the market for appetite as far as raising a fund in this space. Because to me, it's one of the themes over the last couple years, is funds being raised specifically to invest in independent sponsors as an asset class. And so, I think it's a very interesting topic.

Absolutely. We are doing fairly well on our path to that 100 million that's been more or less Dan's top priority in Q2 so far this year. Our goal is to be deploying out of that fund by the end of Q3, certainly before the end of the year is the goal. We're more than halfway there with verbal commitments, but tightening all the screws on getting it up and running.

It's been a pretty interesting path on the fundraise, because we're not just solving problems for the sponsors, but the way that we're set up, it's actually solving a lot of problems for LPs as well. If you think through the typical path for an LP who's investing in an independent sponsor deal, they're getting caught flatfooted at every turn. They've got a week or two, maybe a month or two at best to make a decision, and they're constantly trying to play catch up. They are very likely attending the McGuireWoods Conference in October down in Dallas, as of course we do, but they might meet 50 people a day, at least 20. They might get pitched on 30 deals for three straight days while they're there because that conference has run so well. Who's the guy that does that? He's doing a great job. But it's like you basically have to show up at that conference if you're a sponsor or an LP looking to invest in those deals.

Even aside from a high volume event like that, you're catching some pitches and investment memos in your inbox, you haven't done the thorough diligence. You're barely getting to the value creation plan, you're more just trying to figure out if this is a market or a space that you want to be invested in. You're probably spending a little bit more time just trying to figure out who this sponsor is and if this is a back-able person, and maybe not even spending all that much time on the commercial terms of the industry or the market that they're in. If an LP instead was basically getting Fed A plus deal flow through DPO&Co, who again have already spent hundreds of hours diligencing not just the asset and the market that we're talking about, but the sponsor and the terms of the deal they have in place themselves. The person showing them that deal already has significant skin in the game because a portion, a significant portion of this fund that we're raising is going to be our own money. That just changes the way that the LP game gets played as well.

So, we've been able to find a pretty interesting audience and when we get it in front of them as to all the different ways that this is going to feed them deal flow differently, it's been a pretty positive conversation for the most part.

That's great. That's great. Well, Clint, thanks for taking some time today. This has been a really interesting conversation. I'm impressed with all the different verticals your team is in. I'm taking away from this just how entrepreneurial DPO is. I'm taking away from this that our listeners can look to you all as a resource on multiple fronts and should probably feel free to reach out to you on any of those fronts, but also just a good example of again, that say yes, attitude, partnering with others where it makes sense. And so, it's been really fun chatting with you.

Fantastic. Thanks so much for having me. Hope to see you and lots of our listeners here soon.

All right. Thanks a lot, Clint.

Thank you.

Thank you for joining us on this episode of Deal By Deal, a McGuireWoods podcast. To learn more about today's discussion and our commitment to the independent sponsor community, please visit our website at mcguirewoods.com. We look forward to hearing from you.

This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state, and should not be construed as an offer to make or consider any investment or course of action.