In this episode of Accessing the Pipeline, a podcast from McGuireWoods featuring the voices of Black professionals in private equity and finance, host Rubin Pusha III welcomes Omar Simmons to the show. 

Omar is the co-founder and president of Exaltare Capital Management, a consumer-oriented private equity firm with expertise in multi-unit and franchise businesses strategically partnering with lower middle market companies at inflection points.

Omar shares his journey in private equity from being one of a handful of Black or Brown professionals in the mid-90s to serving as a board member on multiple corporations, such as ECP-PF (Planet Fitness), EVG (Urban Air), and ECM-GF (The Good Feet Store).

While it has never been easy, Omar provides advice for other aspiring Black professionals in the private equity space. He has hopes that diversity will continue to flourish and representation will become even more inclusive.

Rubin and Omar talk about emerging managers, deal alignments and predictions for the remainder of the year. Omar also describes the ins and outs of a major portfolio company exit he recently oversaw.

Tune in to learn about M&As in a post-COVID world, the value of life balance, and how Black professionals can make a name for themselves in private equity.

Featured Guest

Name: Omar Simmons

What he does: Omar is the co-founder and president of Exaltare Capital Management and currently serves as a board member to ECP-PF (Planet Fitness), EVG (Urban Air), ECM-GF (The Good Feet Store), InXpress Global, and the International Franchise Association. Omar boasts a 20-plus year career in private equity and has closed over 20 principal transactions exceeding $3B in aggregate transaction value.

Company: Exaltare Capital Management

Where to find Omar: LinkedIn 

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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.

This is Accessing the Pipeline, a podcast for Black professionals in private equity and finance, brought to you by McGuireWoods. Join host Rubin Pusha III as he welcomes special guests offering insights into access and capital, deal making, accelerating portfolio optimization, and developing relationships among Black professionals in the private equity industry. Tune in to access the possibilities.

Welcome to Access in the Pipeline. My name's Rubin Pusha III. I'm a partner at McGuireWoods and your host. Please join me in welcoming today's guest, Omar Simmons, who's the president of Exaltare Capital Management.

Omar, thank you so much for being here today.

Thanks for having me, Ru.

Well look, we won't waste any time. We'll jump right in. I think the best way to kick this thing off is let's start by talking about your background, both as a private equity and investment professional as well as an entrepreneur and how that led you to found Exaltare Capital.

Sure. So my personal background, I grew up in inner city Boston in a type of neighborhood where everyone had a hustle and people had side hustles. And so it was a very entrepreneurial environment where you had to go get what you wanted and it didn't necessarily fit within kind of traditional boundaries. And so when I went off to college, I was very interested in business, spent some time in management consulting, spent most of my career in private equity at larger firms from '95 to 2011, 2012. And ultimately I wanted to kind of marry my entrepreneurial interest with a lot of the things that I learned in private equity. And so went out and bought a business, and ended up running that business as a CEO and as basically the private equity sponsor for some time.

And then that was the beginning of Exaltare Capital Management. We have since went on and sold that company, and made some investments in several others, but that's basically how the journey...

Awesome. And I think one of the things that we want to highlight for those listening in is it is a unique position to be able to look at deals and be in this space having one, worked in traditional private equity. Two, also having been an entrepreneur of sorts and been an operator, I think that there are quite a few people who just don't have all those perspectives when they're playing in the space. And we'll talk a little bit more about how that plays into your investment thesis and how you do things a little bit later.

Before we jump into the meat of the questions, it'd be good I think to give the audience an overview of Exaltare Capital. What areas of focus or industries do you focus on? What's your investment strategy? What's the check size that you like, et cetera?

Yeah, so Exaltare Capital, we started in 2012. We focus exclusively on franchising and multi-unit businesses, basically specially retail type of opportunities in the consumer sector. We like to be the first institutional investor in a company. So by definition that tends to be lower middle market, companies with maybe two to 20, 25 million of EBITDA. And we view ourselves as kind of catalytic capital. So we're going to bring more than just money to the table because we're trying to professionalize and scale these companies. We are value add/operating oriented, so we don't necessarily look for the broadest portfolio. We have a small number of companies at any one time. And we spend most of our time trying to grow those companies in a more traditional private equity context.

You do a number of deals and you have maybe broader diversification. For us, we maybe mitigate the lack of diversification risk with paying a lot more attention to each company. And we don't want to run the businesses, but we're in close partnership and try to be a value added support to the management teams that actually run the business on a day-to-day basis.

Awesome. You talked just briefly about your expansive investment PE background and also your background as an operator. What was happening in the marketplace as with you professionally, personally back in 2012 that said, "You know what? I'm going to walk away from a position in a committed capital environment to go more so to this independent sponsor model where on a deal by deal basis you're looking for checks to get the deal done"?

That's a great question. I think most of my friends thought I was crazy. Like, "Why would you leave pretty cushy PE?" Kind of context. I had raised my own fund with a group of partners before I joined Windjammer Capital, which was the last large PE firm I was part of. So I had had some entrepreneurial experience and I think that was important because it maybe wasn't as daunting to me to kind of go out on my own and create my own shot.

Ultimately, I think there were two things going on in the marketplace at that time. One, private equity was clearly becoming more institutionalized. The firm that I was with was great. Windjammer, they're great investors, but most of the deals we were bidding on were through broad auctions. The joke was kind of we're buying everything from Harris Williams, from another PE firm that already owned the company and you felt a little bit like a stock picker as opposed to a company builder.

And so that environment is really stimulating. But I did question how to what extent is it sustainable to recreate value? And so I was very interested in the lower middle market where I'd spent some time and there are aspects of the lower middle market if you want to be the first institutional investor but I wasn't sure the committed capital model was optimal, right? Because by definition you can raise a small amount of money, you got to do a lot of deals, you have to have a same back office as you do for a larger fund and you're not amortizing those costs over a large fund. And can you attract the same type of talent? And you're going to be diluting your efforts with a large number of companies that are smaller and more fragile. And I just wasn't sure that all made sense, kind of my interest in what I wanted to do.

And so the thought was, well let's test this and let's just go out and buy a company, which isn't really any different than I've done my whole career. Had the deal flow, knew what I wanted to look at, understood how to underwrite structure, partner with management teams and create value. The only part that wasn't clear is would I be able to get financing in a timely manner? And I found that if you got good deals you could get financing. I was fortunate that I had made enough money in my private equity career that I could kind of sustain myself during those dry periods, which I think is an important consideration.

The part that I didn't fully appreciate was what my role was going to be post-close. I wanted to be more than just a stock picker. I wanted to be clearly active in the company. I didn't have in my mind that I wanted to run the business. At the time, there wasn't anything really called independent sponsor. There was maybe some people that would call it from the sponsor. We had done deals like that at Windjammer to support people, but there was this clear bifurcation between are you an operator, are you an investor, are you a deal sourcer? And they all had slightly different connotations and economic model.

I wasn't sure where I really fit in that spectrum. I talked to people that were more traditional what they would call search funds, where they were like, "Well you have to be committed to run the business and if so, we'll give you a capital." And I was like, "Well I don't know if I'm committed to run the business. It depends on the business, depends on the management team and I don't know if that's what I'm after. I want to give the business what it needs." As Paul Pierce used to say, "Give the game what it needs." And so I didn't know exactly what I was stepping into. Ultimately when we bought our first business, it did require a significant amount of management oversight and ultimately I did become the CEO. But I'd be lying if I said that was the initial.

Yeah. I want to go back to something, I know the focus of our conversation today is not emerging managers, but I think there's a theme that exists if you're either a GP, you're emerging manager, you're raising your first fund, second fund, third fund, and being an independent sponsor which is you've got to be willing to invest not only your time and energy but some of your own capital in order to make it successful. And so I just wanted to highlight that point for our listeners. And two, give you an opportunity to talk about what's that right mix of equity, debt, your own capital? What should people expect if they're going to be an independent sponsor trying to grow a portfolio deal by deal and the way ways in which you've done?

Look, I think it's a super important question, particularly important for people of African descent and people of color because we don't often have the rich uncle as I call it, right? Just hanging around, been there, done that, maybe can give you some capital. For me, I thought of my entrepreneurial pursuits around two kind of dimensions. The first is when do I know enough to be able to take that risk? And second, when and how to finance that risk? And the first entrepreneurial leap I made was after a couple years into business school when I was at a firm called McAllen. When I left, mainly Black and brown partners, we started a small IP firm about $122 million called Reliant Equity investors. There, I had the skillset and the energy to do it. I didn't have the capital but my partners could help me because some of them were older. And that was kind of the trade, they could help finance our period where we didn't have enough management fee to pay the bills. I still had to take a pretty significant pay cut to take that risk, but at least I could eat and my wife worked at the time.

Three kids later, my wife's at home, kids are in private school. It was a completely different equation. My burn rate was very different. My lifestyle was very different. And so I had to have enough money in the bank to say, "Hey, I can do this without really changing their lifestyle." Not only were they not going to make any money, kind of had to support a small team. And also, it wasn't a traditional path. They didn't know exactly when you were going to close a deal and then how much money you were going to have to put in a deal. And so I think a lot of the capital providers are sensitive to you may not have as much money in your first deal or whatever. For me, given my background and just getting my orientation, we put real money in that first deal.

And so when you add it all up, there's opportunity cost of not making any loot, and then you had to put in more money, and then depending upon how you're going to source and process deals, you had to support resources around you. And I think do that in a way where you weren't single threaded is wise. And so I do think that means there are certain windows of opportunity to take these entrepreneurial risks. And I encourage people, again, particularly people of color, to think long and hard about your personal balance sheet, about your family, about your husband or wife, and make sure everybody can absorb that risk because it can be an extraordinarily stressful time.

Yeah, I appreciate the transparency on that piece. I think one of the things that's the core of this initiative is trying to encourage more people to get into space, encourage people to take some of these risks, understanding that there is a likelihood of success on the other side of it. But you do have to be prepared for when will that success come? Is that success through portfolio optimization or is that success through an exit three years, five years, seven years down the road? And if that's the case, that check may not come in the way that you anticipated it for a little bit of time so you got to have something to sustain you in the middle. So appreciate that transparency there.

In that same vein, having to take a look at your personal balance sheet, thinking about what other things you have going on, I would imagine you're still maybe particular about who you take capital from, when, where and why. What are some of the table stakes when you're thinking about who's going to be a capital provider? Be it debt, be it equity, whatever it is I imagine you've got sort of a thesis around that. What would you mind sharing that with us?

Look, again, it's extraordinarily important. When I was in more traditional committed fund, we still thought a lot about what's the nature of our debt partners, for example. Because no matter what the spreadsheet says, deals don't go straight up. There's usually ups and downs. And if you hit a air pocket, you want to know you have a good partner that's not going to freak out or pull the plug.

That said, it's even more important to have a good partner when you're an independent partner, independent sponsor. We've had deals where groups have flaked post-LOI and you got us to deal risk, you got will the deal close because you had to introduce them to the seller? The seller's like well, "What happened to this other group?" And so for me, there are a couple of really important considerations. One, does the deal fit the, I don't know, ethos of the partner that you're partnering with? No matter what type of investor you are and even in most flexible groups, everyone has to have a strike zone implicitly or explicitly. Type of size, type of risk they like to underwrite, type of people they like to work with because that's just how institutions and people are, right? You get comfortable in a certain space.

And so I try to understand does this really fit what they do where they're comfortable? Because if someone's a little bit on the outside corner and they're a little uncomfortable, and they learn something in diligence or something happens post-close, they may not react in the way that's healthy for the business or the transaction.

I think the second thing is, are they high integrity people I can trust? Because the most important thing I'm going to be risking is my reputation, and my time and my money. And so things happen. There's no way to predict every twist and turn in a deal or a life of a deal. But if there's a character alignment or integrity, you can talk about it, you can work through it. There's a trust level to say even if you don't agree on everything, there's a way to work through it.

And the last thing is, I don't know what the right word is, but maybe credibility, certainty of close, certainty of being a good partner post-close. And the good thing now is because there are more transactions in the independent sponsor space, and because they're more capital providers that are consistently in the space, you can check each other out. Moreover, the smart groups know that their reputations follow them and so if they care about their reputation they'll do the right things more time than not. And I think that's what you want. Because you're in an incredibly vulnerable period as a sponsor if you get the wrong part.

I've seen independent sponsors on the path of creating value and they would say that their partner, just because they weren't aligned and that misalignment ended up destroying value. One wants to exit, another one doesn't. One wants or fire the CEO, other one doesn't, right? And how do you create an alignment so that you're both looking at the same things and have some same framework to make decisions? You try to do your best to make those decisions up front. I've been really, really fortunate that everyone we've partnered with have been great. And we've been through a lot of difficult situations and difficult conversations, but we feel like that's been extraordinarily fortunate.

What's that alignment look like beyond the capital providers when you're thinking about potentially bringing in an investment banker? Or what law firms you align with? Because as you mentioned with these independent sponsor deals, the certainty to close I think it's been ratcheted down just a little bit from sort of traditional strategic M&A transactions. And so you got to be prepared for how to deal with busted deal fees, including QVs and legal spend. What have been some ways that you've mitigated some of the risks that can happen if you've got a busted deal?

So a couple things. I think the first is I'm fortunate in I worked in these firms. I think I know how they think, and I understand their constraints and what's important to them. And so that helps me maybe get to the heart of the matter a little quicker. The second is I just ask for alignment. So we asked them to pick up some of the busted deal fees. Some firms are better able to do that than others, but we explain to people it's not just the money, it's I don't want you window shopping.

If anyone can say, "Yeah, I love this deal, it's under LOI, it looks great." It's like, no, if you walk, I want you to feel a similar amount of pain to me, and you still won't feel the same amount of pain because you're going to absorb it in some big institution. It's my personal balance sheet with a small team. And so that's one of the first places I try to get some alignment.

The second is because my background's more in control buyouts, we kind of view it as it's our job to run the whole deal. And so we will pick our service providers for the most part. Now it doesn't mean we're not open-mined if someone has a specific thing, but unless they're going to commit the capital upfront, they can't dictate all the service providers. And so we have had the good fortune of working with some different service providers at different stages of the deal. And what we try to do is make sure there's alignment with the capital partner, with who they are, their rates and their style, their quality, their reputation and those things. And that's part of signing kind of exclusive term sheet.

We had one group at one point who was like, "Yeah, QVs are fine but every deal we do has to have an audit." We're like, "Okay, I hear you." Audits cost a lot of money. They take a lot of time. We ended up saying, "We don't love them but if we do it, you're going to pay for it." And then [inaudible 00:20:45] well you can't just isolate that one so you'll pay for part of it. But we ended up working it out such that again, there was some shared risk on that. And they brought in a very particular group that they wanted to have in for every one of their audits.

And so I think we try to mitigate that. And we try to be upfront with, if we were doing a deal together, hopefully we would develop a long-term relationship and partnership so that things may happen in a particular deal but if we're going to be in this business, there'll be other opportunities to create fees for both sides and maybe some of that will roll over or something. And so I think for us the idea of kind of long-term partnership is one way to mitigate that so everyone that we deal with understands we're going to make sure you're not left holding the bag, but we might need some flexibility here so we can all share a little bit of risk.

And I think as a firm, that's our approach is we're committed to the independent sponsor space and recognize that when you're a partner and you're developing a long-term partnership with someone, one of the things you don't want to do is I don't want you to feel like you got to do this deal because you've got whatever number of legal fees hanging over your head. And so beyond whatever discussions need to happen with the potential buyer or with you as the buyer/seller and in some of the other fees you incurred, and we're going to have a conversation about well maybe we can park some fees here and if you get ready to do another deal down the road or even a series of deals that we can find some creative ways to spread the love across the entirety of the relationship. And I think that's something that if you're going to be a service provider in the space, you really got to be uniquely aware of and be intentional about making sure your client knows that heading into the deal. So all good stuff.

Now the meat and potatoes of what I wanted to talk to you about today is you recently had an exit. And wanted to talk through the portfolio company exit. And could you just to start us off, give us a little bit of background on that transaction and how it came about?

Yeah, so our first deal was a Planet Fitness franchise. Planet Fitness is the market leading health club fitness provider in the country. At the time, we did this deal in 2012, not many people knew about Planet Fitness. I hadn't heard of it. I had in my past invested successfully in a business called 24 Hour Fitness when I was at McAllen [inaudible 00:23:38] we made about 11 times that money. So I knew a little bit enough to be dangerous and this particular deal really fit our strike zone. It was about five, five and a half EBITDA, it was fundamentally sound, it needed some help managerially, it was under managed and it was pretty steady despite being under managed. It couldn't grow or management hadn't figured out a way to grow it. And they were willing to roll over 15%, the sellers were, into the NewCo. And we basically could afford it, right? Because it was a little bit of a hairy, complex transaction.

So we closed the deal. I put in some money. We brought in a group called Brightwood Capital, did the debt and the equity, another African American owned group. They were really more of a debt oriented SBIC. And I was the executive chairman at close, which basically meant I was the neck that could be strangled. I was holding myself with, I'm accountable because they didn't have a traditional CEO. I pretty quickly realized it needed more than executive chairman, it needed a CEO. So I became the CEO.

One of my colleagues, who's now our director, basically became the CFO. And some of our kind of operating affiliates helped out and they were like one of the COO. And we kind of built in the team. We ran the business for a couple years. So phase one of Planet Fitness was we were clearly the sponsor. We had an investment thesis, a buy and build strategy. And we had to fix the business, grow the business. And we grew the number of units from 15 to 50, and EBITDA from five to 20 pretty quickly, couple years.

Then we started bringing in a more traditional management team that was better than we were. And at that point, Brightwood was getting ready to raise another fund and they were like, "Hey, this been a good deal for us. We going to kind of book this so we can sell and we can raise more money." And we said, "Well we just got this new management team, we got these new growth initiatives. Why don't we just buy you out?" So we raised a small kind of institutional fund that was more of a special purpose vehicle to hold that Planet Fitness asset, maybe did one other deal. And they stayed in the debt and kept a little bit of the equity, but they earned a really nice return and we were doing a lot, more or less the same thing we did, but as a more traditional sponsor with a little bit more equity because we never had patient equity capital, we were disproportionately dependent on debt. That allowed us to grow a little more aggressively. And so we went from, I don't know, about 50, 60 units to over a 100.

And then we got to 2012 and candidly we were thinking about selling, we're getting ready to run the process. And fitness clubs in 2020 got hit by COVID. And so things changed from interviewing bankers to spending all my time with landlords, and lenders, and governors and mayors trying to survive. I mean it was all hands on deck. We had to lay off 1,500 employees. And so it was a really challenging time but we kind of had those two chapters, right? Chapter one was a little bit more operationally and sponsor in it. Chapter two was a little less operational but still pretty hands on, more traditional. Merrill, where we had a good CEO, good management team. And then we had this kind of extraordinary event during COVID. Make a really long story short, we got through that period.

I think we got through it stronger, candidly. And actually kind of started shifting our thinking. We realized we're going to survive and we may even thrive. 20% of our competitors are dying or gone. Maybe 25% are going to go. Maybe it's surprising opportunities here from an acquisition perspective. There are probably sites and other things that are available that wouldn't ordinarily be available. We worked out something with our lenders, which happened to be Brightwood and some other groups that had joined in, but they at least had some history, and we had some history and credibility with them. Just kind of said, "Look, we're going to put our foot on the pedal here, and let's both think offensively and not just defensively."

And this was kind of really early 2021 when the vaccine had just come out. And so we built a pipeline and we were getting ready to go play offense and more luck than skill, a couple of groups started knocking on our doors saying, "Would you transact?" Initially, I was like, "I'm not even talking to you guys. I don't have time to play these games. You're not going to buy me for 50 cents on a dollar. We're not desperate. We have a plan. We have a capital structure to allow us to endure." Some groups were like, "No, we're not trying to buy you on the cheap."

But in my mind our EBITDA was half as much as what it normally is because we had all these closures and all this mess in there. And I couldn't take a management team that was really focused on creating value that had just come through, and hadn't even finished getting through this really difficult tumultuous period and distract them with a transaction, and even make them think that it was possible to get out early. Because I had kind of been very consistent saying, "It's going to take two or three years us to build back up to where we were."

Ultimately, we had a number of groups that were kind of interested and then I was bidding on some other deals in similar situations. And people were looking through the pandemic affected EBIDTA. They were making adjustments. They kind of could understand well if we weren't closed, this is what you make. Those deals were getting financed [inaudible 00:29:55] those deals are getting financed, maybe my deal getting financed. Maybe it's worth talking to some of these [inaudible 00:30:05]. So we talked to three of them and didn't hire a bank. We basically became the investment banker. We're pretty candid like, "This is what's going to take for us to engage. This price, we'll talk."

And long story short, one group, private equity firm ended up buying controlling interest. We did, myself personally and some other the other partners I worked with did roll over some of our personal money. But the fund got out of the hole. They did very well despite COVID. And so from beginning to end, I think if you were an initial investment, well over 12 times, but each segment along the way also made a great return. It was for our management team and great for the people that had been a part of it, but it wasn't straight up, it was just a lot of ups and downs.

So going through that process and having a banker lead it, I know that... And no disrespect bankers out in the industry. I mean those guys drive really, really, really hard and they're looking to get a deal done for obvious reasons. How are you able to manage the process and get to the right buyer from your seat? Because I would imagine that the right buyer was something beyond just check size given that you had just brought on a management team and you were thinking about potentially rolling over some of your own money into the deal. So viability post-close is a pretty important thing to you at least in part at this point. So just curious how you drove that process and what the right buyer in your mind looked like.

So the three groups we engaged in all kind of knocked on our door, but we had been around the M&A in the space long enough that we knew what a right buyer looked like so you could recognize it when you see it. One was a family office, one was kind of a strategic, one was a private equity firm. And all of them had a thesis as to why it made sense for them. Part of what we were trying to assess is did it really makes sense? Could they hit the price that made sense? And were they going to deliver the certainty of clothes that made it worth us taking the risk to go down this road, right? Because in normal times you maybe can play these games. We were still in very fragile times, so wasting a lot of time, and money and energy wasn't something we were interested in.

Our best mitigate candidly that we had built a business that we were prepared to hold. And rather than hire a bank, we could credibly tell the group, "Look, if we engage, we know this is a hairy story. We're going to tell you what we're willing to engage at, but you're going to have time and have an exclusive look to do your work." And so we customize the process that would kind of mitigate the risk and share the risk around these parties. And so I think that in some ways increased the probability of success as opposed to more traditional option where we just hire a bunch of people, because I've been on both sides of that. If I'm making the auction, I'm like, "Well there's all this hair. And I'm going to spend all this time. And I don't know what the price is. I don't even know if this is going to be a good use of time. It's a low return on... I'm not going to spend time on it."

As opposed to, you really like this space, we're going to be very transparent about what we have and what we're willing to do. And if you're willing to be in that neighborhood then we can talk. And you got a real legitimate shot, one in three or whatever it is, to take this off the table. And so that's what we did.

To your point about was it more than just the traditional considerations? I mean for us, we didn't have to roll over if we sold with one of these groups, but I think we kind of wanted to and we were open to it. And for some people that's a signal, value. But we basically felt like this is the business that had enduring... And so being able to signal yeah, we're open to rollover, I think was important to both sides. And the partnership thing becomes more important.

I also was effectively a founder. So me and my team felt like we built this team. We literally handpicked every management team member and they had invested a lot of their time, was really depending on this for their own wealth creation. They hadn't been able to take money out much and hadn't had a wealth event. So making sure they were going to be in good hands was a consideration and making sure we were partnering somebody that we felt could take the business to another chapter, another level. And we felt like we really found that with this group TowerBrook. They were honest, they were trustworthy, they looked like they'd be really good partners, they were smart and we thought they could be value added. And I think I'm still on the board of that business, they've proven to do all those things.

I think about some of the things you just said about having a business that you'd spent a great deal of time getting to a really good spot. Then you've got the pandemic, which as you mentioned, for the wellness business where it's harder to come up with ways to make money virtually. When really you got to have people in the building using the equipment, taking advantage of the ancillary services you provide. And so now you're getting ready to exit this business and sell it, and you're in a really different position than a lot of people who are at that exit inflection point where their balance sheet, their financials are as robust as they've ever been. And then you've got yours where, "Look, we were here but now we're here and here's the reason." And obviously people were willing to get creative in looking through that.

But now I think through that, we found ourselves in really good time in the deal space. And now as we peel through the first quarter of 2023, we're almost back at sort of another inflection point where debt costs a lot of money. We've got banks on the brink of failure. Folks are a little bit more skittish to do deals. Are there any sort of lessons learned from that experience that you think are going to be applicable as we continue to press through what many are predicting to be a little bit of a difficult time in 2023?

I spent a lot of time on this with my team and my portfolio company CEOs. I'm a little older, man. I've been in the game a while. I've seen a lot of cycles. I mean, I got in this business in 1995, so I remember 2001, 2008, COVID. A lot of people haven't invested through, particularly at a senior level, a lot of cycles. Things can change. Things will change. And I do think we're at a particularly volatile or risky period right now. And I think the world recognizes that.

To your point, it creates a gap. There's higher risk. Buyers are going to say, "I got to get compensated for that risk and so I need a lower price because things may not go well." Sellers are like, "What are you talking about? My boy last year just sold it nine times. Why isn't it still nine times?" You're like, "Well, all the reasons you outlined, debt's higher, risk premium's higher." But they're like, "Whatever, man. I've been working on this my whole life. Why would I take a discount?" And so it creates a disconnect to get things done.

I think for us, again, we're very focused on creating value, making the pie bigger for all the people involved, all the parties, all the stakeholders. And so, we tend not to be in super aggressive auctions, but we'll participate in them certainly when we have an angle and it fits our strategy, but we try to be in situations where one plus one equals more than two. That means that if we're buying a business, hopefully they view us as value add. If they view us as value add, we almost require that there's some role, some sort of skin in the game. Maybe it's a seller note or something. But that means that second bite is valuable in some way. And so that's a currency that you can play with to bridge valuation gaps either explicitly through ratchets, or implicitly through if we add some value, you'll get dollars and you'll get some shares. And that shares should be worth a lot of money in the future that you leave to your kids or keep yourself.

Second thing is we have used earnouts. The last three deals all have earnout component to them. We don't love earnouts, but we've been fortunate that we've been able to structure earnouts to create good alignment. So when these unexpected things happen, sometimes it was because of COVID, sometimes it was cause of things you couldn't predict. But a lot of times what we found is like, look, we both can acknowledge this is a risk. We may not know how it's going to turn out. You may know who's going to pay for it, but if I can give you enough cash that you can feel comfortable, we're going to have to share this risk here going forward. And since you think there's no risk, you shouldn't be scared or take a little bit of it yourself. And if they're not willing to do that, then maybe that's not the right deal.

And so the last thing I would say is can you focus in areas where, for us, again, it's a little bit of a more limited set of competitors. So are you focusing in areas where it's more of a one-on-one type of situation or one-on-two, than it is 1,000 people bidding on a deal. And I think that just the dynamics change because then you can really have real conversations as opposed to, "All right, management meeting's over. You have to go home and tell me your best bid," right? Because we don't know enough and they don't know enough. And so the ability to bridge these valuation gaps are partly relational and partly, again, I go back to work partnership. Can you find a way to get something done? If the answer is no, that's okay, but at least you can spend the time to explore can it work? And you can't get those customized solutions in really limited rigid processes.

Well, I agree with all those points. Appreciate you sharing a little bit about that transaction.

I want to pivot one more time here and kind of talk a little bit about the Black professional in private equity and finance ecosystem, but also that sub ecosystem of independent sponsors. I think we at McGuire Woods, we're as a firm particularly focused on the independent sponsor space. I don't know another firm that does more deals in that space than we do.

And shameless plug, we have a huge independent sponsor conference in Dallas every year that we've outgrown our host hotel and our moving it to new space. And we'll probably have 1,300 people at our next one. We'll be a mix of capital providers, and independent sponsors and lenders and so forth.

But kind of drilling down on the Black folks in that space, I can only imagine that you've experienced some challenges that are unique to the Black experience in the independent sponsor space. And obviously we don't want to name names or make anybody look bad, but interested in hearing some of the themes that are developed that you've sort of noticed over your time in the space. And what are some of the mitigation strategies that you've learned, developed and deployed over the course of your career to overcome that gap between people say they want to do business equally, fairly across the spectrum of people that play in the space, but then the system doesn't necessarily support that mantra? And I know people mean it, but at the same time the system's not necessarily set up for folks that look like you and I to have some of the same advantages that our counterparts do.

And so just curious if you drop a couple nuggets on us on what you've seen and how you've overcome those things.

That's a great question. And I appreciate having a venue to even talk about it because it's not always easy to address.

Look, I got in the game at '95. When I was in private equity I could count the number of Black people in the game on one hand. It was just really small. In fact, I used to look for proxies like do they have women? Do they have Jewish people, maybe Catholic people? You just look for any semblance of diversity in the private equity thing to say, "Okay, there's some open-mindedness here."

And I don't know, it was always interesting and subtle. I remember my first... Well, like I said, I won't name any names. And I ended up loving this guy who's one of my best bosses ever. But I remember in the middle of interview he basically said straight up, "We never hired any Black person before." I was like, "Well okay, I never worked any place that did. So what's next?" But I appreciate what probably was against HR's policy or something. But I really appreciated his candor being direct. Because I think what he is basically saying is, "We may make mistakes, can you handle that?" And I was basically like, "Look, I'm good. I don't expect perfection here. I just want an opportunity."

I think things have gotten a lot better as far as representation. It's still really hard to be a player, a senior partner at these firms. But I do think the talent is in the pipeline and we're very talented folk. And so it will happen just because of hopefully competitive pressures.

But for me, the three biggest barriers have been for lack of a better word, cultural capital. So some of this can be just... And I'm always trying to be careful. I can think of in one of my gigs, one of my PE firms, I was pretty senior. And I remember coming in, I thought I was going to be responsible for a particular territory. And then some other guy that had been there was like, "Yeah, you don't really want that. You want this other territory so we're going to switch." I was like, "Why do you want it?" If it's so great, right? He was like, "You don't mind, do you?" I'm like two days in the job. I had no logical way to say what territory is better or not. And even if I did, I'm not going to come off like a team player so I was kind of in a bind. I can't demand that, but I was like, "I don't know if I want switch territory." It made sense for me since I lived in this particular area to run that territory.

So ends up that I think the senior guy just didn't want any trouble. He was like, "Yeah, you don't care right?" I was like, "I kind of do care, but do whatever you want to do. I'm the team player." He's like, "All right, we'll just switch." Ended up, it did put me at a career disadvantage because that other territory is just more fruitful and lucrative, which is kind of predictable. Was that because I was Black? I don't know. I doubt it, but it certainly is possible.

But at the cultural capital of me not having a lot of people to talk to about how to deal with this, and I knew I was the only Black or brown person around in that context. It can make me double clutch a little bit. It can make dealing with all these kind of subtle political, structural issues a little more difficult. Particularly when I talk about the second barrier, which is basically to be in a partnership model means that you not only have to be good at what you do, but you have to get along. You have to connect. You got to feel like Ken. And I remember my first few jobs in PE, I didn't fox hunt, I didn't golf, I didn't want to kick it with them on the weekends. I was doing a completely different set of stuff. After work we were going to completely different areas.

So I didn't have that lubricant to be like [inaudible 00:48:01]. Which counteracts a lot of things, right? Now, maybe I moved a little bit, but I would argue those firms have to move a little bit because back then the partnership groups... And they're getting a little better but I'll tell you, it was like 99% homogeneous. They all went to a good undergrad school, maybe top 10. They all did some investment banking, usually an M&A from a handful of porch bracket firms. They all went to HBS or Stanford. Then they expanded a little bit from the top two to maybe the top... Then they were in PE. And they're all white men and they all lived in particular zip code, extraordinarily homogeneous. Is it a little better? Yeah, but that's still the weight of it.

And so that means it's a certain lived experience. There's a certain lens through which they look at the world. There's a certain lifestyle. And so the things that I was dealing with for fun or for challenges, were just different. And so that means it was harder to connect at that deeper level, which is really important if you're saying you're going to be my partner. Not just an employee, but a partner.

I think the third thing and the last maybe thing, and it's been a little bit of a challenge, is being able to bring all of myself to work. Some of this was my own evolution. How do I do that? How much of that do I do? What's appropriate? Am I going to scare them off, right? And again, it's easy for me to say now, but I was like, "I don't care." I had to get to a point where I had to learn to be my best self. And if it worked, great. If it didn't... Because it's going to be hard and a really competitive business in a competitive industry to win playing someone else's game.

And so at our firm, and I wouldn't even say it's conscious, but we work really hard to get a diverse set of people. We have super talented people that have high integrity, and really hard-working, and they're smarter than me. And I think that allows us to make better decisions and it allows us to be more tolerant and see different things. And I don't know if we have to work that consciously at it, but it just comes from an underlying philosophy of bring all of yourself, the business. Because that's how you'll be special, that's how you'll be distinct and that's how we'll get the best thinking.

Again, we have, I'm Black, people from different countries and different people of color. And I think we want to do better in that regard. And we try to encourage our management teams to do better in that regard. And we really are proactive about it. It's not always easy, but I think it starts with that sensitivity around do you really want to see all of somebody? Or do you want to see them as a means to an end, or a small limited lens of who they are? And I think you're underestimating the power of the talent that different perspectives can bring.

Appreciate the candor there. And I think there are a lot of parallels between private equity and big law. I mean, I don't remember the numbers exactly, but somewhere in that, and I'm probably being generous, that 2% to 5% range is what Black lawyers make up of big law. And the number gets smaller as we parse out for gender at the partnership level. And so it's a rarity to look across the aisle and see someone that looks like you sitting in a partner seat, leading deals or being a thought leader in this space. And it's not that, I don't think that any of us want a homogenous environment, but we want one where again, like you said, you can bring your whole self to the table and you can use that to harness our differences and create value across the spectrum of diversity in the workplace and in this particular industry. And we're getting better on both sides, both legal and PE. I think this initiative and having folks like you on this podcast is going to be a catalyst for that type of change.

A couple more questions in this space and then we'll close out. But in that same vein, you talk about being able to bring your entire self to the workplace. And as you were looking for capital/provider sourcing deals, leading teams. What are some of the misconceptions that folks have about Black independent sponsors as they're at marketplace either looking to buy or sell something?

It's a great question. So much of what we do is around credibility because you pretty quickly got to assess is this good use of time, money, energy, et cetera. And being an independent sponsor in general, you lose credibility. If I was working at Windjammer or KKR or Summit Partners, your card gives you a degree of credibility. Your institutional capital gives you a certain credibility. And so by not having that and by being a person of color, particularly being a Black person, because we have historically been at the lowest in the socioeconomics standpoint. I mean there's no question about the wealth gap and how persistence that has been. And we're not the group that people think of as smart. They may think of as athletic or whatever. But whatever bias they have, it's not like, "Oh, let me let this dude run my money." That's not first thing that comes to mind.

And so I'm sure it's a little bit of a disadvantage because we all have unconscious bias and to ignore that would be foolish. I think there are ways to mitigate that by just being conscious that people have bias and you have to establish credibility however you can because no one would become an independent sponsor, I won't say no one, in general because of the risk that you have to absorb. You got to be pretty confident, pretty crazy or some combination thereof. So being able to communicate to the world why you're confident/crazy because you're betting on yourself. The thing I like most about it is, and why I think it's inherently a more entrepreneurial pursuit than being in a more traditional fund, is there's perfect alignment. You don't make money unless your investors make money, unless your management team make money. There is no leakage. You can be in a big fund and maybe this deal doesn't work or maybe the management fees cover you or whatever. That just doesn't work here.

And so there's a reason you're doing it. And if you're good and you're confident and you're competent, it's got to kind of get that energy out into the world so it becomes contagious. And think about how best to maybe frame it, but there's got to be some reason you and your loved ones think that this is a good use of your time.

No, I appreciate that. What are some things that we could do to encourage more folks like you to look at this space as a viable option? And it's not to say we just have tons of people in more the traditional committed capital vintage fund type of space, but at the same time, we're trying to spread the talent across the continuum. How do we best do that? What are some things that you've done to encourage others to look at the space or even providing, "Hey, man. I can't spend all the money. Here's a list of capital providers that might work for you." What are some of those things at the top of your list?

Look, so there's some things at a personal level, again, wealth creation, around people of color and Black folk in particular is really important to me and my family. So my wife and I are kind of starting or going to support investing in lack of a better word, a nonprofit initiative that's going to try to create more entrepreneurs of color to own franchises. So we've been in the franchise business for a long time. We see a lot of people work, and consume food and things like that at franchises. We're saying, "You have the ability to own and run these things." Part of it's a mindset shift.

I think similarly in private equity, more of us are going into private equity and that's great. And more of us are in the private equity ecosystem, which is great. I think more of us need to think about how to own the means of production and not just work for people. It's a completely different mindset and it has no downside because if you think about how to own something, some of the pitfalls we talked about when you're working for somebody, you're just not as afraid. You'll be your best self because you're like, if they don't treat me right I have an independent skillset that is portable. I work for, whatever, Ruben Inc. And I can go out and do this myself or take it to some other firm or whatever. And I think it makes you a much better professional.

Third is opening up, going to the business schools, and podcasts like this are extraordinary, but letting people know there's so much more than the traditional path. So for me, traditional path was never quite as attractive. That's why I kind of jumped off and was like, let me start my own fund. And then it was like, well, let me jump off and go back to a big traditional fund, but use that as maybe a learning laboratory to then go out and buy my own company or do other deals.

And there's so many different ways to kind of play this private equity thing. But I do think the idea of controlling your own destiny is more rewarding than people might appreciate. And I think a lot of us can get, I don't know, subdued or get too used to the trappings of certainty. I got a nice check, I got a nice life, I got a nice car. And I suspect when you look back earlier in your career, that wasn't the reason you got in the game. You wanted to create something, you wanted to contribute, you want to have an impact, not be a cog in a wheel.

And the last thing kindly, it can be just way more lucrative, and way more fun and give you an opportunity to have a canvas to paint on, to leave your fingerprints, to leave a legacy. Because it's really, really rewarding to feel unconstrained and empowered that you can choose how to spend your time and how to design your life and your professional career.

It's harder, at least at certain points, maybe early on. But from my experience, it's been way more rewarding than trying to do the things that you think other people value so you rewarded by them, get promoted by them. As opposed to you doing what creates value, you doing what creates wealth, you doing what makes a lasting impact on the communities you're trying to serve or people you're trying to work for. It's a completely different mindset. And I think more of us need to recognize how talented and gifted we are. And we're all blessed. Don't be afraid to use it. Take a shot. First thing that happens don't work out, you go work back for the man. You got back out there and do it again, right? There's do downside. We can get this done.

Yeah, great advice. Well we're going to wrap up here. Usually at the end of these I try to do something a little bit fun that'll allow our listeners to get to know you a little bit better, but also give them a couple of things in addition to sort of the private equity substance that they got from our earlier conversation, but some things that they could do to enrich themselves as professionals.

And so I just got three quick questions, rapid fire. You let me know the first thing comes to your mind. And then we'll close out. But if you could have dinner with one person, dead or live, who would be and why?

[Inaudible 01:00:35] I'll leave it at that.

All right. Good choice. Recommend one book that's been transformational for your career.

The Bible. Same thing, self-explanatory. Read it.

Awesome. And I think maybe we've already kind of gotten it a little bit for you, but single best piece of advice you've received from a mentor, personally or professionally?

I would say I'm paraphrasing but, "Be the best you that you can be. Be authentic and recognize you're who you are. Be the best at who you are, as opposed to just modeling after..."

Awesome. Ladies and gentlemen, Omar Simmons, Exaltare Capital Management. Thank you again for sacrificing your time, and sharing your wisdom and experience with us. We really appreciate you for being willing to be on Accessing the Pipeline. Thank you.

Thank you for joining us on this episode of Accessing the Pipeline. To learn more about today's discussion, please email host Rubin Pusha III at rpusha@mcguirewoods.com. We'll look forward to hearing from you.

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