Marilyn Adler and Liddy Karter identified a gap where credit fund managers were getting larger and the lower middle market was getting ignored. They combined forces to “really go after the market,” forming Mizzen Capital. “We'll start with a company when it's two to five million of EBITDA and then help them with add-on acquisitions to get to their target EBITDA,” Marilyn says. Liddy adds: ”The steady returns come from diversification. We can pivot from one of several sectors.” In this conversation with host Ann Dorsett, the co-founders and managing partners describe their complementary backgrounds and their approach. Tune in as they reveal how they keep leverage low with their portfolio companies, why diverse teams price risk better, and when a warm referral from an aerospace CEO turned into a three-year relationship.

Connect and Learn More

☑️ Liddy Karter | LinkedIn

☑️ Marilyn Adler | LinkedIn

☑️ Mizzen Capital | LinkedIn

☑️ Ann Dorsett | LinkedIn

☑️ McGuireWoods | LinkedIn | Facebook | Instagram | X

☑️ Subscribe Apple Podcasts | Spotify | Amazon Music

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.

Welcome to Deal Us In, a podcast brought to you by McGuire Woods. Deal Us In promotes the advancement of women in private equity and finance through conversations with women in the private equity and finance space. These conversations provide both insights and practical takeaways to inform your deal work and enhance the culture of your organization. If you're ready to drive the industry toward a more inclusive and diverse environment, then it's time to come to the table.

Hello, welcome to another episode of Deal Us In, a podcast brought to you by McGuire Woods by and for women in private equity and finance. I'm Ann Dorsett, counsel with McGuireWoods, and with me today are Marilyn Adler and Liddy Karter, both founders and managing partners of Mizzen Capital. To start, can each of you share a bit about your path to Mizzen Capital and how your collective experience shaped the strategic vision of the firm?

Hi, I'm Marilyn Adler, one of the founders of Mizzen Capital. My background has been in the SBIC small business investment company industry for many years, over 30 years. And what I was seeing was that as credit fund managers kept getting larger and larger, they were ignoring the lower middle market. Used to be under 10 million of EBITDA, it was a desk kill. Then it became 15 million of EBITDA and then 20 million of EBITDA so that companies, these credit funds wanted to put out a minimum of 50 to $100 million and the smaller companies were being largely ignored. And that's when I reached out to Liddy that we should launch Mizzen Capital to really go after this part of the market.

So the relationship with Marilyn really started in my second operating company. I started work traditionally in M&A at Morgan Stanley, but then decided to become an operator. First company was as CEO of a manufacturing company, which we sold to a public company. Second company was CFO of a software company, which is where Marilyn and I met, and she was the first investor there.

Great.

I then went from there to, after I sold that company to a public company to running credit funds and have been doing that ever since. It's been tremendous for me to see that. And because of my operating experience, I think I identify very closely with the CEOs and CFOs understand what they're going through. And also it enables us to be their first call if there's a problem because of that close relationship. We tend to be very supportive investors and we've had a lot of experience. This will be my eighth credit fund coming up. Marilyn and I both have had top returns, but we've always focused on the lower part of the lower middle market, and partly because of my operating experience, it's where we really have the most leverage.

So what core market inefficiencies or borrower needs did you identify that convinced you that Mizzen could outperform traditional credit strategies?

So in the lower middle market, there's a lot less competition and these companies need a lot of handholding. We have to work very closely with them. With larger credit funds, it's become almost a commodity. They're just pricing the deals as low as possible with no covenants and you're just not really adding value. Whereas in the lower middle market, companies are looking for advice, not just money. We have covenants on all our deals. And a lot of our companies in the home services sector, for example, are doing a lot of buy-in builds. So we'll start with a company when it's two to five million of EBITDA and then help them with add-on acquisitions to get to their target EBITDA. Could be 15, 20, 25 million, and then wish to sell to a strategic or another private equity fund.

So Liddy, please describe Mizzen's investment strategy and the specific components of that strategy that have contributed most meaningfully to strong performance and attractive risk adjusted returns.

Thanks for asking that, Ann, because that really is what we focus on every day, which is how to diversify our portfolio to give steady returns and also how to maximize those returns by following that strategy. The steady returns come from diversification. We can pivot from one of several sectors. We focus on manufacturing and services right now. We've kind of gotten away from energy transition, for instance, a lot of externalities in that market, and that gives us the ability to not only pivot, but also optimize. We've had really good luck with optimization around where there's great opportunity. Right now, we're doing a lot in business services, and that's also mitigated any risks from tariffs or other trade policies or tax implications. So those two things together with the fact that, as Marilyn said, we're in a slightly less competitive part of the market by staying in the lower middle market, companies of 15 million of EBITDA and below when we get in, so that we're able to optimize not only our interest rates and our spreads, but also our covenants, and that protects us.

So there are two parts of a return. One is the money you make and then the other's the money you keep. And we've been very fortunate to not have losses to date by staying in this sort of senior position on the balance sheet in good companies that are growing. Is that helpful?

Yes. Thanks very much. Marilyn, we know private credit is competitive. What sets Mizzen apart in terms of underwriting discipline, portfolio construction, and deal sourcing?

So we're really looking to keep leverage low with our portfolio companies. We're typically around 2.8 to three times debt to EBITDA. And we do that to give a little cushion in case things don't go as planned, but really having this lower leverage and working closely with the companies, we set covenants a little wider than where they currently are, so that if there is an issue we're on it immediately and diversification where again, we're manufacturing, business services, IT and software. And because these companies are smaller, there's just a lot less competition in this part of the market. So it's not like a banker's going out to 20 different funds to compete on this. We're usually the phone call, can we get involved and do something with this company? And we always try to think of a ways of how we can do the deal, not how to kill it.

We have strong deal sourcing. Liddy and I have both been in the sector for over 30 years. And so typically somebody, it might be a CEO who refers us to someone in his network. We usually are getting a warm introduction to a company, seeing if there's some way we can help. And if there's not, we always like to refer it on to others who we think might be able to do something.

Excellent. So what are the consistent characteristics in the companies that you support that align best with achieving outsized returns?

We're a pretty fast growing team and fund, and so we've had to be very systematic and careful and very disciplined in our strategy around company characteristics. We're looking for companies that are under 15 million of EBITDA, typically with at least a 10% EBITDA margin that are growing in sectors that are growing and stable, where management is functioning independently. We're not looking to take over companies. We want a partner to provide the capital. We don't necessarily want to own it and we don't even want a significant equity stake. So our goal is to really be the credit partner that these companies need to grow sort of like a traditional bank used to be. And we're also not looking for technology risk or execution risk. So we're looking for a management team that's either been there for quite a while or has significant industry expertise.

Mizzen emphasizes relationships. How have your professional networks assisted you in terms of sourcing deals, evaluating opportunities and supporting portfolio companies?

In terms of our networks, we have relationships that go back over 30 years with investment bankers, lawyers, accounting firms, as well as we've been going to trade associations and industry conferences. And so our deals, our relationships with our companies are very important. Some of our best references are with our portfolio companies. So it's really important that we treat people right. And so we love getting the last look at a deal or a CEO just says, "I want to work with you because I know you'll help me grow." And so having these strong relationships in terms of sourcing, having the team that we have, which is a diverse team in terms of evaluating opportunities, and then we have a strong portfolio management system that really helps us to manage the portfolio. We get monthly numbers from our companies, and if there is a problem, we are on it very quickly, which is the key to protect the downside.

Please share an example of where your network, especially a diverse one, opened the doors to a compelling investment or strengthened diligence.

That could be a question about almost every one of our relationships. So many of our companies and investments come from our networks, that relationship structure, but one in particular stands out. We had made a loan to a CEO who had paid it back, was a great relationship. This was in aerospace manufacturing. He's actually become an investor in our funds. And I will say that that's not unusual. Many of our CEOs come into our funds as investors because they pay it back. They pay forward the value that we brought to them. So he was contacted by another CEO in aerospace manufacturing who was having trouble getting a loan done in order to buy one of her competitors. It had to be done within a certain period of time. This was going to be an SBA loan with her traditional bank, and they just couldn't get it done in the timeframe.

So we came in because of the relationship with the CEO, warmly referred to the new CEO. We did the deal with her in under six weeks, and we thought it was a short-term situation until she would get her SBA loan, which of course would've been a better rate. But because of our lower amortization requirements and because of our ability to work with her quickly, we have stayed with her now for almost three years and we expect to continue as she has continued to grow, continue to do other acquisitions, and she's referred us to other people. So the aerospace manufacturing world is full of these supply chain businesses that are smaller and many of them doing roll-ups or at least acquiring their peers. And so this has been a very lucrative set of relationships for us and for our companies. We define our success as their success, and this is a good example of where her business has tripled in the three years that we've worked with her.

That's really interesting. Thanks for that. So please tell our listeners the intentional steps that you take to expand and foster diverse networks, and how do those efforts translate into tangible business outcomes?

Liddy and I are both very active in women's networking. We're both very active in PWIN, Private Equity Women's Investor Network, and I'm also a founder of Exponent Women, which is a networking for women. And all of our team are very involved in their cultural networks. And so we end up getting very diverse deal flow that we don't think other groups are seeing. And we're all going to trade associations, industry conferences, independent sponsor conferences. We all go to those, but it's really the relationships that you build when a CEO is giving you a warm introduction or someone in your network is calling you to say, "There's a company that could use your help. Would you mind taking a call?" All of these things, and you don't know right away, could be a year later that someone reaches out to me to say, "I saw you speak at a conference in this city.

I didn't have a deal for you then, but I think I have one for you now." So you just don't know, but you want to stay top of mind for people. We also have a lot of banks that were in our last SBIC, 17 banks, and we really try to build on those relationships in terms of geography to be able to bring them into deals when we are closing a deal and need a revolver or a bank for the deposit base, and they bring us into their deals to do the term loans. It's very symbiotic.

There's a growing recognition that diversity and decision making leads to better investment outcomes. Where have you seen this play out within Mizzen's team or advisory ecosystem?

I think it's important and to think about what diversity means. And we think of diversity as having teams that have diverse experiences. And I think that's not that unusual in the credit space, but we probably take it to a higher level of diversity, which has helped us, in many cases, become more sensitive to the situation of our portfolio companies. And that, of course, is the most important thing for us to be able to put ourselves in their shoes so we understand what's important to them. One example comes to mind of a woman who was running a company that did a lot of government contracting, and she was particularly sensitive to having us as the lender in case we were having to step in to an ownership position, which of course we haven't done, but we could be in that position if required, so that the business would not fail because many of her contracts had to do with her position as a woman and being a WMBA woman owned business enterprise and a minority owned business enterprise in that case as well.

So that can help us actually get a deal flow, a deal done that we might not otherwise have had access to, but I think it also helped us understand why she was trying to structure our transaction with the kind of equity component that she required.

How have diverse viewpoints influenced risk assessment or opportunity selection in a way that benefits both borrowers and investors?

Well, when you have a homogenous team, I think you think you end up over underpricing the risk involved, whereas when you have a diverse team, everyone has different viewpoints and we want to have discussion. We want to welcome people's backgrounds and what they might have experienced on a deal. So it's really important to us to have that diversity of people, which really brings different opinions on every deal we discuss. We meet every day to go over deals. And I think just having the different backgrounds really helps price the risk in better and diverse teams are known to have better results and better investment results.

So looking at the current landscape and market trends, how is the current market environment shaping Mizzen's approach to credit selection, return targets, particularly in the lower middle market?

A falling rate environment is always a tough market for credit funds. You have to stay ahead of that curve. We're moving more toward fixed rate transactions and also trying to mitigate any activities that have government-related contracts or reimbursements or government programs as their underlying drivers. And that's helped us avoid any of the market implications that are coming through new policies from federal government, but also state governments. We try and really just look at companies that are going to be able to cover our loans from a cash point of view based on their market-driven economics.

Are there areas where Mizzen's strategy positions you ahead of broader market trends or dislocations?

Because we lend to a company that's smaller, we build a very strong foundation and relationship with them. And so we get to be very involved in the add-on acquisitions that they're doing. So we might start when a company is at two to five million of EBITDA and then do a number of add-on acquisitions over a few years to get them to their target EBITDA. It's not just you do a deal and you're done. You're very involved in the operations, always trying to be helpful in terms of what they're trying to accomplish. And so it really, in terms of our strategy now is we just want to keep growing with our companies.

Now let's turn to LP expectations and track record. When engaging with LPs, what aspect of your network's strength and differentiated strategy resonate most and how do they connect with realized results?

And it is no secret that this is getting to be a pretty crowded market with lots of dry powder, particularly on the private equity side, but certainly on private credit as well. However, that is largely in the upper or middle market sectors. From our smaller sector, there's a concern typically that smaller companies might be riskier. And that's why it's a little tricky sometimes for us to convince LPs that we're actually in a sector of that lower middle market, manufacturing, service providers that are be to business to business service providers, companies that are providing essential goods and services, not discretionary goods and services. And so when you look at the lower middle market and get rid of all the retail, consumer, all those things that are dominant in the lower middle market and just focus on our sectors, there's actually a positive correlation with smaller companies relative to defaults.

And when LPs come to understand that, it's very powerful for them. And we can demonstrate that based on the significant success of essentially all of our companies and the consistent quarterly distributions that we've been able to provide, which is very unusual for credit funds in the lower middle market. Often those credit funds are getting their returns from their equity yield and their mezzanine higher yield. We're getting our returns from interest and that comes monthly and we pay it out quarterly. And that's a real differentiator, which our LPs definitely appreciate.

How are institutional investors seeing the intersection of performance, network diversity, and long-term value creation?

I think institutional investors are now realizing that having diverse teams is creating increased returns for them. And not only diversity in team, but also diversity in terms of the investments. I mean, there are a lot of women CEOs out there, there are a lot of ethnic CEOs out there just in terms of the diversity just helps lower the risk of the portfolio. And I think institutional investors are looking at the investment committees of funds these days to make sure there is some diversity because they see that there've been higher returns with that.

Looking ahead, as you consider Mizzen's next phase, where do you see the greatest opportunities to deepen returns through expanded networks or targeted strategic focus?

The opportunities for us are partly to build on what we've done, which is to focus on essential goods and services from US-based companies which have US supply chains and US customers largely and are not dependent on exports, although that can be a piece, but not a dominant piece of their customer mix. This leads to risk reduction and better returns in an environment where international work can be very challenging. So we can continue to see that as a growth opportunity. However, the less obvious part of our strategy is to focus on companies where productivity gains are going to be significant. In 2024, we documented a 36% increase in productivity defined as EBITDA realized over hours expended, and that EBITDA increase was directly correlated to automation. Automation, some people call it AI, but it's really like Oxygen. It's very much part of the fabric of what our companies are benefiting from, which is better ERP systems, better accounting systems, better marketing targeting systems, all the small thousand points of benefit that you get from implementing productivity tools.

And for us is key. When you don't see that opportunity in a new company, it's less likely that that company will either thrive or be competitive even, and that's what we're trying to avoid. So we try to look at the most tech forward of companies within a certain sector and those sectors we've talked about, they would be manufacturing, they would be software, but software that's really an enterprise level software. It would be services businesses that are B2B providing essential goods and services for their customers. And when you do that, I think we're going to take advantage of the very significant trends that are enabled by artificial intelligence and also the benefit of trying to keep the risk down of a lot of externalities.

If you could offer one takeaway to emerging managers about leveraging networks, not just building them, what would that be?

Really, your networks are so key, at least for Mizzen when we launched was right when COVID broke out and having our networks was so important because institutional investors weren't taking new meetings, so they were only investing in groups that they knew already. And so having those relationships over many years really, really was very key for us. And it's also very key in terms of deal flow. In terms of your LPs, the deal flow that you're getting, you just need to stay in touch with people and persevere because every environment is challenging and just really key to just keep your focus on what you're trying to attain. We're excited. We have three funds on the platform now, and the end of this year, we'll be launching our fourth fund and just always staying in touch with investors or potential investors, even if they don't come into your first funds.

If you stay in touch with them, they might end up coming into a future fund. So really just networking and staying in touch is key.

Marilyn and Liddy, I really enjoyed speaking with you today. Thank you very much for taking the time to talk with us. Where can listeners learn more about Mizzen and stay connected to your work?

And we love staying in touch with people. As Marilyn said, it's key to our existence. And so we would encourage people to reach out directly to either Marilyn or myself or anyone on our team. We also have a website where we keep all of our deals updated and we also post a regular insights column where we talk about our part of the market, which of course is not bigger markets, but what's happening with smaller companies. And I think that that gives a unique perspective. We also post that on LinkedIn. Those are really the three main channels. Directly reach out through email. Our email contacts are on our website, go to our website, read about what we're doing, and then please connect with us on LinkedIn and follow us there.

Great. Thanks again, Marilyn and Liddy. This has been another episode of Deal Us In, a podcast brought to you by McGuireWoods by and for women in private equity and finance. And this has been Ann Dorsett, your host.

Thank you for joining us at the table for this episode of Deal Us In. If you have a recommendation for an inspiring interviewee, a question you'd like us to ask or topic you would like to hear covered, or if you'd like to tell us about women-focused initiatives in the field, please email us at wpef@mcguirewoods.com. We look forward to hearing from you. This podcast was recorded and is being made available by McGuire Woods for informational purposes only. By accessing this podcast, you acknowledge that McGuire Woods 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 McGuire Woods. 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.