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 Austin Smoak to the show. 

Austin is the founder of the private equity firm Grove Oaks Capital (GOC), an investment partnership focused on acquiring privately owned businesses in the lower middle market space. GOC is backed by various investors, including CEOs, entrepreneurs, and institutional investors.

Austin and Rubin talk in detail about how Austin closed his first deal after opening GOC. 

From the length of the deal from its inception to its closing, Austin doesn’t hold back on giving advice to other aspiring Black professionals in private equity. Austin also provides insight to what he sees as attractive verticals in the marketplace, as well as influential books that helped shape his own business practices. 

“I know for a lot of independent sponsors, even for a lot of search funds, people are 12, 18, sometimes even 24 months into this thing where maybe they've had a deal or two under LOI, or almost got them under LOI and couldn't get it done. So, it’s no small feat that [Austin] was able to get that first deal done,” applauds Rubin of the work being done by Austin Smoak at Grove Oaks Capital.

Tune in to learn all about getting that first deal off the ground and forging professional relationships in the private equity sector.  

Featured Guest

Name: Austin Smoak

What he does: Austin is the founder of Grove Oaks Capital, where he serves as managing principal and spearheads acquisitions and asset management, alongside his advisors and equity partners.

Company: Grove Oaks Capital

Where to find Austin: 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 McGuire Woods. Join host Rubin Pusha III as he welcomes special guests offering insights into accessing 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 McGuire Woods and your host of Accessing the Pipeline. Please join me in welcoming Austin Smoak, who the founder of Grove Oaks Capital. Austin, thanks so much for joining me on today's episode of Accessing a Pipeline. I think we're going to call today's episode Chasing the Elusive First Deal, since we're going to spend the majority of our time talking about your experience getting that first deal done. So man, thank you again for joining us and welcome.

Definitely. Thanks for having me.

All right, man, so we'll jump right in. Could you tell us just a little bit about your private equity and finance background and how we ended up where we're at?

Definitely, definitely. So I'll give you a scope of who Austin is and then we can dive into formative experience and things of that nature. So originally from Atlanta, went to school in New York, went to St. John's University, got a BA in Economics in 2017. After finishing that up, joined Goldman Sachs in the real estate private equity division. Stayed there from 2018 to '21, decided to leave there towards the end of '21 to do a self-funded search. That's what brings us to Grove Oaks Capital, which is started off as a search fund as we had spoken about previously, Rubin, but which is now a, I would say, full-fledged, lower middle market private equity investment vehicle.

Nice. And I know we talked about this a little bit before, but what was happening in the marketplace, or with you personally, professionally, that made you pivot from the search fund to more of an independent sponsor model?

Yeah, definitely. I'd say I was never a traditional search guy, which those are more so implanted CEOs who invest in equity. I felt I'd be better as a deal maker, and as an independent sponsor you're more so structuring a management team and putting that into place, and those who operate a traditional search fund just go into the operator seat and typically are CEO. So when I was looking at assets specifically, and when it came to the one that we acquired, and it's a construction vertical, it's a roofing company. Me with a banking background, I didn't see myself as being the most appropriate CEO to push it forward, so looking at management structure post acquisition, I put a COO and into place, technically, and I sit as the face of ownership.

Nice. Nice. And you gave us just a little bit of background about Grove Oaks, but could you do a little bit of a deeper dive in what industries you're focused on? What's your high level, your investment strategy, check size, EBITDA, revenue, all the good stuff?

Definitely. So EBITDA threshold was anywhere from one to 4 million in EBITDA. I would say right now, the strategic focus is home services within the southeast, primarily Georgia and Florida. The platform that we acquired roughly six months ago, it's in the roofing space as mentioned, looking to scale that through roll up. So looking to get somewhere in the seven to 10 million in EBITDA range within the next 18 to 24 months. And that's my primary focus here in the next year or two.

And I guess, ballpark, how many add-on transactions are you forecasting to do to get you to that number?

I would say three to four. Right now I have two under LOI, so if those go pretty well, it's more so looking at, within Florida, a geographic focus of taking over an asset in the southeast of Florida, the Southwest. We're central right now. And also northern Florida, whether that be Jacksonville or the Panhandle.

Awesome. Awesome. Well look, good getting a little bit of background about you and Grove Oaks Capital and the company you acquired, but I wanted to spend the bulk of today's episode talking about getting that first deal closed. I know for a lot of independent sponsors, even for a lot of search funds, people are 12, 18 months, sometimes 24 months into this thing where maybe they've had a deal or two under LOI, or almost got them under LOI and couldn't get it done. So no small feat that you were able to get that first deal done. If you wouldn't mind giving us just a little bit of context on how long it took you from an inception to wires going across to get that first deal done.

Definitely. So I formally launched the search in October of '21, but I would say I'd been looking passively for a year prior to that. So I built out the Rolodex of brokers, lenders, equity investors. I communicated with the ecosystem for a while prior to formally launching. After formally launching, I acquired a small network of franchises at the top of '22, which are more so passive, personal balance sheet assets. Went back out to the market looking for a larger deal to do, after working with a franchisor, how much red tape is around getting multi-unit opportunities within that. So went back out with the strategic focus around home services, got a deal under LOI in May of '21. The diligence and closing process was arduous, that took roughly seven months after getting it under LOI, and we finally closed in November of '21.

When you were in the LOI phase, I mean, we tend to see sponsors, a lot of times, agree to things in the LOI phase that lenders, capital providers don't love, and then you end up trying to re-trade on some of those things once you identify either your last resort capital provider or the capital provider that you really want to hitch your wagon to. And so, I guess at what point did you get your capital provider involved in the process? And were they involved at all in the LOI process?

Yeah, definitely. So there's a lender within the search fund ecosystem who is, I would say, top-notch. They're the primary one most of the elite search funds go through in a deal that's enterprise value anywhere from five to 15 million. So I built a relationship with them over the course of year plus, and I was sending them deals, and a lot of times they'd say, "Hey, no, this is not going to work at all." So I figured out what type of deal was financeable from their standpoint, and also I worked with the syndicate for my equity, so finding what was attractive to that syndicate as well. And I found an asset that fit into that mold, so can I answer your question, it was pinpointing targets that were financeable.

Yeah. Yeah. So they were involved before you even got to LOI phase?

I probably had 10 deals under LOI prior to the one that I closed. And every one that I brought, not every one, but most that I brought across, were no's. And they were for specific reasons, so that taught me what I can actually get across the finish line.

Nice. That's good perspective for other independent sponsors out in the space to ... A lot of times I encounter independent sponsors like, "Oh, I got a deal under LOI. Who are some capital providers you recommend I reach out to?" Or, "Who are some people that can do a Q of E for me?" Or whatever it is. And which is, it's great as a law firm to be able to be that resource for folks in a space, but also a good, teachable moment to early and often be building those relationships. And running things by them, so that as you find deals, you know whether it's going to work for them or not because they're side by side with you in the process. So that's super helpful. Let's talk a little bit about, what were your core principles in looking for your first deal? I mean, I know your capital provider and your syndicate had some say and were helping you evolve your position on things, but at the heart of it, what were really, say, were your table stakes?

Yeah, so when I started the search, I was generally industry agnostic. Anything with operating profit or EBITDA above a million I would take a look at. So it was pretty much anything across the gamut within the certain markets. Georgia, Florida, was also taking a look in Texas, Chicago land, as well as southern California. So within those markets, I was taking a look at anything that fit within that EBITDA threshold. As I progressed and figured out which verticals were more attractive to both sides of capital, equity and debt, I started to target that more. It's easier to throw things out the window and it was easier to buckle down on certain assets, so that was generally the thesis of how I came about it.

And what are some of those verticals that you are seeing in the marketplace as attractive for debt and equity providers, for independent sponsors?

Yeah. Well, it's different now than what it was previously. I feel like capital was a lot more lenient maybe six to 12 months ago than what we're seeing in the environment currently. But when I was searching and on the hunt, home services was quite attractive, whether that be HVAC, plumbing, your tree services, roofing companies, et cetera. You're seeing a lot of private equity interests, lower and middle market firms coming in and taking a hold of those companies. And there's a lot of multiple arbitrage down market that we're seeing. Or have seen.

What's driving that? I mean, what are the real opportunities with respect to those companies? Is it digitization? Is it building out a stronger back office? What do you think is ...

It's part of the latter. So if you look at it from a roll up thesis, or my thesis, it's, at the whole co level being able to structure HR, certain processes, at a unified level for four to five entities, it's creating a higher margin profile. And also taking some of the unique intricacies from the first acquisition and putting those in place at some others that we're seeing in the market. And it's a highly fragmented market. It's creating a higher margin profile, so for me specifically, that's what I saw.

Nice. And I think the other big piece for independent sponsors in doing these deals is thinking through what they want their economics to look like. And I'm sure that, on one end, you've got a number of where you think your couple of tranches of economics ought to look like. And then you've got you debt and your equity and they may have a different viewpoint on what those look like. So could you just talk a little bit about, and this is more educational for our audience, where are the buckets of earnings that make up the economics of a sponsor? And then, what are some of the negotiation pain points in trying to land on something that works for everybody?

Yeah. I would say the search fund ecosystem is split into two. So the self-funded search ecosystem, there's a typical rule of thumb; you're giving away anywhere from 20 to 50 points in a deal to your equity based, depending upon what type of lending facility you're going to use. On the traditional search ecosystem, it's you're receiving a vesting package of anywhere from 20 to 25% within a company and that vest over anywhere from three to five years. And that's similar to what you see in an independent sponsor model as well. The way I structured my deal was the self-funded search route. So generally, I had that thesis in mind, and that's been prevalent in the ecosystem for the last three to five years.

Got it. In terms of that structure, did you find there to be some sticking points where you think your capital provider was more interested in pushing one way or the other on the number?

Yeah. Yeah. I mean, lenders always wants you to put more equity in the deal and equity providers always want a larger chunk of equity, so it's always a negotiation. Good thing, at that time when I was raising, the market was a lot more open than what it is right now. You had more options, you had more leverage. Today we're saying something totally different.

Right. No, yeah, definitely. I mean, debt is more expensive, obviously. And I think others are a bit skittish. They're in the wait and see mode and kicking the can down the road a little bit, more than they probably were when you were teeing your deal up and I think it's something that we're all going to deal with for a little bit. And hopefully, by the time we get ready to roll out of the second quarter, people are ready to do some deals and we see a uptick in activity. Some of that will probably include sellers taking less on the multiple front then maybe they would have 12 months ago.

But there's some creative ways, I think, in the deal space, to make up those gaps. Maybe not completely, but between seller notes and earn outs, there's things we can do to get the deal activity flowing again. Coming out of this first deal experience, what would you say were your big, teachable moments? I mean, this covers the gamut. I mean, it could be dealing with legal counsel, thinking about transition services as the seller's cashing out and you're taking over the business, or supervising the take over of a business, diligence, whatever it might be. What are maybe one or two big teachable moments that you had through this process?

Well, I would say post-acquisition, it's be humble. You don't know what you don't know. Lean heavily upon the previous ownership within that transition period and try and squeeze as much as possible out of them, whether it's three months, a year, two years, just try and really latch on and understand how they think about the business. And then, you're always going to have your thesis going of how I can make operations more efficient? Or how we could spend less on materials? Whatever it may be. But listen first, I'd say. That's post acquisition. Prior to acquisition, I was working with a family office who was going to be my sole equity check. They said no two and a half weeks prior to closing the deal, so I had to go back out to the market and raise a myriad of LPs within a week. So these are all people that showed interest throughout that period, but that was also a teachable moment. Keep all options open prior to closing. Until you're across the finish line, you're not there.

Yeah, no, that's an interesting wrinkle two weeks prior to closing, man.

Yeah, two and a half weeks prior to it, it was frustrating to say the least.

What was the process like going back to the well, trying to get folks to open up a checkbook who had, at some point, probably realized you were moving forward without them?

Yeah, well, they did, but they didn't. It's funny. So prior to them saying they weren't going to go forward with the deal, the family office, it was literally ... I had put on my calendar the next day I was going to let the myriad of LPs that I'd been speaking to previously, who were going to write much smaller checks, let them know I was moving forward with the family office. So I kept both baskets open, so to say. But the communication with the smaller LP base, it was drawn out for three months. So in saying that, there was roughly 10 to 15% that had said yes three months prior, said they couldn't do it anymore. So there was a gap a week before the deal closed, to be honest. So it was a process and it was a great teachable moment.

One of the things that I think we see from Black emerging managers, Black led search funds, Black independent sponsors, is a lot of times they just don't have the same Rolodex that some of our counterparts have in the space. What are some of the things that you did in order to build that Rolodex as you were thinking 12 months down the line, Hey, I'm going to eventually find a target and I know that I'm going to pay for it, in part, with equity and debt. How do you build the relationships that are necessary to be able to do what you did and pivot two weeks out if you need to?

Yeah. I would say prior to me even launching Grove Oaks Capital, I was building relationship with equity investors. That's mostly within the search fund ecosystem so it wasn't your typical capital providers and the independent sponsor ecosystem, per se. But that was through conferences, networking with ex-Goldman people who had launched a search themselves, actually listening to a lot of podcasts, and then reaching out to those people post podcast. How did you do this? I would love to speak you. And one leads to two, two leads to four, four leads to eight, that type of thing. And also to say, I did use a capital raising shop or syndicate. So having that partner greatly helped. They sourced, I would say, 60 maybe 70% of the capital needed from an equity perspective. And then my connection's were really the other 30 to 40%, but having that partner to lean on was pivotal.

Yeah, I think that answers my next question. Thinking about, for anybody out here listening to the podcast, that might be interested in starting a search fund or becoming an independent sponsor and doing a fundless fund, if you will. In terms of critical resources, what would you say those top three, top five resources that you've got to have, to be able to get the deal done from soup to nuts?

Well, you need a lawyer who's going to work for you on retainer. You need a CPA who's willing to work for you on a small retainer as well, from a diligence standpoint. You need an insurance diligence partner. I think with our acquisition, there was a lot of that to go through. And of course, your equity and lending relationships, I would say always have three to five banks that you can run a deal by at any given time. And also have good equity relationships who actually write checks consistently, that you can run deals by and get their perspective.

And how did the relationship with the syndicate come about?

They were part of the search fund ecosystem. So met them at a conference, actually, that's how it started. Pitched them a deal. That first deal, they said no. Came back with this other deal and they said yes.

Awesome. Awesome. So Austin, as we think through what it's like to be a Black independent sponsor, or even a Black person working in the private equity and finance space, I'm curious, I want to get your thoughts on what are some things that we could be doing as members of this ecosystem, members of this community, to help grow the Black independent sponsor community and drive the industry support that we really need to see more activity in the space?

Definitely. I think it's, a lot of what you're doing is critical. So you personally, your firm, it's the conferences, it's the podcast, it's growing the ecosystem. Again, it goes back to that thing I said, one leads to two, two leads to four. The more visibility that's out there, the better it's going to be. And there's also creating on ramps. So the firms that are specifically targeting diverse capital, those are extremely important as well.

Nice. And when we talk about firms that are specifically targeting diverse capital, are we talking minority owned businesses? Or are we just talking about folks like you that may be interested in person-to-business that could potentially serve a minority or underserved community? What does that really mean when you drill down on it?

I think it's both, but more so from a capital provider standpoint, those that have a focus around diverse managers. So that can be New Majority Capital, that can be Stonehenge, there's a multitude of that that are focused on providing capital to minority managers.

Got you. Yeah. Well, look, man, I appreciate you being on the podcast today. I certainly have enjoyed the conversation and think there are a lot of nuggets there for our listeners, but I always like to close out our episodes by asking a couple Round Robin questions that help folks in the audience learn a little bit more about you as a professional, but also find some things that are going to help them and enrich themselves as professionals. So just a couple of quick, fun questions, man, and we'll get you out of here. What's one book that you recommend that's been transformational for your career?

Reginald F. Lewis's book as well as the Harvard's Business Review, How to Buy a Small Business. Those two were transformational for me. When I was 18, 19 years old I picked those up in college. I had my first seller meeting after reading HBR's book. When I was 19, there was a guy selling three juice shops in New York City. Said I'd love to purchase a business, that was the first time I had a seller meeting. So those have been foundational for me. And you know Reginald F. Lewis's book, it's always going to be paramount.

Yeah. Awesome. What's the single best piece of advice you've received from a mentor, personally or professionally?

I would say it came from my dad more so than anything else, which was, be detail oriented and be persistent and you can win at anything you're going to do.

All right. Yep. And then, what cocktail best describes you and why?

Yeah, I would say a Mezcal Old Fashioned. It's a classic, but it's smokey.

Awesome, awesome. I'm a big Mezcal fan myself, man. I can't get into the bourbons with everybody else, I felt like it was a little too trendy, and so the Mezcals still give you the natural sweetness of a tequila, but then that smokey flavor.

That's right.

That still, I think for guys like you and I, I mean it still gives you that I'm sophisticated, I'm still a classic man, kind of vibe.

Agreed, agreed, agreed.

Awesome, man. Well, look, man. Hey, again, appreciate you making time to join us on Accessing the Pipeline. Ladies and gentlemen, Austin Smoak, founder of Grove Oaks Capital. Thank you.

I appreciate it so much. It was fantastic, Rubin.

Awesome.

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. This series was recorded and is being made available by McGuire Woods for informational purposes only. By accessing this series, you acknowledge that McGuire Woods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information, or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuire Woods. This series 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.