In this episode of Accessing the Pipeline, host and McGuireWoods partner Rubin Pusha III welcomes Kenneth Saffold, co-founder and managing partner of o15 Capital Partners, to discuss disparities in access to private credit and how o15 works to solve them.

Kenneth shares o15’s overarching thesis: making lasting impacts on social, racial, and gender equity by funding businesses that target the lower middle market. 

“[At o15], we're focused on healthcare, business services, and education,” says Kenneth. “As you think about impact, these businesses really lend themselves to more impact – as we define it – and opportunities. And we've certainly been the benefactor of that as well.”

While the company’s drive to have a positive impact on social issues is a noble aspiration, it doesn’t overshadow their focus on returns.  

“We have over 60 years of private credit experience on the team, so we know the space well. We're non-concessionary in how we think about our investments. So, albeit every investment will have an impact element to it, every investment will also meet our target return threshold,” Kenneth assures.

Tune in to hear about where Kenneth foresees the market heading, how he sees their location in Atlanta as an advantage, and more about the company’s drive to solve social, gender, and racial inequities.

Featured Guest

Name: Kenneth Saffold

What he does: Kenneth is the co-founder and managing partner of o15 Capital Partners. His 20+ year career includes top-tier experiences in a variety of business and functional leadership roles. Kenneth puts his expertise in private transaction origination and execution, M&A, leveraged finance, underwriting, and portfolio management to good use at o15.

Company: o15 Capital Partners               

Where to find Kenneth: 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, dealmaking, accelerating portfolio optimization and developing relationships among Black professionals in the private equity industry. Tune in to access the possibilities.

All right, welcome to the next installment of Accessing the Pipeline. Today our featured guest is Kenneth Saffold, co-founder and managing partner of o15 Capital. Ken, welcome to Accessing the Pipeline.

Thank you for having me, Rubin. I'm excited to be here today.

Absolutely, man. We're excited to have you too. Today we're going to spend some time talking a little bit about private credit, but before we get into the meat and bones of our discussion, I wanted to give you an opportunity to tell us a little bit about your background and about o15 Capital. So I'll let you take it away from here.

Yeah, so thank you for that, Rubin. Happy to go into a little bit about my background, but we started the firm, o15 along with my partners, Colin Meadows and Brian Morris last year. We received our green light from the SBA, which you're familiar with that program, Rubin, provides leverage on primarily credit funds and we received that back in August of last year. In fact, August 11th, my birthday, last year and started our fundraising process. Before we started the firm, I was at BlackRock. I had a couple of roles there, actually. I was a managing director in BlackRock's private credit division. Led the south efforts for BlackRock. And then last couple of years at the firm actually was part of the founding team and also served on the investment committee for BlackRock's Impact Opportunities Fund. And there's a lot of overlap between what that team did and what my team is doing here at o15 that we can touch on as well.

Before BlackRock, I was at GE Capital for a long time. My partner, Brian and I actually met at GE Capital, so there's kind of a shared track record and work history there as well that investors oftentimes look for. There I was more focused still on the debt side, but primarily healthcare focus, so that's one of our sector focuses here at o15, so that's kind of where I cut my teeth in the healthcare industry as well.

Before GE, I was actually at Goldman Sachs both before and after business school in various roles within the investment bank. I actually did my summer of business school at Goldman Sachs and then ultimately came back to the organization as well and ultimately to the Atlanta office with Goldman.

And then prior to that I was an analyst in investment banking, like a lot of folks who cut their teeth in the industry. I started at Citigroup as an analyst, started in New York, moved out to California in the technology division as well. But that's where my career started. Academically, I got my undergrad at Morehouse College here in Atlanta, Georgia. I think I mentioned our firm is based here in Atlanta and we can get into what that means for us as a firm as well. But I did my undergrad at Morehouse, did my business school at University of Pennsylvania, the Wharton School, and both of those had a business finance degree.

More importantly, I'm a husband and a father. My wife Akilah is here in Atlanta. We've got two kids, KJ, he's Kenneth like me, but we call him KJ, 14 year old going to high school this year. And then my daughter, Eva, is 10 years old. So we're based here in Atlanta and that's my story.

All right. Well, shout out to historically black colleges and universities. I'm an Albany State University grad.

Did not know that.

We play in the SIAC with Morehouse and Spelman, so excited.

There it is.

And we share that connection. And much good luck to you with a 14-year-old starting high school. That's exciting, but I'm sure nervous and all the things all at the same time. So wishing him a good start to his high school career. So we got your background, we got Morehouse B-School, paid your dues at investment banks and private equity shops along the way, some of the best in the world. Tell us a little bit about how you got to the point where you were discussing and decided that creating o15 Capital made a lot of sense and in that answer also sort of tell us exactly what o15's focus is primarily in private equity world.

Certainly. So maybe I'll start with my time at BlackRock because that's important to the story and kind of post George Floyd, what we were trying to do at BlackRock and several other firms were to make a strategy or investment thesis rather around having a social impact focused in the case of BlackRock on underserved communities, but through investing in the alternative space. So at BlackRock they were focused on private credit, private equity as well as real assets and they ultimately raised almost a billion dollar fund focused on that very same effort. And again, as I mentioned, I was on the investment committee there.

But it occurred to me and I was talking to my partner Colin a couple years ago, and Colin and I have known each other for almost 20 years and have always had the idea of doing something on our own at some point, but in call it 2020 now as we were starting the BlackRock Impact Fund, Colin and I turned to each other and said, hey, I think BlackRock and some of these other firms that are focused on investing in underserved communities have a unique approach and a great thesis, but we do think the addressable market is really in the lower middle market.

So whereas BlackRock is writing checks for $50 million plus, sometimes up to a hundred, o15, my firm today, is focused on writing up to 30 million checks. And we think, and we've already seen this, that there's a much broader addressable market in the lower middle market. So think kind of two to 10 of EBITDA if you will, where we can write checks in the five to 30 range that are meaningful. We did a little bit of research around that number. What we found was that there's over 22,000 businesses in the US that are owned or managed by women or minorities with over 10 million of revenue. And so for us, that was a testament to our thesis. The addressable market is there, but then if you take it one step further and you kind of survey those entrepreneurs and business owners and say, Hey, what's your number one challenge? What you find is it's typically access to capital. Even more specifically, which is where we're focused, access to credit.

We believe that given the addressable market and the issues that they have in accessing capital, we're here to solve that solution. So that's our impact theme. The impact theme is directly around racial, social and gender equity. And I can get into the definition more there, but we think there's a real opportunity there and that's kind of the catalyst for the firm today.

Great point. I want to take you up on unpacking exactly what those definitions are. What underserved communities are you truly trying to impact and both from the community level and from the ownership and employee level as well?

Yeah, great question, Rubin. So as we think about the criteria for an investment, for us it's kind of a four pronged approach if you will. So all under the theme of again, racial, social and gender equity, we define it in four different ways. The first is probably the most obvious, businesses that are either owned or led or the employee base actually comes, or sorry, rather women or underserved minorities. That's the first criteria.

The second really looks at the consumer base or in the case of healthcare, the patient base. So to the extent the product or the service of that business is focused on those very same communities and for us, that's also an impact theme and potential investment as well. The third really looks at the supplier diversity program. So we are corporate members of NMSDC, which grants certifications for MBEs and to the extent that there's a supplier diversity program already in place, then we would consider that opportunity or if the business is willing to create a supplier diversity program that we would help to implement through our partnership there as well. And then last but certainly not least is really more on the community and social level, businesses that are housed, geographically housed in low to moderate income census tracks that's defined by the Community Reinvestment Act, CRA. So if the business is actually in any of those regions throughout the US, then we would consider that an impact investment as well.

Nice. And I just want to maybe take a step back, make sure that we've got all of the prongs of your criteria for investment out there. So we've got the four prong impact approach and I you mentioned looking at two to 10 million of EBITDA and I think you gave a revenue number, but are there any other criteria that you want to get out to make sure people have got kind the full picture of what o15 is out in the marketplace looking for?

Certainly. You hit on a couple, businesses that are two to 10 of EBITDA, and then we're writing checks on the small end, kind of five million and on the very high end, kind of around 30. We'd potentially go a little bit higher for certain opportunities, but that's really where we start to cap out. And that's a function of where we think the addressable market is. And also because we're an SBA fund, there are certain criteria around the size of businesses that we can invest in. To further answer your question, Rubin, from an industry perspective, I didn't mention this earlier, we're focused on healthcare, business services and education as the sectors that we primarily focus on. That's a function of our track record, our background at our previous firms. But also as you think about impact, these business really lend themselves to more impact as we define it, opportunities and we've certainly been the benefactor of that as well.

We like to think from an investment perspective that we are a very flexible capital. So as you know, we are primarily a private credit firm, but really the split is 80% private credit and 20% private equity. So on the private credit side we can be senior debt, which for us is kind of first lien, second lien, unitranche type investing. And then we can also do sub debt, so think mezzanine, both with and without warrants as well on the senior side. And that will be 80% of our portfolio. And then the other 20% is equity, but that's typically in the form of an equity co-invest. So it can be preferred equity, common equity, but it will be equity co-invest alongside the sponsor or the management team or the independent sponsor that we're working with on the transaction.

Last thing I will say we are based in Atlanta. And frankly there's a few firms, not a whole lot unfortunately, but there's a few firms that have a similar makeup of ours that are focused on credit and they're primarily on either coast. There's maybe a couple in Chicago as well, but nobody in this region. And as you think about the demographics of the south, I saw stat recently that said 37% of all Black owned businesses are in this region, very similar numbers as relates to Latinx businesses, women owned businesses. And so for there not to be somebody that does what we do that provides growth capital to these type businesses, I think that's a miss. And fortunately for us rather we've been the benefactor of a large pipeline of deal opportunities just given our business network and our relationships here in Atlanta and in the south in particular. So I did want to highlight that as well.

Awesome. And if you could tell us a little bit, I think you mentioned that o15 is about a year and a half in the making. Where are you guys at and in the process, have you gotten your first close, you close your first fund, give us all the details.

Yeah, happy to. It's no easy task on the fundraising side, I'm sure you know very well, Rubin. So we are a first time fund, so it's hard. We set out to raise $300 million fund and that is 175 of leverage from the SBA that I mentioned earlier. And then we're raising an additional 125 to get to that 300 number. To date, we've raised just under $90 million of that 125. Actually, the exact number is 88.5, but who's counting? Our investors to date have been primarily pensions and banks. As an SBA, we can actually raise capital from banks who are able to skirt the Volcker Rule because they're getting community reinvestment at credit by investing in our funds. So we have three banks in our LP list to date and likely we'll have more as well. So well on our way to that 125 number.

We had our first close earlier this summer, in June, as a matter of fact. We're looking at our first deal in the business services side that we like a lot and subject to close next month that we're excited about, but we're looking to deploy capital, we want to do one or two additional deals this year as well. We're looking at a bunch of stuff and we're seeing a bunch of stuff as well.

I'd say, and I can talk as much as you want about some of the challenges with the institutional fundraise. I think we've done a real good job, frankly, so much so that we do have a hard cap of 400 million and we'll likely keep our fund open well into next year to get as close to that hard cap well beyond the initial 300 million that we had initially set out to land our fund later into next year.

That's awesome. It sounds like you guys are off to a great start and one of the things that given the name of the podcast, Accessing Capital, we tend to talk about no matter whether the guest is emerging manager or a more established independent sponsor or first time independent sponsor, one of the challenges is always getting access to capital. And so if you wouldn't mind just sort of talking about some of the challenges you guys experienced, even though you have these great pedigree, being a first time fund and being the type of impact fund that you are, what are some of the challenges you all had in terms of raising capital?

Yeah, you said challenges you had, I would say challenges we have Because they-

Challenges you're having.

They haven't officially gone away. We still have a fair amount of wood to chop, but we're getting there, so we're real excited about that. There's so many reasons why it's hard to raise capital and certainly in this environment I think the most obvious is just kind of where we are in the market cycle. A lot of LPs have pulled back, especially LPs that have said, hey, we want it to have an emerging manager focus. A lot of those dollars have frankly gone away, certainly slowed down, and so that poses a challenge just where we are in the market cycle. So I'd start there.

As I think about some of the other challenges we have, it's a long list. I would say, look, from a cost perspective, raising capital, starting a fund can be extremely cost prohibitive. So we've been fortunate enough to have our managing partners and our co-founders have all done reasonably well in our previous careers, so we can afford it, but that's a huge undertaking for a lot of folks and certainly for us as well. So that's another of challenge that I think a lot of potential GPs might face.

The other and we've certainly done well here is just on selecting the team. As an emerging manager, and I'd go even further to say as a diverse manager, it's hard enough to be successful at a lot of these corporate institutions to get to a point where you can go out and raise a capital, but then coupled with that, you also need to have a team preferably with a shared track record that you can go out and raise capital with and that is extremely hard. We've fortunate enough been able to do that, but that's hard to do when there's so few of us in these industries already. And then to be able to create a team of three, four, however many folks around that at a very senior level is extremely hard to find. And so I highlight that as another issue.

I think where we've done well is identifying institutional capital that is in line with our impact focus and our asset class. So we're very niche focused. We are private credit, lower middle market and have an impact theme. So it's real easy to find out who are the LPs that are looking at those type of funds, 'cause there's not a long list. And so we've done a really good job of targeting those. We think those are the, low hanging fruit is not the right word, but I'll use it. Those are the low hanging fruit for LPs for us, and I think we've done a really good job of targeting them and had some successes already, but as I shared before, we still have wood to chop, so we're not patting ourselves on the back just yet.

At one point I want to make sure we underscore here is although you are very niche and have the impact component, at the core of what you're trying to do is create returns. I'm interested in hearing from you when you're having these discussions, how do you balance the focus on impact but also sort of making sure that folks know, hey man, this is just not... We want the warm and fuzzies, but we also are here to make money too.

So we think credit is a great place to be for that. So shared with you the stats earlier around access to credit, how entrepreneurs cite that as their number one issue. There's a real need there from an impact perspective. And then obviously we have over 60 years of private credit experience on the team, so we'd know the space well. But make no mistake about it, we're non-concessionary in how we're thinking about our investments. So albeit every investment will have an impact element to it, every investment will also meet our target return threshold. So we are, again, can't say it enough, non-concessionary in how we're thinking about it.

Just to give you a sense for kind how we're targeting the market, we think at the portfolio level we're targeting kind of low double digits and that's given that asset allocation mix that I shared with you earlier. And then the benefit of the SBA leverage is that it actually provides a little bit of a premium enhancement to our fund as well. So we're all in targeting mid to high teens based upon that asset allocation that I shared with you. But yes, we are non-concessionary in how we're thinking about our impact investing.

Before we transition to talking more broadly about the private credit market, I want to put a bow in our conversation about o15. If you wouldn't mind sharing with us if there is some meaning. I assume there is, what's the meaning behind the name, o15?

Yeah. And thank you for asking by the way, we get that question a lot. So o15 stands for Special Field Order 15. Special Field Order 15 is what General Sherman decreed at the end of the Civil war to grant the freed slaves in South Carolina and in Georgia, 40 acres and a mule. What we found out is in our research is that the mule actually never existed, but it was 40 acres and our thesis for o15 is you can't participate in capitalism without having capital. In the 1800s, capital was in the form of land. Today, we think that providing private credit, private capital to these entrepreneurs, we're providing a solution that hasn't been met by many of these entrepreneurs. So we thought that the name was apropos.

That's awesome. I love the historical nature and thought process behind naming your shop and I think it's fitting and think that you guys are making a difference even from the top down with the name, with the assembling of the team and then the impact focus and then taking all the knowledge that you've gained over the years through your educational experiences and working at other places to really deploy a product in the marketplace that's going to help underserved communities, underserved entrepreneurs get their business to the next level and create some generational wealth. So thank you for doing that work.

I wanted to spend some time before we close out our podcast talking more broadly about the private credit market and some people, hopefully all of our listeners know a bit about private credit, but just wanted to talk briefly about what are some of the tailwinds that you're seeing that's driving the private credit market? I mean, we've got this $1.5 trillion plus market. We've got almost 350 billion in dry powder out there. It's only growing. I think the numbers I've seen is that we will hit like 2.7 trillion in the next four years in terms of the private credit market. So what's driving this? What do you think?

Yeah, so it's a great point. I've seen that 1.5 trillion number. I've seen it as high as 2 trillion depending upon who you ask. So I mean it all goes to say the industry is very large and growing and I think that's for a couple of reasons. One, certainly in this part of the market cycle, what we're seeing is that banks have pulled back in terms of the lending that they're doing to entrepreneurs and to businesses. They're much more risk averse in this market. As they should be. They're banks and they're regulated by the government. And so that's an opportunity for private credit. We are less regulated and so we can be much more aggressive in how we're thinking about risk return characteristics of any investment. And so the fact that banks are pulling back, it really opens up the market for lenders like us that can do a little bit more for these entrepreneurs and for these business owners as well. So that's really the first piece.

The other piece is very much attributed to where we are in the market cycle as well. As Feds continue to rise, rates have gone up considerably. So we price most of our deals to SOFR, SOFR three months is a little bit over 5% right now, and that's the floor. So when we're pricing deals, it is much more aggressive than it was call it 18 months ago when we're in a different part of the cycle, and that's been a significant tailwind for us as well.

Maybe the last thing I'll say, because the private equity channel is a big origination source for us, and private equity groups I think over time are much more willing to focus on private lenders versus banks, and so that has really opened up the market opportunity for us as well. We get calls all the time from private equity groups looking for financing for their M and A transactions. M and A lot of times is the source of our transactions, and so that means we're seeing a lot more from these private equity groups that want to involve us, and that's always been very positive for our industry.

And you mentioned a couple of times being located in Atlanta, having this focus on the southeast presents some unique opportunities for you all. How's that impact the way you're able to source deals and deploy capital?

Yeah, so I think a couple few ways how we think about sourcing is one, what I just shared with you, the private equity channel. My team has probably over a hundred different private equity relationships from both our previous firms and just our own business networks and relationships that bring to bear. And we do track that data, so just under 40% of our deal flow is actually from private equity groups. All the emerging managers that are out there, we see their deals and there's really this developing ecosystem of emerging private equity and private credit managers that we're starting to see, and that's a close-knit community and we all typically help each other and cooperate and it's very helpful from an origination perspective, in addition to your regular way private equity groups that have been there for a long time and starting to show us flow.

I'd say the second-biggest piece is just our own business networks and business relationships, but also being here in Atlanta. We see opportunities frankly that others don't see because we're here and no one else is unfortunately today. We'd love for there to be at some point, but because we're here, we see stuff that are, what we call proprietary deals, that we're able to act on and seize upon just because of the fact that we're geographically located in this region. That's certainly very helpful as well.

The other maybe third piece that I'll highlight is we're very bullish on working with diverse laid banks. We're very bullish on working with organizations like the NMSDC that has over 15,000 member firms that could potentially fit our criteria as well. Our former firms, Invesco and BlackRock have also been extremely helpful as well. And so there's just a lot of different sources where we can target deal opportunities and have a robust origination channel through those.

As we get ready to close out, I want to just spend really quick talking about your forecast from now until the end of the year. Where do you see private credit? Is it going to continue or is it even tracking the kind of current PE, M and A deal market? What's on the horizon?

End of the year, that's very near term and private equity or private credit rather, excuse the term, ain't going nowhere. We will be here. I think the rest of the year will continue to be very active for private credit lenders. Coupled with that is the first part of the year, especially I think private equity stalled a little bit in terms of deal flow and they've got dry powder that they have to put to work too. They've got to deploy that capital. And so what I suspect we'll continue to see is an uptake in M and A activity on the private equity side, which translates to our business as well. And so those two are really the catalyst for what I think will be a great rest of the year for us and frankly well into next year.

That's awesome. Ken, I appreciate you getting on the podcast, sharing your knowledge and exposing our audience to o15 and all the great work that you and your team are doing. I want to close out the same way that I've closed out the previous three episodes by asking you a couple of questions. They're serious, but we're intended to have a little bit of fun, so we'll just jump right into it. What's a book that you recommend everybody in PE read?

Everybody in PE read? That's a good one. I'll tell you what I recommend to students at Morehouse who I talk to is a book called Why Should White Guys Have All the Fun? And I think someone else on your podcast, maybe it was Bruce Hampton or someone also mentioned that book or somebody did, but that's a great book. Just it gives you a sense for as many challenges as we're having in this market as minorities to get a seat at the table. Think back, call it now, 40 years ago when Reginald Lewis was doing his first deal with Beatrice Foods and all the challenges that he had to face, it goes into that deeply and I think it's very motivational not only as a black man but just in general about doing deals in this market and how great the industry can be. So that would be one.

I guess since Bruce already gave that one, I'll give another one. I'm being very serious, the Bible, I would certainly read the Bible because this industry is not for the faint at heart and to the extent that you can be motivated through whatever your spiritual source is, in my case, it's the Bible, I'd stick to that as well. It's extremely important.

Awesome. Appreciate that. Both good books. No matter what your spiritual or religious leanings are, I think a lot to be gleaned from both of those bodies of work. Shifting gears just a little bit, what's the cocktail that best describes you and why?

Oh, at my age, I'm trying to stay off the cocktails and drink water. Man, I just gave the Bible, now I'm going to give water as my cocktail of choice. I'm painting a different picture than who I really am. I have decided that the cocktails need to slow down and water needs to be a more appropriate choice. It just keeps me better for the next day. In this industry and as a leader of an organization, it's important to keep my wits about me and the water has been extremely helpful in doing that. Staying hydrated is more important than anything at this point, but that's probably a function of my age more than anything.

Look, you keep trying to paint this picture that you're an old man, although wise you are not quite yet an old man. I'll accept staying hydrated as a response. A sage advice for everybody, drink more water and less cocktails. Last question before we close out. If you could have dinner with anyone dead or alive, who would it be?

Anyone dead or alive? That's easy for me. My dad passed in 2010 and he was a lawyer. He actually, when I was young, told me, never be a lawyer, which is why I'm in finance, frankly. But he went out into business for himself later in his life and he told me that being an entrepreneur as a lawyer was the best professional decision he had made. And so that held true for me and I always saw that as a goal as well. And I wish I could share with him what I've done. I think he'd be proud.

I agree. I did not have the pleasure of meeting your father but in the chances that I've had to get to know you better, I think that he'd be very proud of what you've accomplished and I think he'd be excited about the possibilities of what you'll do in the next 10 or 15 years as well.

Really appreciate that, Rubin.

All right. Well, Ken, I appreciate you joining us on Accessing the Pipeline, and thank you again for letting us borrow your talents and your wisdom for just a brief moment.

Talk to you, man. Bye

Bye.

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 McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods 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 McGuireWoods. 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.