Our special guest on this week’s episode of M&A Masters is Brett Hickey, the Founder & CEO of Star Mountain Capital, LLC, a specialized U.S. lower middle-market investment firm. Star Mountain employs a data-driven approach to provide value-added debt and equity capital to established small and medium-sized private companies, leveraging its scale-driven resources and longstanding relationships.
Brett graduated from McGill University with a finance and accounting degree and has over 20 years of investment and advisor experience, with over 15 years specifically focused on the U.S. private small and medium-sized business marketplace. He chairs Star Mountain’s Charitable Foundation which supports the career development of women, veterans, and athletes, as well as health & wellness initiatives, including cancer research.
We chat with Brett about the surprises that have come out of the pandemic, as well as:
- The influence of growing up in a small town on his company today
- Learning from those who are already immersed in the financial culture
- The Utility Curve of Money
- The North Star of the company and their guiding values
- Impact Investing
- And more
Listen now…
Mentioned in this episode:
- info@starmountaincapital.com
- www.StarMountainCapital.com
- https://www.youtube.com/c/starmountaincapital
Note from Star Mountain Capital: Past performance is no guarantee of future results. All investments involve risk including the loss of principal. This interview does not constitute an offer to sell or a solicitation of an offer to purchase interests in any fund, note, separately managed account or other product managed.
The investments discussed do not represent all investments made by Star Mountain Capital. It should not be assumed that any of the investments discussed were or will be profitable, or that the recommendations or decisions made in the future will be profitable or will equal the performance of the investments discussed herein.
Certain information contained in this interview constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or comparable terminology. Due to various risks and uncertainties, actual events may differ materially from those reflected or contemplated in such forward-looking statements.
Crain’s two-part survey process consisted of evaluating each nominated company’s workplace policies, practices, philosophy, systems and demographics. The second part involved an employee survey to measure the employee experience. The combined scores determined the top companies and the final ranking. Star Mountain must pay a fee to Crain’s only for survey collection purposes. Detailed eligibility criteria can be found here: https://www.bestplacestoworknyc.com/eligibility-criteria
P&I partners with a company called Best Companies Group on the survey that is behind the Best Places to Work program. P&I works with them to develop the parts of the questionnaires that are specific to money management. Beyond those questions, P&I’s survey partner develops and scores the surveys. P&I only sees anonymous responses to questions, identified only by the company name. If Best Companies determines that a firm scores above the threshold cutoff that they have set for a firm to be considered a Best Place to Work then P&I names them on their list. P&I uses the same cutoff for all firms but rank the firms against their peers by number of employees. P&I only ranks the top 5 firms per size category and then list the rest in alphabetical order. Detailed eligibility criteria can be found here: https://www.bestplacestoworkmm.com/eligibility-criteria
Transcript
Patrick Stroth: Hello there, I’m Patrick Stroth, President of Rubicon M&A Insurance Services. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today I’m joined by Brett Hickey, Founder and CEO of Star Mountain Capital. Star Mountain is a specialized asset management firm focused exclusively on the US lower middle market. They do this by investing debt and equity directly into established operating companies, making strategic investments into fund managers and purchasing secondary fund positions. Star Mountain Capital was once again recognized by Crain’s and Pensions & Investments as a best place to work for the second consecutive year. And my guest Brett was named one of Axial’s Top 20 thought leaders for the lower middle market for 2020. Brett it’s great to have you here. Thanks for joining me.
Brett Hickey: Thanks, Patrick. My pleasure.
Patrick: Now, I guess people couldn’t blame you. But I’m just wondering if the track record you had? Were you a little sad to see 2020 end?
Brett: Good question. No, I think 2020 brought a lot of interesting learnings. And as with everything in life, it shows us the importance of agility, strategy, organization and culture, as well as insurance related matters where your expertise comes in. And thankfully, being ready for challenges and ready for opportunities. We did as a business thrive last year, and we’re excited about 2021. But of course, a lot of challenges for a lot of people which were very heartfelt around. And we did a lot of support relating to with our Charitable Foundation.
Patrick: Brett, I don’t mean to put pressure on you. But before we get into Star Mountain Capital, you have a fantastic story. And it is reflective on not only yourself, but on the caliber of Star Mountain Capital. So again, I apologize, no pressure. But before we get into your firm, let’s talk about you. How did you get to this point in your career?
Brett: Not not as a crow flies, that’s for sure. I often sit back and reflect. And I recently as we were talking about moved into a new house and, you know, made me reflect upon where my life is now and where we’re going and how I got here. And it’s it’s been a real evolution and is pretty interesting. And one of the reasons that I like to sit on different boards like Harvard’s alumni entrepreneurs, and try to be helped with our charitable foundation to inspire people that you don’t need to have grown up in the community you want to land in, you don’t need to have gone to all the best private schools and universities and so forth to get the best jobs. There are a lot of paths forward that largely relate to being strategic, having grit and tenacity, and effort really working hard. And if you do that, I’m biased to think that a lot of people can achieve a lot of things.
So with that as a little bit of preamble, very quickly, I grew up in a small town in northwestern Canada of approximately 10,000 people. A bit of middle of nowhere, sort of halfway between Vancouver and the US border. And I unfortunately lost my mother to cancer at a young age, which was pretty formative to me on a number of fronts and how I think about life. I was fortunate to have a father who was very involved in my life he was a principal of the middle school at the time and quit that and became a teacher at the high school to be more involved in my life. So as an only child, having lost my mother to cancer when I was six and she had diagnosed and fought it for two years when I was four. You’re really is made me think about community, culture health, I’m very fortunate that a lot of people again, thankful to my father’s engagement in the community, they really engaged with me a lot of my extended family helped in the life I had, I did want to ultimately get out of that life if you will and move to live somewhere A warmer as a very simple threshold test and B where there would be other careers outside of lumber and you know, forestry mining, oil and gas is is pretty, pretty prevalent for what’s there. And you see the cycles of those industries which led me to where I don’t invest in those industries today. I’ve lived and watched how cycles can be difficult and and it’s hard to time that we don’t do it.
But fast forwarding a little bit. I spent one year on the oil drilling rigs in northern Canada, which is how I ended up paying for college. I initially I was going to college in Calgary, Alberta. I was speed skating on the national speed skating training team with aspirations of going to the Olympics. I’ve been fortunate to be a Canadian record holder and a gold medalist in speed skating when I was younger in Canada, I thought it’d be a lot of fun to go to the Olympics. I feel fortunate that unlike other sports, speedskating, you know, right up front, there’s no money in it. So plan B, I didn’t know exactly what it would be, but I knew I needed a plan B. And I figured that school would really be the door that plan B, I unfortunately flipped my bicycle training on the velodrome in the summer, and got injured and decided not to continue to pursue the Olympics from that capacity. And then really switched the energy into business. And I as I learned more about business and was in a bigger city in Calgary and environment, I got very excited and very passionate about that.
And this is now in the late 90s. And so I learned to code and built a little internet company and stuff like that, which was a lot of fun. Nothing overly financially successful, just interesting, and the innovation and passion of building that was really my first taste of and I love that I also really got inspired by finance and what you can build in your career and how much impact you can have and how interesting and dynamic it seemed. And I wanted to go to either New York or London to work in investment banking, I was fortunate to get into McGill University in Canada, which is one of the best launching pads out of Canada, because it’s a reasonably well known International University and one of the top universities internationally, and particularly in Canada. And I was lucky enough to get recruited from McGill to work for a bulge bracket investment bank, at the time was the largest investment bank or largest financial institution, I should say, pardon me, and the investment banking division within it at Citigroup Salomn Barney, and thought that covering asset managers would be really interesting buying and selling asset managers looking at different strategies, evaluating strategies, and really having a future strategic thought within the investment space that way.
And so I moved to the US about 20 years ago to do that. And then I left that to try to tie together the investment banking and the finance, which I really learned to love. And I did my undergraduate degree in both finance and accounting as well. So I love math, I was one of those guys that in school, I found somebody telling me whether my story was or wasn’t good to be very subjective. And I wasn’t as much of a fan of that subjectivity. Whereas I loved math. So I loved calculus. And I like to go in and take an extra calculus classes within the engineering faculty and whatnot, because I liked the fact that you were either right or wrong. And somebody couldn’t subjectively tell you that. And maybe that’s one of the reasons I like investing were one of the ways that we get judged is our returns and our performance, and it’s black and white. And that’s, I guess, something I’ve learned to like in my life.
So getting to where we’re at today, Patrick, I left investment banking to focus specifically on than just principle, investing in the lower middle market in 2004. So at this juncture, we’re about 17 years into my career investing us lower middle market, I’ve made over 100 private equity and private credit investments, as well as over 20 secondary and fund purchases all within the US lower middle market. And the trends in the US, US lower middle market are both interesting. And I feel it’s a place that we can have an impact. From a culture community, you mentioned the awards that we’ve been fortunate to one. And, of course, thankful for my team in helping us do that. But we also do invest very aggressively in culture in team in talent, in how we build our training programs, how we invest in ongoing training, we have a Star Mountain University. And we we really put a lot of effort into that. And I’m thankful for my team for putting that effort in.
We also align interests with our entire team, where all of them own carried interest and share in the profits of our investments. We have about 75 people in total now, including our operating partners in 20 cities across the US that are focused on nothing but finding high quality private businesses, figuring out how we can add value to them. And one of the other things that I wanted to build within star mountain was a flexible capital solution approach where we could sit down with business owners, get to know them, understand their personal desires, their businesses, challenges and opportunities, and really come up with a game plan and the right type of capital for that, whether that’s debt, whether that’s equity, whether it’s a combination, whether it’s some hybrid security in between.
There are different types of capital and different needs for different businesses. And we really want it to be a Blackstone or a KKR type of a player. But within the lower middle market, where we have a full range of services and capabilities for business owners and for our investors within a marketplace where we target generating alpha from an investment perspective. And then for business owners, it feels good to be able to add value and really understand them and get to know them and that’s where it takes I guess my background is that entrepreneurial ism, the small town community where you work as a community, you trust each other, you work together. And you really have that sense of community, bringing that into the financial creativity, and being able to really drive impact. And what we do is something that I’m extremely excited about.
And sitting here today as a 42 year old, I’m extremely excited for the future, because I think we’ve really just scratched the surface and how we can add value to different businesses across the country and for our investors. And that’s, that’s really exciting for us, Patrick.
Patrick: Well, and you’ve segwayed right into, you know, my thoughts about, you know, either the commitment to a lower middle market is that, you know, I think that, as with everything, as you start doing investing, there are a number of investors quite a few that the deals just keep getting bigger, just from inertia, and then they just trend up that way. And there are organizations and their executives like you that are committed to stay. No, we like this segment of the market. I mean, I would just think, just logistically, there are a lot more of those companies out there they’re created every day, you have a bigger impact. With returns bigger opportunity you want on the smaller stuff than on the larger stuff.
But I think the other thing is important, I think you get this too is that this sector of the market, the lower middle market is underserved. There are so many of these organizations that are not as sophisticated. And a lot of times they are not accustomed to mergers and acquisitions or making that transition or taking that next step to get to the next level. And unfortunately, there are a lot of choices out there. But they’re not aware of them. And they can’t distinguish one option from another. So they default and go to an institution. And they’ll unfortunately, when they go to the institution, they don’t know any better, but the institutions don’t have the bandwidth to meet their needs, take hold their hand, get them over. And so unfortunately, the institutions are not going to treat them, you know very well, they’re going to overcharge them, and they’re not going to deliver on execution and so forth, the way that the lower middle market really needs and is essential that there are organizations like Star mountain capital and you that have the passion, the commitment, and and you want to be there to serve that.
And I like that, because what you’re doing is you’re not just trying to, you know, objectively get a return. You want and correct me if I’m wrong, but you want to come in and impact the culture. And you want to do that not just for the culture of that organization, but the culture around the community, because you grew up in that kind of community. I mean, yeah, pretty consistent?
Brett: Yeah, it is. And you you touched on a number of things, I think, are really important. And one is that things I’ve learned, I’ve been lucky enough Patrick to be invested in and have different partners and people in my life that are incredibly dynamic, experienced and successful. And that’s really allowed me to have a rich learning environment. And I couldn’t have been right enough, when I grew up in a small town to say the smartest thing I can do, knowing nothing about the finance or investment banking industries, get into that culture, get into that. And living in New York City for nearly 20 years, I’ve lived walking to my office the entire time. And the amount of effort I was able to put into that the amount of learning from people, it’s just been incredible. And some of the things that I’ve observed, and we all see this, or we all have access to this data, including the utility curve of money. We all know that once you surpass your basic needs, the incremental utility or happiness you get from money is very low.
And there’s a lot of great professors from ours at Harvard. And other than that have written about this and and lots of good people, right, that have written about that. And you see a lot of people that are very wealthy and not happy, and so on and so forth. And so I really took a step back having lost my mother at a young age and said, Who am I? What matters to me? What do I stand for? What do I want to be a guiding light for my children around? What’s the North Star? Star Mountain Capital is a name that I came up with. There is no star mountain, the star in the mountain is our North Star. What are our guiding lights? What do we stand for our ethics, our integrity, our humanity, and really staying focused on that at all times, with the strength and stability of the mountain is really the idea behind building that. And I think that the impact when you lose somebody the young age, it really makes you reflect on life and its fragility and how I built star mountain where I have a very large executive team of extremely capable people. This is not a business built centric. around me, this is a business. That’s a platform.
It’s not, you know, Brett Hickey Incorporated, this is Star Mountain capital, 100% of my employees share in the carried interest and profits of our business. We are a 100% employee owned business, despite managing approximately $1.5 billion today. And I’m extremely proud of that. And I’ll even say, you know, sharing, just personally for you, Patrick, and your audience at my wedding, to my partners at Star Mountain, were two of the four best men in my wedding. You know, we have real relationships where I said, I want to wake up every day and have fun, stand for something, trust, who I work with, enjoy who I work with make an impact for lives of businesses and people that were really impacting their lives, not just for, obviously, our investors, but for the businesses that we’re backing and we’re supporting, that’s their careers, you know, their livelihoods. And we take that very seriously. And it’s fun, it really sense of purpose in life becomes critical.
And so I’ve tried to have my North Stars and guiding lights very clear. And you know, a couple other things that you mentioned, I think are important. Also, Patrick one is being committed to something in our case, we’re committed to being the best investor in the US lower middle market, which includes Canada as well, that we can be right we’re here to wake up every day and say, How can we do a better job every day? The mantra of the young presidents organization is lifelong learning. That’s similar to star mountain, we’re focused on creating value, driving value, constant improvement as a firm and constant self improvement. I’m sure as my wife can tell you, I have lots of room for improvement. And with all seriousness, I do and we all do. And so we trademarked investing in the growth engine America, we’ve trademarked collaborative ecosystem, because we believe in that community or think of it as a small town community feeling where we all serve a purpose.
We’re all here to add value to each other, treat and respect each other the right way. And when you mentioned the M&A capabilities, one of the other things that we viewed as a clear need in the market and a clear opportunity in some of the problems that Star Mountain is solving is how do you bring that large market expertise to small businesses, right, your Goldman Sachs’s of the world aren’t working with small businesses. If somebody is working with them, you’re generally getting a very junior type of person. So at Star Mountain, my partner, Brian, who’s the chairman of our firm, was the Global Head of M&A at Credit Suisse. He was also the president of the firm running an 18,000 person business. And he also ran their $100 billion global asset management business.
And other partners of mine were divisional heads and partners running five 600 person teams at Goldman Sachs, UBS to name to few institutions, running the leveraged loan business as the heads of it at Merrill Lynch, Bank of America, Merrill Lynch. So we really have come together as a team and said, we’re all here to make money. But we care more, we care about more than just money. We care about investing our own capital, protecting our capital, we care about who we’re working with making a real impact. And so what we set out to do is to bring those large market expertise to these smaller businesses.
And again, with the right culture, the right alignment and the right partnership, and the right long term investment, I had to invest a very substantial amount of money in building technology, opening up offshore data centers in India and places like that, that we opened over a decade ago, so that we could really bring those large market resources, skills, capabilities and knowledge into these businesses, which there’s always more to do, but it really, you know, really is exciting, and I couldn’t agree more with everything you just said, Patrick.
Patrick: Okay, well, let’s put something into perspective for our audience because this is now 2021. But Star Mountain Capital, I apologize. Opened in 2009? 2008?
Brett: 2009. I guess we officially formed we sort of say 2010 is when we launched so 11 years ago.
Patrick: Okay. So 11 years ago. ESG environmental, social, government, the that culture, attention and commitment so forth. Companies Weren’t you weren’t paying lip service to it back then. Because it wasn’t on anybody’s radar. I mean, actually, from California’s perspective, it was still within California and the tech community. It was nice and it but it was still kind of remnants of a hippie type of perspective. Okay. Now we come into there and everybody’s talking ESG. And there’s this whole commitment. You were formed with this. So I mean, this is in your DNA now. And I think that’s that long view that you have I think is something that anybody in the lower middle market should really pay attention to. I also like to thank because I was going to ask, you know, what’s special about what you’re doing, as opposed to a lot of other companies.
But the other observation I have is that, and I think this is essential is that you’re having institutional grade talent that is available in a boutique delivery system. So you were, you know, a boutique. But now with the limitations of a boutique, you you have all in it comes from the talent of the your team members, but you got, you know, a less talent that’s available there at not the lowest prices. So I think that that’s striking. What other things is Star Mountain bringing to the table for the lower middle market?
Brett: Yeah, it’s a good question. It’s one or the other thing is, that’s interesting, Patrick, just to try to make this a bit more, a bit more intimate, you know, for your audience in your group. And I think the more that we’re all open and honest and authentic with each other, I think that’s a good thing. And that’s just always been who I am. If you ask any of my friends, the people that know me, well, I don’t certainly think I’m perfect by any means. But I really do care. And I really do work hard and try hard. And I’m sure if you ask my colleagues, what’s one of the things you’d say is his effort. And I guess whether it’s working on the oil rigs, or speedskating, right effort has been something that I’ve I’ve always had as part of my core DNA. And it’s important in the lower middle market, I tell people when they come work for us, it’s exciting, it’s fun.
But you’ve got to be willing to put in the effort, these businesses need help analyze them the right way to find them the right way, the information doesn’t come packaged up in a boat, you’ve got to be willing to put in the elbow grease, put in the effort and work with these companies actively to help be a strategic capital partner to them. It’s fun, it’s exciting, it’s financially rewarding. But you have to put in the effort into it back to your point around the environmental, social and governance within ESG, which people often also call impact and impact investing. I think part of it is when you have a parents, my mother used to work for IBM. And it was really tough for her with a family. Because back in those days, it was really challenging for women to have strong careers and be a mother. And so that matters a lot to me. And so I think the COVID is going to have people allow for better work life balances that I actually believe will increase productivity. I know it started out and I believe it has it’s it’s you know, there are certain things that are less efficient. But I think on balance, our productivity has increased.
We’ve invested aggressively in our team, building home offices, building the right support the right technology, the right equipment for them to have full throttle environments. And it surprises me when I talk to some people that are like no, why would I that’s people’s homes, why would I invest in and I’m like, well, you invest in an office space for them. Why Why wouldn’t you invest in your human talent, if that’s your biggest asset, which certainly for our business it is. But I think the IBM dynamic, and this is nothing negative about IBM is just all large corporations back 30 years ago. But being able to support something and help impact what I know impacted my mother is something that makes me feel good in a way that I’m trying to give back. And I think it’s something also from having a father, as a school teacher, you’re focused on educating and giving back to the community being very involved in the community, which which my dad still is to this day.
And that’s always been something I’m very proud of, I’ve really tried hard to keep that with me as part of our life and to build a different type of finance firm that is really engaged on these matters. And I try to be very forthright about it. Because it’s not for everybody, right? If you don’t care about these things, and you just say, my simple goal is to try to make the most money I possibly can with my career, then you shouldn’t come here because we want people to care about our investors, care about the companies, they invest in care about our team, and are willing to not always put themselves first, but put as our fiduciary obligation, our investors, our team, our portfolio companies to think about them. Now, now as it turns out, I think actually, this approach on ESG and culture team, I actually do believe it also will actually provide the highest likelihood of the type of financial outcome that people want.
And there’s starting to be more and more data behind that but investing in culture, investing in community invest in your team. I think, for example, the fact that I’ve chosen to give up equity will make my equity worth more and will help me therefore be worth more in the whole by giving something away and aligning interest with my team that way. So I think that’s something I know different universities study a lot around that. And there’s more and more data. But I think doing the right thing pays off long term. When you probability weighted, what we’re really focused on is a high probability of your desired outcome. And I think that if you take that approach in life, and when I think about our children, I’m trying to raise them, I don’t care what their end up being worth, but I do care that they’re good people that live a good life, that mitigate risks in life that are happy, positive, good friendships, a good career, I care way more about that. So I want to give my children and our business the highest probability of the desired outcome possible.
Patrick: There are, as we mentioned before, lots of options out there lots of firms, and there are lots of target companies, and you set the table really well on the subjective criteria that you’re looking for the subjective items that you you plan to deploy, and so forth. Let’s get a little bit objective for for our clients and our prospective audience members out there. And, you know, what is a profile criteria for an ideal target company for you? Okay, we’re, what is Star Mountain Capital looking for?
Brett: Great, great question. Thank you for asking Patrick. The, we’re looking for business owners that want to do something else with their business, whether they want to sell their business, whether they want to make an acquisition, whether they want just strategic capital, to help grow a partner to say, hey, how do I frame out the world? What do I take my business to, and then we have different types of capital available, different types of debt, different types of equity, to help grow with them. So we look for businesses that generally have at least 15 million of annual revenue. We’re not experts at startups, so we don’t invest in them. We’re not experts in real estate, we don’t invest in it. We’re not experts in oil and gas, we don’t invest in it.
And I remember that’s one thing, I think that’s key that one of my professors have told me is that if you want to be great at something, you have to know what you’re not great at, because you can’t be great at everything. So there’s certain sectors and certain types of companies that we’re not the best solution for. So carving those out. The other thing I would say is that generally, if you’re over 30 million of annual EBITDA, there are probably businesses that are better positioned to focus on you, and where you’re going at your next phase. So what we’re really experts at is taking a business from 20 million of revenue to 200 million of revenue, or from 5 million of EBITDA up to 20 million of EBITDA, things of that nature, finding strategic acquisitions, analyzing them, negotiating, structuring the investment structure with them to earn outs and all that integrating tech talent systems, financing and providing the capital, and then helping those businesses really thinking about the future strategically and how they’re structured, as well as add on acquisitions.
So for example, in a downturn, we were ready, we were geared up, we viewed a downturn was coming. And I actually think there’s a reasonable likelihood another one is coming, because a lot of things that we worried about pre pandemic, like valuation bubbles, they’re higher than they were pre pandemic. So I would caution people to think that, oh, phew, we just got out of 08, now it’s gonna be another 10 year bull market. A lot of the Black Swans that were flying around, have perhaps been better fed recently. And maybe that means they can fall harder and from further to use the Black Swan analogy, but I think that being ready to find acquisitions, so for example, we helped one of our portfolio companies acquire a business out of bankruptcy that will hopefully be extremely valuable for it, we helped another business spin off a subsidiary as a wholly owned subsidiary, because that subsidiary, really, trades is a revenue multiple versus an EBITDA multiple and perhaps it’s a telehealth business that could really be worth a tremendous amount and how to how to take that business to the next level.
Similar to if you’re a big company that can afford to hire the best talent at Goldman Sachs and a Bain or McKinsey consultant. That type of strategic advice is really what we’re bringing to the companies and you know, we’re we’re looking for high quality people that are looking for, you know, good capital partners and people to work with. And you look, we’re, we’re open for business, we invested in about 27 companies last year, this year with continue to grow, open new offices. We have six offices in 20 different places, we have at least one person in across the country. So we’re we’re delighted to talk to people that generally speaking have between 15 million of revenue and 30 million of EBITDA and our North American based businesses is kind of our market segments in the world that were built optimize value with.
Patrick: Yeah, well, one of the things they just came through on that in terms of the size and the other things you talked about it underlines and supports a philosophy I have about mergers and acquisitions. And it’s for the outsiders, people hear the news about an M&A transaction. And it’s usually the very large ones that are in in Wall Street Journal that it’s Company A buying Company B. And mergers and acquisitions for us is not that it is a group of people choosing to partner with another group of people. So it is a you can’t get the human element removed from that you have to have that.
And in an ideal situation is one plus one equals six. And it’s it’s that bridge that is key out there. And it comes really hard and fast, particularly with lower middle market where you’ve got owner founders that are selling their baby and looking for the next step. And you’ve got a willing partner there, where their attitude is, you know, with Star Mountain, we want to help we want to, you know, we’re is in our interest that your interests are also met. And it goes forward, I think that that works out really well.
Brett: And one of the other things I would just add on to that Patrick, one of the things I didn’t like doing early on in my career is having a much more limited type of capital, where I really had to sell my relationships on hey, here’s the right type of capital for you, whether that’s a senior loan or or private equity buyout. So one of the things that we built at Star Mountain is this, we have different funds in different pockets of capital with different mandates associated, which allows us to interface with businesses, with private equity fund managers, with independent sponsors with intermediaries, as really an open architecture platform to say, What are you looking for? What do you need, let’s talk about it. And let’s come up with the right customized solution together for you.
And now, I love that because I do business with so many different friends of mine, and I’m not selling them on anything, I’m not trying to stuff their desires into something else, because that’s what I have happened to have available. And so whether they’re smaller private equity funds, we also have our secondary fund capital. So we can get strategic with them, where we can buy an LP interest providing early liquidity to add value to their investors so that their investors can say, Oh, that’s great, I can be more liquid when I invest in XYZ’s fund, give them new capital for their next fund, give them new capital to help fund other deals.
Same with independent sponsors, and people launching other funds, we’re often really strategic with them. Because we understand the lower middle market, we understand the challenges we understand the needs. And so we’ve built a platform to really provide a lot of flexibility in trying to add value to as many people as possible.
Patrick: Well, one other element that comes in this is what I’m very excited about now for the lower middle market is that I mean, these deals aren’t done in a vacuum. Okay, there is there is all this wonderful stuff, we are going to come together, we’re going to combine our efforts and move forward to a brighter future. However, you can’t ignore there is risk. And what sellers come to realize as they go through the whole process is that post closing, that individual seller or group of sellers, personally, is personally liable to their buyer partners. If post closing there, the buyer suffers a financial loss due to a breach of the seller reps.
And it isn’t until they start negotiating the purchase and sale agreement, you get to the indemnification discussions, and then all of a sudden, wait a minute, I might have to pay you back for something that I don’t know about. And now you’ve got the fear of the unknown out there. And initially, they start talking about I even been in a number of these situations where we have nothing to fear, we know of nothing out there. But then they don’t have a corporate veil to fall behind. They don’t have a company fall behind. Because post closing there is no company. And so all of a sudden, you know, risk becomes very real when it’s your dollars or your house at risk. And that creates tension, particularly for people that are new to M&A. And that’s everybody in the lower middle market.
Most likely, this is their first and only sale in a lot of cases. So there’s a lot of fear there. I’m very proud of the fact that the insurance industry has come in with a product called Rep and Warranty insurance that originally was reserved for the 100 million dollar plus transaction level deals where they take that indemnity obligation away from the seller, and they move it over to an insurance carrier so that if the buyer suffers a financial loss, instead of pursuing the salad, they go right to the insurance company. The insurance company pays the loss and I mean is an elegant, elegant way. It removes a lot of tension because risk is transferred. It really helps that owner and founder of those entrepreneur exit cleanly without the worry that some, you know call in the middle of the night is going to come in and something that they never thought about came in the development the last two years it was interrupted, just because a COVID is that the insurance industry has become mature.
And now with competition, there are more insurance companies coming and they are now targeting lower middle market deals with transaction values, under $20 million. Those those types of deals are not eligible for insurance in the past they weren’t. And so it’s great now that if you’re there to serve that lower middle market, here’s one more tool that removes the biggest, toughest part of that transition. And that’s getting that risk taken away from from the deal parties, because that’s the one that comes to attention and so forth. So we enjoy how this has gone. We’ve seen the credibility of it over the time. But you know, you can’t listen to me talking about it, it’s more, you know, I’m interested really, in your opinion, which, you know, good, bad or indifferent. Share with me any experience, you guys have had at Star Mountain Capital with rep and warranty insurance.
Brett: Yeah, it’s great. You mentioned something that I think a lot of people under appreciate the importance of Patrick, which is the friction and making things easier, and how to do business so rarely in life is something a one and done and the relationship never matters again. So whenever you can do things to reduce risk and reduce friction, depending on the cost of it, of course, some capacity, but I generally think is well worth it. So for different types of insurance, I think it’s very valuable to help get deals done a where you can transfer that risk, because you say to an insurance company, it takes worries off the table for both sides. It allows for a better relationship between those two parties, because the more time you spend negotiating tough things, the more you’re hurting a relationship. So if you’re buying a business from somebody, and you want them to be speaking well of you afterwards to clients, community employees, whether they do or don’t have an economic interest remaining, you want them to say you know what, these are good people, I liked doing business with them, that’s always going to be in your best interest in life.
So if you can reduce the amount of friction, you create, and getting the deal done a, b, if you can increase therefore, the probability of getting a deal done, I think that’s great. And then the sleeping well at night, from either party’s perspective, knowing that you have that taken care of with a good insurance company and having, you know, the right type of person really understands the detailed minutiae of these insurance policies is crucial, because they’re complex, and you need the right people that really get it like yourself that specialize in it, just like we specialize in what we do you specializing in what you do. I couldn’t speak highly enough for how important it is. We sometimes have people that hire their real estate lawyers to represent them and stuff on complex matters. And it’s just, it’s just so penny wise pound foolish as the Brits would say.
And you know, the right people doing the right thing is important and insurance. From my perspective, I mean, I’m a big user of insurance on a lot of fronts, whether it’s D and O policies, E and O, policies, different life insurance related things, I think there’s transactions, it’s, it’s very important. And I think, as you pointed out, the evolution of it, Patrick is ongoing, and there’s things that I still want to continue to learn more about, we’ll look forward to speaking with you and your team further about, but I think that it helps you get deals done, it helps you have better relationships, it helps you sleep better at night. And all of those things, I think, are worth something. And what I generally observed is that the cost of insurance relative to the tail risk they can solve for is often really valuable. And you have some people in life that are really skeptical that say, well, you have an insurance company, they’re making money, they’re really smart.
Yes, but they’re doing a probability weighted analysis over an insurance company, they can take a dispersion of risk and say, on average, what’s the probability this is going to happen? Whereas for you as an individual, if that tail risk is only a maybe a two and a half percent likelihood, or 5%, whatever it might be, maybe that’s reasonably small. But what if it does happen? Do you want to take that risk in life? Is that something worth you living with and taking and so I personally think that removing big impact tail risks just to live a better life as a seller is extremely valuable. And as a buyer of businesses, I think mitigating those tail risks as well. So that, as I said earlier, having the highest probability possible of your desired outcome. And maybe that means because of the cost of the insurance, you get a little bit less potential upside, but you get a higher probability of a desired outcome.
And for me in life, that creates a lot of peacefulness, a lot of happiness I think our investors appreciate I think our portfolio companies appreciate it. I just think it’s a better way to live life philosophically, personally and professionally as a business. So highly encourage people to learn more about it. understand where it’s at the evolutions as you’ve mentioned, with it Patrick, hopefully, that’s helpful.
Patrick: Brett as we’re talking today, we were just in the new year, got a new administration. COVID is, I don’t know if we are at the end of the beginning of COVID, or the beginning of the end of COVID. Time, but time will tell but, you know, as we sit here today, looking forward and you’re an Axial thought leader, you know, what trends do you see going forward? Be they macro with M&A, or just with Star Mountain Capital or lower middle market? What do you see out there?
Brett: Good question. Here are a few trends. Some of them, I will try to polish my crystal ball for and have some guesstimate into the future. I love forcing people and some people don’t like as well, what’s the what’s the probability you think of that? Or where do you graded from a one to 10? And like, well, I don’t know, you know, they give these sort of qualitative responses. And as I mentioned earlier with how I loved calculus, and less liked English literature, just due to my own, probably lack of competency in English literature relative to mathematics. I like certainty, but I like to force people to quantify their views on things. So I’ll give a little bit of views of some of my thoughts of the future. And then certain things that are also much more definitive and are going to happen.
So let’s start with the definitive trends. There have been so many things going on between COVID politics, I think people have forgotten about some major massive, definitive trends. One is the aging demographic, our population is aging, that creates a tremendous amount of both challenges and opportunities that people really think about how does that impact the future of industries of businesses, because the impacts are large, and they are systematic. So where that benefits Star Mountain is that you have more privately owned businesses and business owners that are saying, I want to transact The second thing that we know definitively is the amount of debt in the economy at a generally speaking at a sort, certainly governmental level is big, and it’s growing. Right.
So I think people need to be just mindful of understanding that I know in California, you have people that are concerned and moving to Texas is that I think the biggest probably outflow, but people are thinking about taxes. And they’re thinking about, what’s the economy going to look like? Does there come breaking points where the economy can’t invest more into x, because it has to make difficult trade off decisions. Those are questions that are important now today, with rates really low, they can finance high levels of debt. But if rates do increase, it could get very difficult. And I think that is a trend. It’s more difficult to forecast how that can impact things. But it is a definitive trend that I think people should be thinking about. I know we are thinking about it, and how that can again, impact the economy, industries, taxes, things that are systematic.
There’s a new, obviously a new party in charge, how does Biden think about things? What is he likely or less likely to do? Some of that is more difficult, so I won’t try to predict that. But it is something that is worth thinking about and how that, again, may have positives or negatives and industries and sectors and so forth. But the one thing that we always know about the government is, there’s a unknown, there’s a volatility aspect related to it, that you just can’t control what they’re going to do. And sometimes it’s hard to anticipate what they’re going to do and be able to do, right. So there’s what they may try to do and what’s the what can they actually get past and how does that impact things. But I think that’s worth really thinking about how much is government involved in an industry or business that you own and run, or that you’re looking to invest in and in whatever capacity that might be, I think is really important to think through those things. Because it’s everyone’s a little bit different and the probability weighting of it.
And we’re big fans at Star Mountain of probability weighting future outcomes, you’re never going to be exactly right. But you you do a probability weighted analysis and say, If this happens, then what and you kind of forecast a few moves out and play chess, if you will, to think about how to deal with things. As we think about some of the other things that are definitely there. But really hard to understand the impacts of valuations, public market, valuations are extremely high relative to historical measures, and people believe they’re fair or not fair, I won’t comment on but they’re high, the amount of liquidity in the market right now is very high, the additional government stimulus money that’s coming in, is really high, which is correlated to the dead, but does of course, help the economy from just more liquidity more spend.
Other things that are happening that people may less know about is that costs of goods, where manufacturing can be challenged right now, in some places a demand for certain things, high costs of certain goods are increasing. How is that going to impact the future? How does that impact potential inflation risks? People need to think about that one of the other challenges that we see out there is, from a business perspective, how do they think about their future planning? knowing some of these things? How do you think about talent replacement? One of the things that businesses I think, under evaluate is the org chart. And yes, I know that we have a president currently and a former president that are in their mid 70s.
But the probability of health issues occurring as you age increases, right? It’s just factual. And this isn’t a comment on any political person, it’s going to happen to you and I as well, it’s just a fact when you look at businesses understand the org chart, you may have like, how important is this person? And do they have succession planning really well set up or not? Because the aging demographic that we have, is more than it has ever been? So the other last thing I’ll say, Patrick, is that the pace of evolution, the pace of change, continues to increase. And I think COVID has exponentially increased that. So one of the other things that I was going to mention is that the weighting of the large tech companies and just big companies period, irrespective of the type in indexes, so a lot of people used to think of, well, the S&P 500 is a really balanced, diversified index, not so much anymore. Now, the weighting to these trillion dollar companies, which we’ve never had before in history, is huge.
So how do you think about how diversified you really are or aren’t in something that you use to be very diversified? Now, you’re very heavily concentrated in a few companies with their idiosyncratic risks that any company has, as well as sectors and so forth. And hopefully, some of that provokes some thought. I know, it doesn’t give any definitive answers. But that’s the reality of life, no definitive answers, but there are things to be focused on. And I think this is a good market to look for both challenges and opportunities, because it’s, I think the market is is riddled with them right now, maybe more than ever.
Patrick: I think you’ve outlined a whole variety of things, both challenges and opportunities. And I think that’s the successful leaders out there do that is they look for both. And, you know, they, they make decisions, straightforward. With all the information, I can’t tell you how much we appreciate having just all this, you know, perspective that you provided in what you’re doing with the lower middle market, and so forth. And I think it’s just like I said, you’ve got a compelling story. And I’m sure everybody that’s listening is probably going to want to get a little bit more. How can our audience members find you, Brett?
Brett: Yeah, thanks, Patrick. The best way from an email address perspective is info@starmountaincapital.com That’ll come in and then we can route you to the right people, including myself if that’s what’s needed. Second is we have our YouTube channel youtube.com forward slash c forward slash starmount capital that has a lot of good content, our LinkedIn profile, we keep a lot of good information on update in a world when physical events which I can’t wait for them to come back, do come back again, we host a lot of events, historically, close to 100 a year all across the country, try to make them fun and interesting and stuff like that, and giving people the opportunity to get together and collaborate and that builds relationships for us. And it’s part of us kind of giving back and being engaged in the community just like you do, Patrick, with this right you’re not charging people for this. It’s it’s the more we all collaborate, share information, share resources, we all benefit.
Patrick: I’m going to just buttress that with recommending people visit starmountaincapital.com. You’ve got a news tab there, you probably have one of the most, one of the more active, updated news of you’ve got a lot of great content. You’ve got a lot of great information out there. So I think that’s, that’s something that you were focused on with communications and I think that’s essential. So, Brett Hickey of Star Mountain Capital. Thank you very much for joining us today and just hope your 2021 eclipses a real productive 2020.
Brett: Here here. Thanks, Patrick. Be well everybody.