Jonathan Saltzman | What is M&A like as an independent sponsor?

In this episode, I speak to Jonathan Saltzman, managing partner of Torque Capital Group, an independent sponsor that focuses on companies undergoing change or at inflection points where there are opportunities to create value. 

Jonathan will share his insight on M&A for lower-middle-market automotive and manufacturing businesses. 

He’ll cover: 

  • Why Torque Capital became an independent sponsor 
  • His experience with reps & warranties 
  • How current challenges in the auto industry affect M&A 
  • And more 

    Mentioned in this episode:


    Patrick Stroth: Hello there. I’m Patrick Stroth trusted authority in executive and transactional liability and founder of Rubicon M&A Insurance Services, now a proud member of the Liberty Company Insurance Broker Network. 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 Jonathan Saltzman, managing partner of Torque Capital Group. Headquartered in Connecticut, Torque Capital is an independent sponsor, that focuses on companies that are undergoing change, or inflection points where they are identifiable strategic, or operational opportunities to create value, which is a great reason for M&A. Jonathan, it’s great to have you here. Welcome to the podcast. 

    Jonathan Saltzman: Thank you, Patrick. Glad to be here. 

    Patrick: Now, we’ll get into Torque Capital Group in a minute, which is a really, really cool name. But let’s start with you. What led you to this point in your career? 

    Jonathan: Sure. I started in finance, I did some accounting for a big six firm, I did some investment banking with the old Salomon Brothers, and ultimately got into private equity, because I enjoy the aspect of building businesses. I enjoyed working with people. And you know, what I’ve learned over the years is there’s a lot less finance to private equity, and a lot more people management and interpersonal relationships. And that’s really, where I get the most satisfaction out of what we do, is building businesses alongside people. 

    Patrick: Well, great. And as we get in to Torque Capital Group, which, as I mentioned before, it’s an independent sponsor, which is a unique brand of private equity that’s out there. Let’s talk about Torque Capital Group. First of all, how’d you come up with the name because we’ll get into it later, but it’s really applicable for your focus. 

    Jonathan: Sure. I appreciate that. I was working at the Cypress Group. That’s the private equity firm that I was with prior to starting Torque Capital. It’s the former Lehman Merchant banking partners that spun out and formed Cypress Group. I was with them in the early 2000s. And around 2008, when the market began to turn, and you know, ultimately, we entered the Great Recession. Cypress Group was unfortunately in a lot of spaces that were really directly impacted. It was in consumer automotive, OEM, building products, financial services, retail, kind of all the places that were that were hit hardest.  

    I spent a lot of my time at Cypress working on manufacturing-related deals and automotive-related deals. And what I found was in, in that timeframe, whereas we were spending a lot of time really trying to preserve value in the portfolio. In some cases, the best thing we could do was turn the keys over to banks, the best thing we could do was sell things back to founders. In other cases, we were able to really restructure businesses, turn them around, withstand the recession and turn them around.  

    But it was during that time period where I saw the opportunity to really help lower middle market manufacturing businesses that had good products that had good management teams, that had good brands and reputations in some cases where they’re branded products and give them the resources and support to grow them to the next chapter. And most of those businesses that we have worked with at the Cypress Group or automotive-related.  

    We owned a business called Cooper Standard, we owned a business called Affinia Group and others. And you know, when I decided with my partner, who was my boss at the Cypress Group, to start Torque, we really went back and we thought about A, you know, what it is we wanted to focus on. Automotive typically. B, what we felt that we brought to the table, which really is a lever.  

    It’s a lever, you know, and as does a torque wrench, right, it allows, for maximum force with minimal effort. And that’s by leveraging our resources, our portfolio companies, our experiences, our networks. And so I literally went to the old there was a Barnes and Noble on the corner of 57th and Park and I went back and I found a Cars for Dummies, you know book.  

    And I went through the glossary and looked at all the terms there and ultimately landed on torque as a name that we thought would, it was cool sounding and it pretty well represented what we were trying to do. And we were fortunate enough that it was available when I went back and Googled, and so hence, you know, Torque Capital Group started in late 2010, as we, as my partner and I spun out of the Cypress Group, 

    Patrick: I appreciate you mentioned this where you’re getting maximum leverage with, you know, minimum effort. So it’s greatest in efficiency. I think that’s one of the reasons why maybe you selected the format for your organization as an independent sponsor, versus, you know, having a fund is, you wanted to have that maximum leverage that maximum tweak without, you know, not minimum effort, but just more efficient. So let’s talk about that real quick, why the decision to do independent sponsor, and how that translates to better serving, you know, your mission. 

    Jonathan: Sure. And I’ve been on both sides of the table. I’ve done, you know, investment banking, where I’ve dealt with lots of private equity funds, and I’ve been a private equity investment professional at the Cypress Group. In starting Torque, and choosing the model of at the time, it was, I don’t know if it had a name, or it was called the fundless sponsor model. But you know, what we now know is independent sponsors, you know, that that was driven by two primary reasons.  

    Number one, I really liked the concept of being able to include in the equity group partners that could be value added in that particular transaction. It could be that it’s an industry that those LPs are interested in investing in. It could be the industry where the wealth that built the family office, you know, that’s investing was generated. It could be that it’s another private equity partner that has a portfolio company in this space, but the ability to choose and to specifically, include in the equity group, folks that could be strategic to those investments was attractive to me.  

    And, you know, the second reason that we’ve chosen to operate as an independent sponsor versus raising a fund is really, it’s nice to not be on the treadmill of having to put money to work. We’ve gone a year and a half a couple of different times, throughout my almost 15 years as an independent sponsor. And, that was because we didn’t find a deal that we thought we wanted to do. You know, we don’t have, you know, LPs that are breathing down our necks about exits, and about investment horizons.  

    And we’re not trying to generate returns and put wins on the board so that we can show a good track record and raise another fund. But rather, we’re in this to invest in businesses that can use our resources to help build and grow those businesses organically and through acquisition. And then ultimately, if and when it turns out, we’re not the best owner of that business anymore, because there’s someone who’s got greater resources, who’s got a, you know, a portfolio company or is a strategic, that can do more with the business than we can, then we know that’s the time that you know, we’re ready to exit.  

    We’ve owned businesses for more than a decade before we’ve sold them. We’ve owned businesses, I think, on average four kind of high single digits, 7, 8, 9 years. We’ve got a few in the portfolio that are 2015, ’16 vintage, no plans to sell. And we’ve got a couple of new investments that we’re really excited about that we’ve just made in ’21 and ’22. 

    Patrick: A couple of times on your site, you mentioned the term that you usually attribute to family offices where you’re talking about patient capital. So you’re not in a hurry to churn and move forward. So you’ve got a long-term partner. I think the other thing that comes up and we’ve mentioned this in the opening, and it’s a real primary driver for M&A. And this is why I really want to highlight organizations like Torque Capital Group, is that they’re owners and founders that they’re not done yet. They’re not ready to turn it in.  

    But they get to that inflection point, as you mentioned, where, you know, they’re too big to be small, they’re too small to be enterprise, the skill set that brought them to where they’re at, at that point, okay, isn’t going to get them to the next level. And they need to find a place and they can default to an institution or to a strategic, either of those may end up costing a lot of money and not give them the outcome that they’re looking for.  

    Definitely not going to be in their interests. And so the more organizations that know about, you know, Torque Capital, where you’re going to be with them for the long term, and you’re not going to you know, hoard them away from other things. You’re going to be out there and find better opportunities. And I think that’s why we want to get this message out about Torque Capital Group.  

    Can you share with us, this is a little bit off script from what we had, but do you have any examples of areas where you came in and just explained something to the management team and founder and you just see this light bulb go off, where they just say you could do that. And how that just led to a surprising, I almost call it an epiphany for them. 

    Jonathan: Yeah, you know, there’s a good example as we bought a business in ’21, April of ’21, called Cable Manufacturing and Assembly, CMA. They make mechanical control cables for automotive markets, heavy-duty trucks, so think shift throttle, clutch cables. They also make some safety and restraint cables like the cables that you find on the back of every F-150 and every Silverado, the end gate cables there. So we bought, we bought CMA when it was doing about, you know, 20, 25 million of sales about 10% EBITDA margin.  

    So pretty modest. A smaller deal than we would typically consider. But one of the things that we loved about it was, CMA had a great product. CMA had a great team that was capable of doing more. And frankly, the only reason that, you know, we were we were the one of the groups that was probably more interested than others was people shied away from the automotive concentration.  

    And so we knew, going into that deal that we could pretty quickly acquire and integrate some other businesses that would enhance, obviously scale, would enhance diversification, and would bring additional capabilities to the table. So the CEO that we backed, a great manager, an operator called Dan Papanno, he had some relationships in the industry. And we went out and we started conversations with some of those relationships. And before you knew it, we had two M&A deals lined up within the six-month period, after we closed that were really transformative.  

    And so we took what was, you know, a small, high quality, light duty cables manufacturer, and we’ve now created a $75 million dollar sales, you know, almost 15% EBITDA margin, global manufacturer of cables and assemblies and linkages for all transportation markets. And you know, that mindset, right, you have a management team, you know, that was used to doing things in a very kind of founder-run way, on a smaller scale.  

    One plant, one set of customers, and now they’re thinking much more globally, much more broadly. They’ve got the ability to sell light duty cables, heavy-duty cables, they’re selling throughout the world. We’ve got manufacturing facilities in four different locations, two different countries. We’re looking at more M&A deals. So you know, being able to go in and you know, not growing just for growth’s sake, but growing because it’s a really smart and value-adding thing to do from a strategic perspective.  

    And having a team that I’m proud I was able to step up and you know, really manage a much bigger organization and still growing. That’s exciting. And that’s part of the, those types of stories where we can invest in, build and grow, both organically and inorganically are really what excites us at Torque Capital about business. 

    Patrick: Well that’s something, and you touched on this, and I wanted to ask you about, and it goes to the your core which is in the name of Torque. But your focus is going to be on the automotive and transportation industries. Okay. Explain why that, I mean, is it as simple as you’re just a gearhead, and this is your passion? You know, so why that? And then secondly, why don’t you get a little bit broader in just what is your ideal client profile? What are you looking for? 

    Jonathan: Sure. I, you know, I didn’t grow up working on cars in the driveway with my dad, like, you know, some others might have. And, you know, I lived in New York City for several years, so I didn’t even own a car at the time. So it wasn’t born into me, but rather, when I was at the Cypress Group, worked on a few automotive deals, and, frankly, liked the economics of that space, right? We started in the aftermarket, in particular, where, you know, where the trajectory of the business is really tied more to miles driven, than it is to new car bills.  

    And, you know, spend on automobiles is you know, probably, you know, third really to, you know, home and mortgage and rent, you know, children and education. And then cars, right? It’s typically nondiscretionary, right. At least in the in the product sets that we work in. And so I was focused on the automotive space from my days at the Cypress Group. What we also learned, I think early on as an independent sponsor is it’s hard to compete with funded with committed funds, as a generalist.  

    And really having a specialization in our case, it’s industry focus. That’s automotive and transportation-related spaces are where our networks are. That’s where our portfolio company investments are. It’s where our experience is. Having that really differentiates us when we’re looking at businesses, like Cable Craft, like Mayville industries, which is a steering remanufacturer that we own in Cleveland. Like MFC Netform, which is a transmission parts manufacturer in Toledo and outside of Detroit.  

    We’re not the highest price, we don’t often win auctions by being the highest price, but rather, we’re often the chosen partner for management teams, for sellers, and co-investors, because we’re a group that they see being able to partner with going forward to accelerate growth in the next chapter. We’re a group that they see, being able to, you know, work alongside.  

    We’re going to have issues, we’re going to have challenges, we’re going to have opportunities over our, you know, 5, 10, longer year period. And you’ve got to really enjoy, appreciate, respect, you know, and admire folks that you work with. We’ll only operate with, and partner with management teams that we feel that way about, and we’re pretty proud to have been chosen by some management teams and sellers, you know, as being the same. 

    Patrick: Well, to echo what you said very early on, when you were starting your career in private equity. It wasn’t the financial engineering or reengineering, it was the people. And I sincerely believe that with mergers and acquisitions, it is, A, it’s not a company A buying company B. It is a group of people cooperating with another group of people that come together. And ideally, the sum is much greater than the whole is much greater than the sum.  

    And so that’s what we see is definitely a people business and you embrace that. I think one of the things that comes with dealing with people and the nuances of transactions is you’ve got elements of fear and greed that come in and things you know, aren’t done in a vacuum. There are challenges out there. And one of the things that we’re very proud about in the insurance industry is we’ve been able to facilitate getting M&A transactions, handled a lot more efficiently and a lot more fluidly because we’ve been able to transfer risk away from the parties to an insurance company.  

    One of the products is called reps and warranties insurance, and it’s made a tremendous impact on not only the speed, but the number of deals getting done successfully. Because the players are repeat players like you, and you want to make sure that if there’s something bad that happens, it doesn’t take you completely out of the game. But don’t take my word for it, Jonathan, good, bad or indifferent, what’s been your experience with rep and warranty insurance? 

    Jonathan: Sure. I would say over the last few years, probably the last three or four years, rep and warranty insurance has just become standard for us. We’ll always use it on the buy side. In you know those few cases where we’ve sold businesses over the last several years, we’ve always required it of buyers. It allows us to be competitive, when we’re buying a business. Sellers want to maximize proceeds at exit. Sellers want to, you know, minimize ongoing obligation, liability risk, and uncertainty, and rep and warranty insurance allows them to do that. So we view it as pretty standard at this point. And we’ll always build it into our M&A process. 

    Patrick: Does it have an impact if there’s rep and warranty insurance on the amount of an escrow that you would require? 

    Jonathan: Yeah, we’ll always will simply make the escrow half of the deductible of the rep and warranty policy, which is typically 1%. So it’s usually half a percent of enterprise value. 

    Patrick: You know, your traditional escrow which is 10% of the purchase price. 

    Jonathan: Yeah, that’s the fundamental, you know, real key for the seller, which is to maximize the take-home proceeds? 

    Patrick: One of the things that’s out there is the rep and warranty policies to date and we’re talking about, uy side policies, they’re wonderful and they are applicable to deals that are priced above $30 million. Okay, however, there’s a gaping need in the marketplace for add-ons or bolt-ons, small transactions that are priced between as little as a million dollars up to that 29, 30 million dollar threshold. Where buy-side policies quite frankly just are not price, you know, compatible for the risk out there.  

    And so there have been a lot of sellers that have wanted the protection and they couldn’t get it just because the deal wasn’t large enough. And what’s nice is there’s a new product out there. It’s a sell-side product. But it is available for sellers, which will cover all of their reps. It’s triggered, if the buyer suffers a breach of the reps, they go to the seller, seller triggers the policy, the policy pays the buyer, not the seller paying the buyer. And at a cost of 10 to $15,000 per million in limits, it’s a fraction of buy-side policies.  

    And we’re very, very proud about that. And that’s another reason why we want to go and bring this up to our audience members is you’re going to have even if you’ve got an established process for buy-side policies, there’s still all these other, you know, smaller transactions out there that need help, too. And it’s a nice solution that is filling a whole need out there. Now, Jonathan, as we go forward, I always ask my guests, you know, what trends do they see going forward and so forth. 

    But with you, I mean, this is interesting, because with the automotive industry, it was facing some real headwinds in terms of growth. You know, Millennials don’t drive as much. The prospect of self-driving cars is out there. So we probably don’t need as many cars. You know, as you know, that never came to fruition. And then we’ve got also now the current issues were in the last couple of years supply chain issues, challenges with overseas manufacturers and so forth.  

    Or if one industry, like automotive parts, it’s not as diverse as people think. And one supply chain issue can handle a lot of things. So there have been a lot of different aspects within automotive. Could you give us your perspective. Going forward, you know, what do you see for the automotive industry, despite the headwinds that are out there? And how innovations aren’t coming to reality, like people thought. 

    Jonathan: You’ve hit on a number of them, Patrick. And, you know, the one that, you know, is really kind of the front and front center, you know, on the Wall Street Journal is really all around electrification. And how quickly is the fleet going to change from, you know, internal combustion engine to fully electric? And, you know, I think what we’re seeing is, it’s not quite happening as fast as had been predicted. And there are a variety of reasons for that.  

    But, you know, while electrification is certainly inevitable, I think there’s still a lot of runway for vehicles with internal combustion engines. We just invested in a business called MFC Netform, that’s Metal Forming and Coining Netform. And they make highly engineered carriers, drums and cases for transmission assemblies. And so we’re almost entirely internal combustion engine.  

    We are at MFC, we’re winning programs today with the likes of Ford and GM, and some of the tier ones for programs which are going to go into production for, you know, in two or three years time. And they’re going to run for 10 to 15 years time. So, you know, we’re looking at new business, significant amounts of new business for, you know, the next 20 years all and internal combustion engine.  

    Of course, at the same time, we are quoting lots of business that is EV or engine-agnostic parts. And so that’s going to be a big part of our future, and a big part of the transition that will make for that business. But, you know, electrification, you know, certain certainly inevitable but not quite happening as quickly as most anticipated. 

    Patrick: Do you see more manufacturing coming on shore domestically? 

    Jonathan: Yeah, we’ve we’ve got a, we’ve got a thesis really around, not reshoring, but nearshoring. Couple of our businesses have manufacturing facilities in Mexico, right across the border. Our steering business has a caliper has a steering remanufacturing facility in Nuevo Laredo, just across the border from Laredo. And, you know, part of the reason of course, there’s, you know, some, the impact of labor savings relative to US manufacturing, but there’s also lots of other manufacturing going on in Mexico.  

    Whether it’s, you know, the automotive OEs or certainly consumer goods and appliances and so forth. So, being in Mexico having a presence in Mexico, as a manufacturer, or a contract manufacturer, or a service provider, you know, we think because of the free trade agreement between Mexico and the US and exacerbated by some of the recent supply chain issues, some COVID related some, you know, beyond COVID related making, you know, Chinese supply in particular difficult.  

    We think that you know, Mexican manufacturing is really a trend that’s just on the rise. And you know, we’re a strong supporter of nearshoring. And so we’re investing in businesses that have Mexican manufacturing. We’re looking at adding facilities capabilities, partnerships, to be able to manufacture in Mexico as a supplement to our US manufacturing in some of our businesses. And we are trying, to some extent, relief, a little bit our reliance on some of the longer lead time, you know, supply chain sources, you know, components and products coming from China, from Taiwan, from India.  

    We still believe that there’s a place in the market, especially in automotive, right from a labor, from a resource, and, you know, from an availability perspective, you’ve simply got to get some of your components or product from China. But we do believe that, you know, to the extent we can recreate some of that capability here in the US, or in Mexico, that’s going to be an important strategic objective for the long term for our businesses. 

    Patrick: Yeah, I see that development happening on a number of industries. Automotive, I think would be key because that’s an industry with a lot of parts. 

    Jonathan: It is, you know, Monterrey is, you know, built up, you know, to be the center of Mexico, there’s lots of OE automotive manufacturing. And so there’s a whole ecosystem that’s developed around it to support it, you know, we’re happy to be part of that. 

    Patrick: Outstanding. Well, Jonathan Saltzman from Torque Capital Group, how can our audience members find you? 

    Jonathan: Sure. Absolutely. Our website is simply You can see a little bit of information about our firm, about me, about my partner, Terry Culmone, and the rest of our team. You can also get links to our portfolio companies, some of which I’ve named on this podcast, and then finally, you can email me directly. My email address is Jsaltzman. That’s j s a l t z m a n 

    Patrick: Jonathan, it was great meeting you. It’s been a little while since we last talked, but it was great having you here. Thanks again. 

    Jonathan: Appreciate it, Patrick. Thank you. 


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