Interview: Ex-Goldman Investors Break the Mold by Bringing Flexibility to Growth Investing

Daniel Kim, Partner of Bregal Sagemount, explains his firm’s unique position in the growth investing industry and how having the flexibility to invest across a company’s capital structure can lead to the most optimal financing solution for all parties.

RJ: Daniel, thanks again for joining us. Can we kick off with a brief overview of Bregal Sagemount and what you focus on?

Daniel: Sure, absolutely. Bregal Sagemount is a $650mm opportunities fund focused on growth industries. What I mean by opportunities fund is that we can invest in any part of the capital structure, from senior debt to control equity, we don’t always have to do the same type of deal. We understand that every company is different, and that every CEO and owner has a different need. So instead of showing up with a preconceived notion of what an investment opportunity looks like, we would rather start with a blank piece of paper and figure out what makes sense for everyone around the table. This collaborative approach often results in creative deal structures that may contain components of both debt and equity to fit exactly what these owners and entrepreneurs are looking for. In terms of what we look for, recurring revenue is the core underwriting criteria for all of our investments. Over time, we’ve found that investments into low-risk business models in growing secular end markets lead to predictable outcomes even in unpredictable macro environments.

RJ: That’s really interesting and truly differentiated. We talk to a large number of growth equity players, and not everyone can be flexible investing across the capital structure so clearly you and your team have experience dealing with all types of situations. Could you share with us a little bit about your background leading up to Sagemount?

Daniel: I grew up in Hawaii and went to Stanford University for college. While I double majored in classical music and biology, I discovered an interest in corporate finance and strategy in my junior year. After graduation, I took a job with Broadview, a tech-focused advisory firm, and later with JMI Equity, a software-focused growth equity fund. I then went to Harvard Business School where I realized that I wanted to learn more about credit and structured investing. The lines were beginning to blur between how lenders and equity investors thought about technology and recurring revenue as an asset, and I thought this would be an interesting theme to investigate. I joined Goldman Sachs’ Special Situations Group in New York after graduation, and in 2012 I started Bregal Sagemount with several members of my team.

RJ: You have a background in enterprise software. Do you find yourself spending more time in that sector versus others.

Daniel: I do spend a lot of time in enterprise software because it’s a business model that lends itself well to both credit and equity investing. But generally speaking, what we are looking for are entrenched recurring revenue streams: software maintenance or SAAS, contracted business services, transaction-based business models, and even physical asset-based leases. We view the contribution margin from these recurring revenue streams as the core asset in our universe of companies. Taken one step further, this perspective allows us to compare different business models as though they were financial services companies: an asset and originating platform financed by debt and equity. While the literal application of this analogy is a stretch for many growth businesses, grounding our diligence and analyses on core financial concepts has served as a helpful framework to make apples-to-apples comparisons between companies with seemingly different business models.

RJ: It’s common among investors to focus on recurring revenue streams. You mentioned earlier that you differentiate with the ability to look across the capital structure. Do you find yourself competing for deals, and if so, how do you usually win those deals?

Daniel: To date, we’ve made 15 investments across a range of equity and debt instruments. On the equity side, it has been a solid mix of both control and non-control investments, but most important to us, eight of those either had no advisor or had a very limited process. The end markets we operate in have no shortage of financial sponsors, but being flexible on terms and structure has allowed us to find opportunities even in the midst of robust competition. Where there is a pressing and strategic financing need, either in the context of an acquisition, a movement in ownership between parties, or an organic growth initiative, our ability to work through complexity and be sensitive to the needs of all parties differentiates us.

RJ: And how active do you and your partners get in terms of strategy and board participation?

Daniel: We are on the board of all of our equity investments and are helpful strategically and operationally, particularly on topics such as tuck-in M&A, partnerships, sales and marketing, and recruiting. That said, we are not operators, nor do we seek to take over day-to-day decision making. Our goal is to partner with the most capable and knowledgeable management teams. We want to support them where we can be most helpful while not getting in their way.

RJ: Great. And to wrap up, do you think you could highlight an example of an investment that you’ve made that exemplifies creativity or one in particular that you think Sagemount did a great job with the management team in helping the company?

Daniel: In October of 2013, I led a $40mm minority equity round into a company called Accela, one of the largest privately held software companies in the state and local government sector. The company was founded over 15 years ago and had built a substantial business selling land management, permitting, and licensing solutions to hundreds of customers all over the world. Unlike many technology companies in the Bay Area, they had never raised outside money. But in early 2013, Accela’s management team saw two enormous opportunities in front of them. First, an increasing number of municipalities were interested in buying software as a subscription rather than perpetual licenses, and second, there was an obvious path to grow the business via tuck-in acquisitions, many of which already had integrations into Accela’s back-end systems. Since our initial investment 20 months ago, Accela has closed 9 acquisitions all while maintaining a high organic SAAS growth rate and profitability. The business has more than doubled since we first became involved, and the company has numerous options going forward, including a potential IPO in the near future. From the beginning, we’ve had a great partnership with management. Even before closing our investment, we set clear goals and mapped out an acquisition roadmap that we executed after closing the financing round. Our conversations are efficient, transparent, and frank. We’ve developed a rapport with management that encourages frequent but timely 10-minute chats rather than 8-hour strategic reviews twice a year. Don’t get me wrong, we still have formal board meetings which contain deep-dives as a matter of course. But I’d feel there was a massive failure on my part if the executives I worked with felt this was the easiest way to communicate with me.

RJ: That’s a great example. We’ve covered a lot of ground here, and I think our readership will find Sagemount’s background and unique investment mandate very interesting. Thanks again.

Daniel: Absolutely, it was great connecting.

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