venture capitalist

Joel magerman

Insight Into Cannabis Investing with Joel Magerman

MDLLCminddog

Joel Magerman brings Insight Into Cannabis Investing.

Joel Magerman of Emerald Park capital is a successful investor, principal and investment banker with over 30 years of experience. During the course of his career, he has been involved in closing over 150 deals representing a total transaction value in excess of $6 billion. Listen to this episode as Seth and Joel discuss: Why the cannabis industry has been neglected and underserved by capital providers. Why this may be the new ground floor of cannabis. The vetting process and due diligence in providing finance to the cannabis industry. Identifying bad risk in the cannabis industry. The most common challenges that these cannabis companies are facing other than access to debt … and much more.

https://emeraldparkcapital.com/

https://www.linkedin.com/company/emerald-park-capital/

More about Joel:

Joel Magerman is a successful investor, principal, and investment banker with over 30 years of experience. During the course of his career, he has been involved in closing over 150 deals, representing a total transaction value in excess of $6 billion.

For almost 20 years, Joel has been the CEO of Bryant Park Capital, where he has led clients and deal teams through complex financing and M&A processes, across both traditional and highly regulated industries. From 1995 until 2001 Joel was the President of Associated Venture Management where he oversaw a family office that invested and raised approximately $250 million of transactions for its portfolio companies. Portfolio investments included investments in the specialty finance, software, technology and healthcare services sectors. From 1991 to 1995 Joel was the Senior Vice President for FCA International, LTD (FCA:TSX), where he headed corporate development, M&A, and US sales, marketing and customer service. In that capacity he founded and was President of Structured Financial Capital, the second largest purchaser of structured settlements issued by the state of NJ. He also was a founder & operating partner with Reliant Partners, a firm that purchased over $1.5 billion of non-performing assets from the Resolution Trust Corporation.

Prior to FCA, Joel was one of the founders and board members of Odyssey Golf, the number one putter company in the world that was later sold to Callaway Golf. Earlier in his career, Joel was the Director of Finance and Technology for Citicorp Diners Club. Joel has his MS from the University of Pennsylvania and his BA from UCLA. He serves on the boards of ValueHealth LLC and Maccabi USA Sports for Israel, and has previously served on the boards of other for profit and not for profit organizations.

Transcript:

Seth Greene 0:00
Welcome to the podcast. This is your co host, Seth Green’s had the good fortune to be doing interviewing Joel Megaman of Emerald Park capital. He is a successful investor, principal and investment banker with over 30 years of experience. During the course of his career, he has been involved in closing approximately 150 deals representing a total transaction value in excess of $6 billion. Joel, thanks so much for joining us. Thanks for having me, Seth. So let’s go back in time a little bit, howdid you get started?

Joel Magerman 0:33
So long ago, I started working in on the business side of new business opportunities in the early 80s. And sort of saw how interesting it was in new business formation and sort of follow that path. circuitous route that followed it over the next, you know, few decades.

Seth Greene 0:53
I’m sure the longer version of that story could probably fill a book somewhere, if it hasn’t already. Tell us a little Europe, just some really interesting things. Tell us a little bit about Emerald Park.

Joel Magerman 1:04
Yeah, Emerald Park is a provider of capital predominantly debt, but also can provide equity as well in the cannabis sector. And it was very interesting does because it’s a sector that has been growing exponentially compound annual growth rate of 25 to 30%, over a 10 year period, but was significantly underserved in its access to capital. And we thought that created a unique opportunity for us to to raise a fund and actually be one of those capital providers.

Seth Greene 1:37
So why do you think for our folks who may not be aware Why do you think the cannabis industry has been neglected and underserved in this department?

Joel Magerman 1:47
Well, I think I think there are a number of reasons. Number one, there’s there was initially federal legislation that made people uncomfortable providing capital in the space, a number of things have happened over the last five to seven years, including 42, states that now consider it legal. And a number of things that have happened under under federal guidelines that provide greater comfort, but there’s some ambiguity in that. And that ambiguity has caused a number of companies and firms to be uncomfortable providing capital, they’re still, even though a increasing number of folks have continued to get comfortable and more and more capital is coming into the sector.

Seth Greene 2:32
And it’s not just debt. Right. It’s also that historically, there have been issues getting, you know, merchant processing, credit card processing bank accounts. Yeah, literally everything. Why do you think you’ve been quoted? Why do you think this is the new new ground floor of cannabis? Well, I mean, we’re, look, we’re

Joel Magerman 2:51
in the very early stages right there. There’s, if you sort of think of the evolution and think about alcohol that, you know, right after prohibition, by example, right, we’re in the early stages, because right now, there are states that it’s still legal, there are states where it’s legal, but only for medicinal purposes. And their states where it’s legal for medicinal and adult use recreational use. And so we’re still a long ways away from, you know, it being approved at a federal level, where can be used in every, every state across the union, based on each one of the state’s laws and the Fed, approving it. And so we’re, you know, we’re probably, you know, some number of years away from, you know, that happening, and then people need to get comfortable with the usage of it, like, like anything else, you know, when you have something that is, you know, initially, for example, approved for cancer patients, or there’s a number of drugs where cannabis is approved, it’s people still don’t necessarily understand it, and nor do you know, state and federal government. And so once everybody gets comfortable, I think there’ll be a continual growth in that.

Seth Greene 4:04
Absolutely. Now, you chose to predominantly focus on the loan, the debt part of the sector, why did you go in that direction, as opposed to you know, equity?

Joel Magerman 4:16
Again, I think it was of the, there are two reasons really, number one, I think it was more underserved. There was less access to capital on the debt side than the equity side. Um, number two, I think that our bias, our personal bias, and we have a lot of money in the fund is that we sort of liked the risk reward arbitrage on the debt side. You know, if you financed a non cannabis business that looks call it small to middle market between depending on what you’re financing, let’s say you’re financing real estate, you might get a 5% loan, and if you’re doing Junior debt, you may pay 15 percent in the cannabis sector to take that same economic risk, you’re probably getting three to five times your potential returns. And so we thought that was a great risk adjusted return profile for us. And it was an underserved spot in the marketplace. And so we thought it was a good place to be further underserved. And that being said, we’ve also made a couple equity investments as well. So we’re, we’re very supportive of helping companies grow, whether it be on the debt, or the equity side of the balance sheet, but we prefer debt.

Seth Greene 5:31
That makes total sense. Now, with there, it seems like every other day, there’s another company popping up, um, in some way, shape, or form in this space. Talk a little bit about your vetting process and your due diligence, because you’re kind of known for making really smart decisions.

Joel Magerman 5:49
Well, I mean, one of the things that, you know, being old means you have experience and seeing lots of things. So we’ve seen lots of deals and transactions over our lifetime. And we have certain things that we think are important to focus on. And we incorporate that in our vetting process. Today, we’ve seen in excess of 725 deals, we’ve invested made eight investments. So you know, that being said, we’ve probably bid on two to three times that number of transactions and for various reasons, either we learned something we didn’t like, or they maybe got better pricing, whatever the case might be, but we’ve you know, we’ve we have a pretty rigorous process, we want to make sure that we at our investors get our money back. And as a result of that, you know, hope is not a plan, right. And so if people don’t have the things, you need to be comfortable, we don’t want to just hope we get our money back, we really want to have analytics and comfort that says we’re going to get it back when we really, we really try to be thoughtful in our approach and understand the company well, which means you need to do a lot of work. And some of these companies didn’t have and don’t have the infrastructure, the people to support to give us the information and the data, we need to be comfortable.

Seth Greene 7:09
What our menu, if I heard you correctly, you had about a 1% rate in terms of the deals that you actually bid on an accepted. So what are some of the things that are warning signs to you to stay away?

Joel Magerman 7:26
Lack of internal controls is a is a major one. You know, people don’t have financial, financial, the appropriate financial systems, and that’s critical in this sector. That you mentioned banking, relationships, those are those are much less of an issue than people think. But some folks don’t have it. Very few folks have audited financials, which is a big deal for us, we want someone to have a third party review those financials and get comfortable with those. And you know, some of its the sophistication of management it you know, coming up with an idea and and so hot making this up but someone to say I want to build a chain of 50 dispensaries. Well building one and operating one dispensary does take some skill, but building an operating 15 centuries is a different skill set. And so some people are skilled in opening an operating number one, but they don’t have the wherewithal to open 50. And so some of it is just the breadth and depth of management.

Seth Greene 8:27
What are you finding are some of the most common challenges that these cannabis companies are facing other than access to debt?

Joel Magerman 8:40
Well, access to capital overall has has has been a concern, but it’s less of a concern now but still remains a concern. The markets are very geographic focused on a state by state basis. So there are certain states where the ability to grow is there’s there’s not enough licenses, it’s a Limited License state. There are hypothetically going to the state’s going to issue 50 licenses if you’re not one of the 50 you can’t play. So you know that’s a major hurdle. Having people that understand, right i mean if you think about cannabis as a particularly, it’s different types of uses, you know, you think about someone needs to understand how to cultivate and grow this and produce it in a large scale fashion. And, you know, just because someone grew it in their basement in college doesn’t mean that they actually know how to run a cultivation facility. So having people that are skilled and understand how to be a cultivator how to how to maximize you know the the efficiencies of the growing cycle and take advantage of that is another important is another important skill. And then once the business gets to the point where it’s thinking about growth in a meaningful way, how do you attract skilled management and You know, a lot of people think, Hey, I got it up and running on the entrepreneur. I don’t need other people, I know how to do it. But the reality of it is that, I mean, if you if you look at Bill Gates, he knew he needed to bring in Steve Ballmer on the business, he might have invented Microsoft, but he needed someone to run the day to day. A lot of these folks think they don’t need those people or they think just because someone worked at a big company, they have this skill set. And really, it’s it’s attracting the right kind of people the right kind of capital, and the right resources to really create a successful enterprise.

Seth Greene 10:35
That makes a lot of sense, your your passions obvious, what do you like best about what you do.

Unknown Speaker 10:41
Um,

Joel Magerman 10:42
I love working with passionate people that and I’m really trying to help them in their journey to to attain a much greater level of success. I mean, that’s, that’s what’s rewarding, right? It’s, it’s hard, you know, being successful with a new idea. And creating that new idea into a business that can be successful and rewarding is a lot harder than people think. And being part of that journey and helping an entrepreneur be successful. And that is something that we love to do.

Seth Greene 11:13
What has been some of the biggest lessons you’ve learned along the way in the 30 years of investment banking and m&a experience? Wow.

Joel Magerman 11:25
That’s a, that’s a big takeaway. I think the most important thing is don’t underestimate the importance of people. A great manager of a business can make a bad business successful, and a poor manager of a business can make a successful business failure. And so if you’re really investing in people, even though there’s a lot that goes around it, you’re all you’re ultimately investing in good people.

Seth Greene 11:52
What do you think the time horizon is for cannabis before it gets to the point where a lot of these hurdles that you’re benefiting from, you know, kind of get erased and VA becomes more commonplace? Um, we won’t call you.

Joel Magerman 12:07
I know, I think it’s, I think it’s a it’s a multi step process. Um, a lot of people thought when Biden was elected, that all these barriers going to be knocked down, and all of a sudden, a lot more capital came into the market, they thought all of a sudden there was going to be federal legalization. That didn’t happen. What everybody’s sort of learning is that’s going to be a process in and of itself, when they figure out federal legalization. It’s not going to be all of a sudden that things change. And there’s a magic wand, right? All of a sudden, all the federal agencies that now touch this are going to do what they do, right? If you’re a regulator Your job is to regulate. So you think about when hemp was federally approved, all of a sudden the FDA came out and said on March 19, of 2019, we’re going to tell you how what the regulation is to ingest a hemp derived product CBD effectively, we’re still waiting. almost two years later, we’re still waiting. So I don’t think people have realized that there I mean, totally comprehended that even federal legalization is going to require the federal, you know, arms of government, time to figure out what all that means. And until sort of all that gets cleared, I think we’re gonna have to see all that happen. Before you see a cannabis business look exactly like a consumer packaged goods company that’s selling sneakers. And we’re just so we’re some number of years away from that.

Seth Greene 13:38
You’ve achieved an immense amount of success and worked on some incredible deals over your career. What’s your biggest challenge now?

Joel Magerman 13:47
Actually, we have the same challenge that the companies have is access to capital. The biggest ones in cannabis would be deemed the most the tiniest funds in the non cannabis world. There are dozens and dozens and dozens of firms that are multi billion dollar funds in the regular world. There’s not a single one in the cannabis sector, a big fund is a few 100 million dollars. And so access to capital is is is an issue for process providers and capital, as well as for the companies and and all of that’s getting better. You know, but I think that, you know, until all the gates sort of open, it’s easier for someone to open a gate and write a check in many ways, other than maybe the top dozen companies to us because we can show an institutional track record. And they’re one step removed, let let us do our job. But you know, until that sort of goes up and down the whole life cycle, we’re we’ve still got a ways to go.

Seth Greene 14:54
What How are you attracting investment capital for your funds at this point?

Joel Magerman 15:00
We’re telling the story, we’re telling you the same story that, you know, we’re outlining to you it’s and people, people get it, right. It’s a, it’s a, they understand the size of the market, they understand, or hopefully they do after we speak. They understand what the opportunities are and the growth that’s happening. And they’re, they’re willing to take, effectively a little more risk for a greater return. And if they believe that risk reward quotient works the same way we do, then we’re lucky and we have we have investors and we’ve, we’ve been fortunate, we’ve been able to trust attract some great investors. And but we’re always looking for more.

Seth Greene 15:41
With all that you’ve shared, is there anything you want to share that I didn’t think to ask you yet? Um,

Joel Magerman 15:49
I guess, I mean, there are a couple things that I think are sort of interesting. I mean, you know, number one, I think a lot of folks sort of think about cannabis, and they, you know, they may try to tie it to alcohol. When you think about cannabis, the three major uses from all the surveys are out there or for pain, relief, anxiety, and sleep, they’re really much more medicinal than most people think about, Hey, I’m going to go get drunk, or I’m going to go get high. So number one, I mean, there’s a big medicinal aspect of this that I think is overlooked. And that’s what the vast majority of the products being used for number one. Number two, there’s a whole new world of pharmaceutical experimentation that’s going on using cannabinoids. And there are a number of drugs that are FDA approved from cannabis derived products that are incredibly successful. And there is 10s of millions of dollars being spent in research around the world, that I think we’re going to come out with some really exciting new drugs. And I think people don’t necessarily appreciate the the the medicinal and wellness benefits that the the actual cannabis plant represents. And so I think that’s worth noting.

Seth Greene 17:10
Absolutely. where can our folks who are interested in learning more about what you’re doing go to learn more.

Joel Magerman 17:16
So we have a website, Emerald Park capital, there’s contact information on there, they can also go to LinkedIn and look up Emerald Park capital or look me up, as well, but happy to talk to any interested parties. And we’d love the opportunity to share what we know.

Seth Greene 17:33
All right. Well, we greatly appreciate your time. We know it’s incredibly valuable. This has been Seth Green with Joel omegamon of Emerald Park capital. Joel, thanks so much for joining us. Thanks, Jeff. Have a good day. Thanks, everybody, for watching or listening. We’ll see you next time.

Unknown Speaker 17:45
Bye bye.

Transcribed by https://otter.ai

Preferred Return in Private Equity

Preferred Return in Private Equity

MDLLCminddog

Preferred Return Private Equity Preferred return is the part of the distribution waterfall and it gets calculated on the Invested amount based on no. of days until …

What is Preferred Return?

Preferred Return, often called ‘pref’, is a minimum return that Limited Partners in a fund must receive before any carried interest can be distributed to General Partners. A preferred return is expressed as an annual rate of return and can be thought of as the minimum expected return for the investment.

Limited Partners will receive 100% of their gross distributions until they have reached a certain rate of return on their investment in the fund. Once this rate of return has been met, General Partners will start to earn carried interest.

How is Preferred Return calculated?

Each Fund’s Preferred Return calculations are defined by the Limited Partnership Agreement that governs the fund. Fund’s calculations can vary in several ways. The most common variations are in the compounding periods of the preferred return rate, and the method for calculating elapsed time between periods.

For example, Fund A might specify that preferred return on any given capital call starts accruing when the call is funded and stop accruing when the applicable distribution of preferred return is made. Fund B might specify that for preferred return calculation purposes, any capital call or distribution is said to have taken place on the last day of the calendar month in which the capital call or distribution occurred. Now imagine a scenario where both Funds call capital on January 1, 2020 and distribute proceeds on December 31, 2020. In this scenario, Fund A investors are receiving preferred return based on 365 days of accrual, while Fund B investors are only receiving 335 days of accrual since the capital call is considered on the last day of the month.

EXAMPLE:

Investor A contributes $1MM into Real Estate Fund 1, LLC on December 31st, 2020. On December 31st, 2021, Real Estate Fund 1, LLC announces a distribution. Investor A’s gross share of the distributable proceeds is $2MM. Assuming the following structure, what Investor A’s preferred return, and total distributions?

Private Equity Post Covid in the US and in Brazil, Webinar

Private Equity Post Covid in the US and in Brazil, Webinar

MDLLCminddog

This Private Equity talk details the view of the industry in today’s world. The event focuses on the economic recovery in the US, from a macro and Private Equity …

jennifer Katrulya

Jennifer Katrulya – Outsourced Growth

MDLLCminddog

Jennifer Katrulya is CPA, CITP, CGMA partner at Citrin Cooperman.

Jennifer has been recognized as one of the “Top 100 Most Influential People” by Accounting Today, and one of the “Top 25 Most Powerful Women in Accounting” by CPA Practice Advisor.

She is responsible for developing strategic and channel relationships for the firm, in addition to contributing her expertise as part of Citrin Cooperman’s rapidly growing business process outsourcing division. In addition to her 25 years of experience working with small-to mid-sized clients across the United States and internationally,

Jennifer has worked extensively with private equity and venture capital firms, family offices, financial service firms, commercial and residential real estate companies, and high-growth technology companies, to connect private and institutional investors with private deals and opportunities to collaborate.

These companies retain Jennifer to help them establish best practices across the company and to provide ongoing services as part of their sales and marketing, operations, accounting, and technology leadership teams, both in their companies as well as in the companies they invest in. She is frequently asked to help form and run company advisory boards, facilitate company retreats, and appear as a speaker.

Prior to joining Citrin Cooperman, Jennifer was a practice leader at a top Midwest CPA firm, and she was the co-founder of Block Small Business, a wholly owned subsidiary of H&R Block. Jennifer was also the owner of a highly successful CPA firm that provided accounting and advisory services to clients within the U.S. and internationally.

Citrin Cooperman’s Business Advisory Solutions Approach ensures our professionals primary focus stays where it counts – on building long-term client relationship. Our specialized team provides integrated general business consulting, accounting, and tax services to our clients. Rooted in our core values right from the start in 1979, our mission is to provide a comprehensive business approach to traditional services and proactive business throughout the lifecycle of our clients. When you are free to focus on what counts, business thrives.

Listen to this interview as Jennifer and Seth discuss:

  • What it means to be a virtual CFO.
  • The most common problems that Jennifer helps business solve.
  • Defining and recognizing “efficiency leaks”.
  • Some of biggest mistakes companies make when thinking about an eventual sale.
  • How the management of teams and our workforce affect sales and marketing strategy..
  • The future of business process outsourcing.

and more.

Contact info:

https://www.citrincooperman.com/

https://www.citrincooperman.com/events

Private Equity: How it really works!

Private Equity: How it really works!

MDLLCminddog

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Andrew Busser “The Importance of Understanding Family Dynamics

MDLLCminddog

The Private Equity Profits podcast with Seth Greene Episode 007 with Andrew Busser,

President of Family Office at Pitcairn For almost a century, Pitcairn has partnered with some of the world’s wealthiest families to meet their needs and drive better outcomes year to year, decade to decade generation to generation.As President of Family Office, Andy Busser leads Pitcairn’s exceptional team of relationship managers, analysts, and client communications professionals, ensuring that the Pitcairn client experience sets the standard for families of wealth. People who know Andy describe him as curious and enthusiastic, with a passion for solving complex problems.

Andy brings a commitment to objective analysis and holistic solutions to the Leadership Team, and he is known for building successful relationships with clients and employees. Throughout his Pitcairn career, Andy has spearheaded the development of the Pitcairn Experience. He continues to position Pitcairn as a leading innovator among family offices. Before joining Pitcairn in 2015, Andy was a partner at Symphony Capital, a healthcare-focused investment manager of private equity and hedge funds. Previously, he was a management consultant at The Wilkerson Group and its successor, Wilkerson Partners.

Andy holds an AB in History from Colgate University. He has served on multiple boards, including the Colgate University Alumni Corporation and Lincoln Center Education, and Andy is currently a trustee of the National Committee on American Foreign Policy. Creative by nature, Andy enjoys painting, in particular, landscapes. He is an avid reader and can usually be seen traveling with a book on history or economics.

Originally from Columbus, Ohio, suburban Philadelphia is now home for Andy, his wife, and two sons. Whenever possible, he can be found skiing in the Rockies or fishing the waters off Cape Cod.

Listen to this informative Private Equity Profits episode with Andrew Busser about maintaining and protecting generational wealth.

Here are some of the beneficial topics covered on this week’s show:

  • Providing a comprehensive service experience across all the dimensions of family wealth.
  • What it means to truly be an advocate for clients. • The one thing that can destroy generational wealth.
  • The importance of understanding family dynamics. •
  • Pitcairn’s Gen 7 research hub.
  • Communication in teaching generations what it means to be responsible with money.

Connect with Andrew:

Website: http://pitcairn.com

Larry Kaplan

Leveraging Employee Stock Ownership – Larry Kaplan

MDLLCminddog

Larry Kaplan, Managing Director at CSG Partners, LLC.

Larry has built the nation’s leading leveraged employee stock ownership plan (ESOP) practice. His expertise in capital structure and ESOP optimization has led to hundreds of successful liquidity transactions and numerous accolades from industry organizations. He is also the owner of Synergy Capital I, LLC, a broker-dealer that provides corporate finance, liquidity and M&A solutions for private companies.

Listen to this informative Private Equity Profits episode with Larry Kaplan about identifying risk factors that can lead to permanent impairment of capital.

Here are some of the beneficial topics covered on this week’s show:

  • Does ESOP give shareholders more after tax value more than private equity?
  • How to determine whether it’s worth exploring an ESOP transaction.
  • Analytics and data that drive the ESOPs recommendations.
  • Employee stock ownership plans and how they are funded.
  • Operating as industry agnostics. Firm philosophy and culture.

Connect with Larry

Email: info@csgpartners.com

website: csgpartners.com

Phone: 212 433 5500

TRANSCRIPT:

Cliff Locks 0:01
Welcome to the private equity profits podcast. I’m Cliff locks your host and with me today is Lawrence Caplan Founder and Managing Partner at CSG partners LLC. Larry has built the nation’s leading leveraged employee stock ownership plan. It’s an Aesop practice and is actively involved in all aspects of csgs investment banking activities. He helps owners of private middle market companies achieve equity monetization, while addressing personal goals such as business continuity, legacy and estate planning. His expertise in capital structures and Aesop optimization has led to hundreds of successful liquidity transactions in numerous accolades, industry organizations. Tell me how you got started, Larry, and what led you to private equity?

Larry Kaplan 0:47
Sure, I was working at a middle market accounting firm in New York in their Consulting Group, doing some general consulting we also have m&a side of our business. And I was working with one young individual that started a company was 34 years old was constantly reinvesting in his business and wanting to sell the company and we had taken the company to market he’d gotten some bids from private equity, a few from strategic and they were really low three, let’s say four to four and a half times Eva Dodd is about 21 years ago. And at the same time, we were doing some work for the garment center company, Bill Blass here that he had passed away and his estate was selling their interest. And I found out they had an employee stock ownership plan, bill actually actually sold a piece of his companies earlier. And he used that money to fund which now I think the name has changed, but was then bill Blass Reading Room at the New York Public Library. And I became interested in the Aesop I knew nothing about it. And I started talking to people that were involved in that Aesop. I spoke to their attorney, and they were telling me the tax benefits that you receive when he sold to the sap. And I knew nothing about that. And I said, That’s amazing. Actually, I said, these tax benefits are really encrypted, you don’t pay capital gains taxes, the company receives tax deductions equal to the sale value. And so I started going around to the partners at this firm, which was an excellent firm, and I started asking them what they knew about Aesop’s and everything that they knew about Aesop’s was completely wrong, because they just didn’t have any of the facts. And these are very smart audit and tax people. And I said, Look, there’s this major disconnect in the marketplace between what’s reality and what this product actually is. And so we then took this company down the road of selling to an iOS app, he got as much money after tax if he would have sold the company. And it became a huge success. Because Three years later, he sold to the software initially for like, value the company was $40,000,000.03 years later, he ended up selling the company for $140 million. He walked away with a ton more money, the employees walked away, I think there are maybe 50 of them with over $40 million. It was a major success. And that’s what led me to say there is this opportunity in the market because business owners don’t understand Aesop transactions, nor do they’re professional advisors, the one that I came across, and that’s how I got started.

Cliff Locks 3:08
I appreciate that. Tell me about your employee stock ownership plans and how they are funded.

Larry Kaplan 3:14
Sure, we like to tell business owners that any doing an Aesop is doing a leveraged buyout of your own company, right, just like a private equity firm is gonna go in, and they’re gonna put some equity to the transaction and go to the capital markets to raise debt to finance the transaction. We’re doing the same thing, right. And initially, we had to educate the banks as to Aesop’s, we had to educate the funds to ethos, we had to educate all parts of the marketplace as to why they should be lending into an Aesop transaction at terms similar to what the private equity firms are doing. And so now we got the same access to the capital markets as a private equity firm doing up and down the markets. Last year, we closed our first high yield leverage bond offering to financing ease up which was we raised over $500 million for that transaction. So we’ve got in and said to these business owners, you could do it and we’re going to help you do it. And that’s where the money comes from. It’s a debt driven transaction. There’s no equity in the deal. But since the owners aren’t paying capital gains taxes when they receive those funds, that’s the equity piece that we’re able to fill in the gap.

Cliff Locks 4:21
Isn’t Aesop give shareholders more after tax value more than private equity?

Larry Kaplan 4:26
Well, a couple of things we’re going to talk about after tax value number one, just from a strict monetary perspective, right when you sell to an ISA, under Section 1042 of the code. When you receive those proceeds, if you reinvest into qualified replacement property similar to a 1031. In real estate, it’s much more flexible. You could defer paying capital gains taxes. As long as you hold that replacement property. There’s a whole industry that’s popped up helping business owners satisfy that qR p requirement, but number one right off the bat, you’re not paying these taxes. And that’s kind of like the great equalization factor with what you’re going to see with the private equity deal. But in addition, right, how does it give them more and this is really, sometimes we go into a transaction and the private equity offers are more than what they’re going to be able to get from selling to an ease up. Most of our deals are done directly, though, with private, family owned businesses. And they could be a business in Des Moines, Iowa, or remote portion of Iowa. And they’re the private employer in that town. So when these companies start looking for liquidity strategy, these employees have been with them. In some cases, since they’ve been in that community since the 19th century. While they want to get the value for the company, getting the absolute maximum last time off the table is not what’s driving most of the people that are doing any stuff. They want value. They want strong value, but they’re also looking at their community and what’s selling to a third party could ultimately do to their community.

Cliff Locks 5:54
Well said, What industries do you serve?

Larry Kaplan 5:56
We’re industry agnostic. So right now we’re probably working on 30 or 40 different transactions. We’re working with companies in the construction industry, manufacturing, distribution, transportation, services and consulting. We’ve got a large medical practice. Aesop transaction right now, you’ve probably done some episodes on the healthcare industry. And we’re offering Aesop’s to medical practices, the same kind of a structure that they’re getting through private equity. They could do it through an Aesop. So you name any attack, we’ve got accounting firms, we’ve been uncertain specialized law firms, you name any type of an industry. And as long as those companies are paying taxes, then Aesop could be an alternative structure for them.

Cliff Locks 6:41
Very interesting. What are you most proud of in your career to date?

Larry Kaplan 6:45
Well, I think in general, we’re both proud of we’ve probably made hundreds, if not 1000s of employees, millionaires through use of putting these up in place. And I’ll just give you one quick story. One of the earlier, Aesop’s, I did turn out extremely well. And it was limited workforce. So most of the most of the top executives at the company when the company was sold four or five years later, walked away with north of a million dollars in their retirement account. And independent of this, I was playing in a casual poker game with my brother in law and some of his friends. And there was one of the guys who I’d never met before who said, Yeah, my wife worked at that a special needs child that really needed a lot of care and it was very expensive. And he said my wife worked at me SATCOM, through the sale of her stock. When the company was sold, she was able to fund the care for the rest of his life through the proceeds that she received from the Aesop. And to me, that was amazing. And we see this time and time again, now that we’re really transforming not just the selling shareholders, right, they’re happy, and they’re getting great deal. But it’s also the people that helped build these companies that are now getting dissipate in capitalism and ultimately sell and get this money. So it’s a nice thing to do very positive.

Cliff Locks 7:59
What is your approach to identifying risk factors that can lead to permanent impairment of capital,

Larry Kaplan 8:04
just like everybody else, right? So anytime we’re going into a company, we’re going to be the liaison between the company and the credit markets. And so we try to do the same type of due diligence and stress testing as any type of private equity firms come into a company and do right, what could happen to impair this company’s future cash flow. And of course, because of the ISA up in the company not paying taxes, they’re always gonna be better off at least there’s some positive cash flow. So when you stress testing and Aesop, even if the company is performing, you know, 50% less, they’re still generating the same after tax cash flows. So you’ve got more buffer in your ability if things go wrong, but it’s the same thing, right? How How big is your order book, how sticky is your clientele, the same kind of stuff that our private equity firms gonna go when we try to analyze and the better companies could get, you know, six, seven times, even puddings that don’t have that, you know that you get two times EBIT, done alone. So it just runs the gamut. And it’s the same analysis than any private equity firm will come in and do. How

Cliff Locks 9:05
do you help clients determine whether it’s worth exploring an Aesop transaction?

Larry Kaplan 9:09
Right, so we do a lot of right. So we’re a very quantitative driven firm, right? So the first thing that we go into a business owner is that we say, look, you have all these other options, right? And which is the best option for you. We’re gonna run financial models, and we do this virtually every day, we’re gonna say, what does an Aesop look compared to private equity day one? What does it look like in years 345? What does it look like and compare it to a strategic value strategic buyer. So we’re running all these different models with different assumptions and then we come through and we work. Normally we’re introduced to these clients through a trusted advisor, whether it’s their accountant, their lawyer, or some other type of their financial wealth manager. And so we’re including them in the process and collectively, they look at it and you also need to include estate planning, all the things that you look at in any type of asset. sale gets incorporated into the analysis very, very positive.

Cliff Locks 10:03
What kind of analytics and data drive the SOPs recommendations? Number one, you

Larry Kaplan 10:09
start with the same thing. So we start with the same base financial models, they would with the private equity, you can have a low growth, moderate growth, high growth case, looking at the cash flow of the business. Is it cashflow intensive? Is it not cashflow intensive, we have to look at factors that lower taxable income such as a cubii deduction, depreciation, and then we look at the company and saying, Okay, how much the bottom line driver with does the E sub really make sense? Higher the taxes that those companies are paying? When I say to companies, they’re usually pass through entities 95% of the time, either an S or an LLC, paying taxes at the personal level? And then we say, okay, when we layer on the ISA, right, how much better off of those companies be? And then we say, how much money Can we borrow, right? What’s the value of the company for Aesop purposes, so all these when we do analysis, it’s usually a 60 page analysis that covers value, capital, raise cost of capital, the ability to pay that down based on various assumptions. So again, it’s a lot of modeling. And that’s where people appreciate the detail that goes into this analytical exercise,

Cliff Locks 11:17
very professional. Describe the culture and philosophy of the firm.

Larry Kaplan 11:22
You know, our culture philosophy is always do the right thing for the client, right. And so number one client comes first, second, and third, always, you know, tell the good news and the bad news, if it makes sense. Let’s go for it. If it doesn’t, it doesn’t, then let’s not waste everybody’s time and, and try to put a square peg in a round hole. Most people at CSG have been with us further, you know, for the last 20 years, when they start coming very few people leave most of our managing directors now they become a Managing Director Emeritus. So even though they’re not working full time anymore, what ex partner who is now in his 80s, and he’s still bringing in business. And so who worked with some of the younger people, they’ll run the deals, and he’ll do it. So we have no stop limit, you know, you could continue working. And then now what we’ve really done over the last five years is bringing a real good core group of younger people that are gonna be the future of this for I think we give the best training. I mean, we know that because a lot of times, historically, they kind of target our employees and take them over the bigger banks. And then sometimes we just hired our new head of capital markets, have worked with us 15 years ago, went to work for the major banks, and then we brought him back in, and he’s been a phenomenal help for us opening up new sources of capital that we could never have touched by ourselves. So that was great.

Cliff Locks 12:39
I’m proud of you and your team a continuity, yeah, and flourishing, and really the doing the training with internal. And then the mentor. I think it’s very, very positive. And I wanted to ask you, what do you love what you do in what do you find most rewarding personally?

Larry Kaplan 12:53
Yeah, so I’m not a normal person. Because I love I mean, I love what I do, right? I mean, we’re working with different business owners in different businesses all around the country. And one thing I really didn’t love was I was on a plane, you know, usually two or three days a week. Now I bow under COVID, I sit here, we’re doing a meeting in Los Angeles, I’m doing a meeting in Phoenix, and I don’t have to travel as much, I enjoy that. But I enjoy working with business owners, right. And I enjoy working with the companies and then seeing them transform, and then seeing the success that comes out of these businesses and how successful they could become and how value how wealth is a tremendous wealth creator, not just for the few people on top, but for all of the employees at the company. And it really is great when you start to see some of these companies in the success they’ve had. Since I’ve been doing this now it’s our 21st year, you know, we see some major, major success stories.

Cliff Locks 13:46
It’s exciting. It’s not just the top sea level, the really it’s the employees at that point. And it’s

Larry Kaplan 13:51
we’ve got, you know, hourly employee workers at companies that have got retirement accounts that are in the seven figures, tremendous, what would be your personal legacy? Well, my personal legacy, just that this see our firm and the work that we’re continuing to do, to see and continue to see that, you know, we’re out here and do more of them. Unfortunately, Aesop’s are, you know, a backwater area of finance, most people don’t know them. So when you look at the benefit they bring versus the amount of market penetration they have. We’re just scratching the surface. My what I would like to see is a company that hopefully this year we’re going to do 25 to 30 of these transactions, but in five years, we’re doing 150 to 200 of these transactions and just to continue what we’re doing but in a bigger, more broad based way. Very positive. I truly appreciate you spending the quality educational time with our listeners today, Larry. Larry, can

Cliff Locks 14:47
I share your contact information with our listeners? Absolutely. You can reach Larry by email at info at CSG partners comm which is spelled info inf o at CSGP ar T and ers.com you can reach Larry by phone at 212-433-5500. Again that’s 212-433-5500 Thank you for our listeners. I look forward to being back with you shortly for another episode of the private equity profits podcast. This show has been produced by market domination, LLC.

Transcribed by https://otter.ai

Private Fund Edu: Fund Types

Private Fund Edu: Fund Types

MDLLCminddog

Hedge Funds, Venture Capital Funds, Real Estate Funds, Private Equity Funds and Special Purpose Vehicles! This video gives a quick overview of these …