Five Questions with Doug Sutton of Huron Capital

Doug Sutton leads Huron Capital’s new Flex Equity Fund, which invests in non-control deals in the lower-middle market. Flex Equity Fund closed on $142 million in April.

Sutton chatted with Buyouts on the strategy.

1. How did the idea for the Flex Fund come about?

There were multiple factors that went into creating the new fund. The first one was that Huron had been seeing deals that required a non-control equity investor and the firm didn’t have a vehicle to address that. Number two, as we dug into this further, we realized there weren’t many firms pursuing this strategy on a proactive basis. We knew it was an underserved segment of the market.

And third … this created the opportunity for the firm to grow its assets under management without moving away from the lower-middle market, where the firm had its success and had its network built.

2. What are some ideal situations for a company to bring in a minority backer?

A minority equity investment could become relevant in a variety of circumstances. We’ve seen situations where it could be a management team that owns 30 percent of the business and management wants to become the majority owner. They’ve been running the business. In order for that deal to achieve everyone’s goals, management wants a minority equity partner to help capitalize that deal.

[A deal we announced at the end of last year] was Stay Online, a custom power-cord manufacturer in North Carolina. This was [a] family-owned business that was looking for an equity partner to help them fund growth and a partial liquidity event for the owners. We structured a transaction that met their needs; we’re executing on the strategic plan we put together with everyone’s input. Between our operating partners and our family owner and the Huron team, [we’re] helping the company grow from organic opportunities and through acquisition.

3. What is activity like in the market for this type of strategy?

There are a variety of opportunities that fit our profile. We have a number of transactions that have a lot of promise. Our pipeline is very strong. Our second transaction was working with an independent sponsor and a family office to execute a buyout. The opportunity was for us to partner with the family office on a non-control basis to help capitalize the transaction. It was a very attractive, high-margin, lower-mid-market business we felt had some great attributes for growth and opportunities to create equity value. The business is called B&B Roadway Security Solutions.

4. How did you find the fundraising process, especially as a new strategy?

It accomplished our goal, which was to expand the Huron LP network. We did get some investors who were already familiar with Huron to invest in the Flex Fund and we were very pleased with the new investors to the Huron platform that were attracted to our strategy.

5. How are you navigating the high-priced environment? Does this strategy help with that?

The market is frothy. There’s a lot of capital pursuing transactions: private equity capital as well as credit, banks and non-bank lenders. It’s driving valuations up. My experience is if you make an investment in a good company, it doesn’t matter where we are in the cycle. We still believe there are good opportunities in the market, especially in the lower-middle market, where you can put fair valuations together and create a strategic plan that will enhance the value of the business. We’re not afraid to invest in this cycle.

We always look at the downside. Anyone who lived through the Great Recession remembers that. We do take cyclicality into account as we look at deals; we do try to find things we think have some recession resistance. But the reality is in rough markets everybody is impacted in some way or another. But a well-structured balance sheet with a strong management team can do well through good markets and bad.

Action Item: Read more about Huron’s Flex Fund here: https://www.huroncapital.com/strategies/flex-equity/