Five Questions with Nick Russell of Tuckerman Capital

Tuckerman Capital is a private investment firm that works exclusively with independent sponsors to acquire niche middle-market industrial companies. The firm has raised five funds.

Co-Founders Peter Milliken and Tim Briglin conceived of the idea of starting Tuckerman Capital while working together at Green Mountain Partners. In 2001, they established the firm, aiming to become the first-call “partner of choice” for independent sponsors.

Nick Russell joined the firm in 2010 and became a partner in 2012. He sat with Buyouts to discuss why the independent-sponsor model has become so attractive to investors in recent years.

What are the benefits of investing with independent sponsors rather than traditional funds?

We consider ourselves, and engage, much more as a lead co-investor than as an LP, so we have never considered investing in traditional funds. Small-company investing is a labor-intensive business that doesn’t lend itself naturally to scale. Thus, partnering with independent sponsors is of significant benefit in our view.

How has your business model evolved?

Our model has remained remarkably consistent in our 17 years and across five funds.

The independent sponsor market around us has evolved dramatically during that time, however, as has the lower-middle private equity market. Senior debt for companies in our size range is more widely available now than it was two decades ago.

We are happy to be junior-capital providers where appropriate but still seek to minimize third-party leverage risk going into a deal and conservatively capitalize our investments. The offer of providing all the necessary capital to get a deal closed in a package that’s aligned with the independent sponsor as equity investors is as compelling as ever.

Nevertheless, we’ve noticed two subtle evolutions in our business.

First, we have broadened the mandate for the types of business models we feel comfortable investing in. Increasingly, we are focused on the value that our deal partners may bring to a particular investment thesis. We originally articulated our mandate as “niche manufacturing” but have expanded that in recent years to “niche industrial” as we have had success with a broad range of higher-margin industrial product and service businesses.

And second, as the independent-sponsor channel has taken market share from other buyers, we have seen the number but also the average company size of our opportunities increase. A higher percentage of companies are above the $5 million Ebitda threshold than 10 years ago, in addition to there being more platform appetite.

Traditionally, the independent-sponsor model has been seen as a precursor to raising a fund. Has this been true of your partners?

We have worked with some folks that have gone on to raise a fund or two, and have also seen some who have done that and then reverted to deal by deal. It’s easy to forget that the private equity industry really started with deal-by-deal financing (at the time called “bootstrap” financing), and it wasn’t really until the 1990s that the fund model really became established.

It’s difficult to put a time frame on it, but there was certainly a pickup in 2011-12, and since then it has accelerated, with more “new” sponsors every day.

To some extent, we interpret an aspect of our role as supporting a vibrant and successful independent-sponsor marketplace. We are happy to hear when friends of ours raise a new fund and are excited when others decide not to pursue that route.

Do you have a class of independent sponsors you routinely do business with, or do you seek out new partners on each deal?

More than half our deals have been with repeat partners, but we are always meeting new potential partners who we would be excited to work with, especially given the expansion of the independent-sponsors market.

In terms of how this growth has affected our business, it has increased deal flow. But at the same time, it also makes it more challenging to develop meaningful relationships with partners in advance of seeing an opportunity from them that you want to work on.

What qualities do you look for in an independent sponsor you want to invest with?

Regardless of the strengths and skills of our deal partners, the traits we look for include good communication, appropriate risk tolerance, self-awareness, relevant experience (be it operating or investing), leadership attributes and an interest in partnering collaboratively. These are folks that are looking to drive, not ride in the passenger seat. We work hard to be and stay aligned with our deal partners, and to support them — a big part of our business is about trying to help them be successful.