The Exchanges

Q What's one of your favorite examples of a creative structure in one of your investments?

A I have two examples. One is we invested in a very entrenched payments and invoicing company. They did payments in the real estate and property management space, which is heavily regulated around tenant protection. So historically, about 90% of landlords did not offer an electronic option. You had to pay by check, and there was a whole antiquated way of collecting and cashing checks so landlords could stay on the right side of tenant protection and tenant eviction laws. We had thesis in this. We went through our whole playbook. Stars aligned several years after building a relationship. And one company that we thought was great needed more capital. They didn't want to sell control. They were approached constantly by smaller private equity players, and they couldn't take on debt because one of the reasons they need more capital is they need to have substantially higher liquidity and tangible net worth as required by some of their processing bank partners. So what we did was an interesting structured deal. They were also dilution sensitive. So their view was their company was worth X. We thought if we had to sell the company tomorrow is worth 80% of X. We basically went to them and said, hey, if the company does not grow materially, we have to have some way we can make a respectable return. So we'll meet your valuation, but we get our money back first before anyone else. We get a b…

AI assessment note: “So we'll meet your valuation, but we get our money back first before anyone else.”

Q When you put these together, how do you think about structuring a portfolio?

A The shape of underlying deals could be a little idiosyncratic, but when we think about our funds, they are, call it plus or -10 positions, historically, maybe even closer to 12. Maybe we only have 10 or less outstanding at a given time. We have a high degree of recycling in our approach. So the way we think about it is, Plus or -10% positions at a max, one. Two, even though some deals may be a preferred note with warrants or a convertible preferred or totally unlevered vertical strip of the capital structure, when you blend those all together, we want something where in a downside case, you have a structured return that'll be meaningful. It could generate in and of itself A low to mid teens return where our risk exposure looks and feels like attaching at 10 to 20% LTV and detaching at 60 to 80% LTV. So really upper to middle of the capital structure type blended risk. But we want sufficient optionality across the portfolio so that we can hope to generate returns that are north of a three or four X groups. So blend those all together in a base case. Maybe that looks like we're an outcome of three X or more.

AI assessment note: “when we think about our funds, they are, call it plus or -10 positions”

Q As you crystallized the ideas you had into a strategy, how do you describe what you're doing at Dayer Street?

A I think two sides of the coin. So what are we doing from a structure and approach perspective? And then what are the themes we're investing behind? So from a structure and approach perspective, we are doing proprietary relationship driven partner deals where we are investing either on a totally unlevered basis or in the upper half to upper two thirds of the capital structure in a manner where we feel we're relatively downside protected and collateralized by some underlying recurring revenue stream that could be subscriptions, royalties, leases, or other financial assets. Or a hard asset. We're primarily providing capital to these companies for growth, so it's mainly primary capital, sometimes a bit of secondary. We're really not doing any buyouts. We've never been at an auction. We are investing in businesses where we hope have really low correlation with the capital markets. So these are businesses that their in-place revenue is super consistent. So North of 90% annual gross retention, north of a hundred percent year-over-year net retention, where these are businesses and financial services, real estate services, and business services that are gonna keep operating like clockwork. And they have, through the recent tariff spikes, COVID, last several downturns, the key way to make money is can they either consolidate in a fragmented industry Or can they grow organically in a way …

AI assessment note: “we are doing proprietary relationship driven partner deals where we are investing either on a totally unlevered basis”

Q With the way you structured positions and wanting to capture upside without necessarily needing to have the cash coupon, how do you blend that with wanting to make sure you have your downside protection if it's not coming in the form of cash?

A It depends on the deal. There are some deals that are minority deals where we'll be senior preferred. We'll have all protections around Debt major actions, budget approval, etc. And even though that minimum return is on an accrued basis, on an exit liquidation event or some other form of liquidity, we're going to end up earning just based on that minimum return, something that's equivalent or materially in excess to where a conventional private lender is earning. And in fact, we're going to have A more efficient and faster means to protect against adverse scenarios than a lender might who can't be on the board and can't have certain consents around the table and can't step in and help when things go awry because they're worried about lender liability issues.

AI assessment note: “minority deals where we'll be senior preferred. We'll have all protections around Debt”

Q What was your first paid job, and what did you learn from it?

A I had lots of traditional small jobs, babysitting, fixing computers, any little side hustle. My first paid job was actually being a style and marketing consultant for Levi Strauss when I was 11. A stranger heard me talking and recruited me to do this job, and for about two years I got assignments from Levi Strauss company to basically give them my opinion on lots of different ideas they put in front of me. Actually, the New York Times wrote a story about how it was child exploitation. I thought it was the greatest thing ever. I guess what I learned from it was even people who are experts and are possibly the best at what they do only know so much. I sit around a table with all these adults I thought obviously had all the answers, and it was crazy to me that they didn't know everything.

AI assessment note: “My first paid job was actually being a style and marketing consultant for Levi Strauss”

Q What are some of the themes that you're excited about today?

A There's kind of micro themes within each of the sectors that we're hitting on. Big picture right now, I think structured equity or flexible capital is really interesting in our part of the market for a few different reasons. The setup is intriguing because on one hand, in terms of credit, you see this tale of two cities. You see small and local banks providing Debt to an increasingly de minimis portion of the population of companies out there in the mid-market and small businesses. Happened materially starting the GFC, and it's accelerated more dramatically, typified after SVB and FRB, etc. And then everyone talks about how direct lending is approaching five trillion dollars, and folks assume that that's serving the market that's less served by the banks. But the reality is, 80% of private credit is dominated by 20% of the players. They are investing out of very large funds. That market continues to consolidate. And the focus of most folks in direct lending and private credit is on opportunities that are larger than fifty million dollar checks. It's hundred plus million dollar allocations. So you have this piece of the market somewhere between five and fifty million dollars that is not efficiently served in terms of flexible debt. So that's one. I think the second is you have this array of fragmented, high recurring businesses, and examples of some of these business models that…

AI assessment note: “I think structured equity or flexible capital is really interesting in our part of the market”

Q And so then what happened through the GFC in what you learned about what you hadn't known previously?

A I think the mantra of our group generally was don't lose money. So every deal was first underwritten like a debt deal. Our group was doing both public and private investing. I would spend all my time in private investments, but debt, equity, and a lot of things that were in between JVs, minority deals, et cetera. And our capital was using the firm's balance sheet. So firm would allocate some amount of dollars. It would get levered. Eight to 15 times, and then we put it into companies. And so, always the first set of questions around committee were, where's the risk exposure? How do you lock in some basic return? And then how do you create some really interesting risk-adjusted return? So, deals that might only yield 10% or deals that are the potential to yield 30% were all weighed with consideration for the risk. Even when things were heady in 2007 and four things started to really fall apart in 2008. That was the mantra. And I remember us losing out on lots of opportunities because folks were so downside oriented. It ended up being a blessing in disguise or as intended. It was formative to initially, but then when we saw things fall apart in terms of liquidity, just entirely leaving the market through the GFC, it really hit home and focus on how you find multiple ways to de-risk, multiple ways to take your capital off the table, and then also hopefully multiple ways to win and …

AI assessment note: “it really hit home and focus on how you find multiple ways to de-risk”

Q What are the particular skill sets that you need on your team to be able to build relationships and then have the creative structured finance piece that brings that together?

A I think there's two components. So right now our senior team comes from similar backgrounds to myself. So they come from other institutions. Some folks have been at Coleman, but other institutional firms where they're investing in the same business, financial and real estate services, combination of debt and equity, but they did it at a larger scale. So they're a part of roll ups or creative financings. They have the real institutional pedigree to understand what good looks like, but they've Joined our team for that same reason. They find it more fun and rewarding to work in this part of the market. So having that debt equity lens is an important part of the team. Not everyone has it, but we have a mix of perspectives. And I think that's something that we're going to continue to focus on maintaining. And the other one is just being tenacious and dogged and thoughtful about research. So Part of it is having the right idea. The other one is getting out there and listening and meeting companies and figure out ways to be collaborative and solution oriented and not everyone on our team does everything. But I think the combo today is what ends up being our secret sauce.

AI assessment note: “having that debt equity lens is an important part... the other one is just being tenacious”

Q So I'd love to dive into that structure piece. How do you set it up to try to meet a certain risk reward framework on each deal?

A Every single deal is different. Big caveat. The way we think about setting this up is across our fund, we're trying to create a portfolio where the majority of our capital at risk from an underwriting basis is within the credit envelope. So if it were a different portfolio and a lender looked at it, they would say, hey, 80% of these dollars are dollars I would take risk exposure in a loan. The second from a portfolio approach is we want to create some sort of minimum return. Again, not every deal has it, but some sort of minimum returns on a blended basis across our portfolio. We have some sort of downside protection beyond capital preservation on a case where the company doesn't do as well. We're buying businesses at relatively reasonable valuations or investing in them at reasonable valuations. But if you have multiple compression, Or more typically, the company just doesn't execute to the extent they plan on executing. There's some sort of hedge in us not having dead money on that return. So across our, our portfolio today, we have just shy of a 1.5 X minimum return. We're trying to create this base layer where if none of the companies grow, they just stay stable, which is rare. You know, we're already engineering, call it a 10, 12, 14% IOR. Obviously, that is not what we're setting out to do. Many of our companies do three, five, seven X, but we're trying to create that dow…

AI assessment note: “we're trying to create a portfolio where the majority of our capital at risk”

Q As you look at your first six years as this scrappy deal by deal, the next six as an institutional manager, where are you hoping to go in the next six years?

A In short, we want to keep doing what we're doing. Started the business with the intent of investing in lower mid market companies. It's just as fun. And I think we can add more impact today than we can before with all the learnings. Focused on continuing to do it in an even more dialed in manner. Our funds may grow a little bit. We have a pretty material co-invest component to what we do. So that co-invest allows us to keep funding capital into companies that grow over a long haul. So The idea of sticking with our portfolio companies over a longer horizon is interesting and something that's top of mind to us. I think this pocket of the market and being a flexible capital provider is actually more interesting today than it was several years ago. And our team's even better at executing at it today than before. So want to do a little more and continue to refine the model.

AI assessment note: “In short, we want to keep doing what we're doing.”

Q Why don't you take me back to your earliest interest in business or finance?

A Probably informally, I became interested in it, I'd say, in middle school and high school. No one in my family was in finance. I grew up in New York City, surrounded by lots of people in finance or real estate. A lot of those things didn't make sense to me at the time, but I was one of those kids that was always interested in following the stock market and then also interested in how neighborhoods were changing and developers were shaping them. And growing up in New York City in the nineties, And part of the eighties got to see development of neighborhoods evolving and people around me were involved in that and benefiting from that. And then when I got into college, I went to Brown, generally a pretty liberal arts education. I was a history major. And honestly, a lot of my time at school was spent working on a commercial radio station as a DJ. So A lot of my time was involved in the music business, which is definitely not analogous to the types of things I invest in today. But in the classroom, there are a few experiences I had with independent studies or classes with adjunct professors who were entrepreneurs or real estate developers or had experience doing lower mid-market private equity. It wasn't called that at the time. The process of learning about that Evolution of a company or evolution of a development project really intrigued me. I didn't totally understand how to con…

AI assessment note: “informally, I became interested in it, I'd say, in middle school and high school.”

Q So what happened when you launched? You had a few families you thought were going to back you that didn't, you were looking for deals. What those initial years look like?

A At the start, the goal was find a great deal, build relationships with initially family offices that love to fund one-off deals and see if I could pair the two together. And the overarching theme and finding deals was how do I find something that is truly proprietary where I can justify my place in the capital structure versus another firm. The way I did that was similar to how we approach investments today. So develop sector expertise where board and management don't feel like they're educating you, where I'm not necessarily telling them how to do their job, but I may bring insights or connections or network to the table. I think the second is be really solutions oriented. So Today at Thayer Street, we're focused on businesses in the lower mid-market that are somewhere between a conventional debt investment and a levered private equity investment. So we're investing in the fat middle part of the capital structure. Sometimes it's an unlevered investment, sometimes it's a super bespoke preferred security, and took that same approach when we were doing one-off deals. So it was cases where someone didn't want to sell the company, they wanted to minimize dilution, they would give up Some equity. They didn't want current paying debt. There was an opportunity to structure something interesting and differentiated. The idea was leverage the relationships that I invested time and effort…

AI assessment note: “At the start, the goal was find a great deal, build relationships”

Q How do you think about competing in this space when you're trying to win a deal? How do you think about your positioning relative to other players?

A The good news is we're not doing tens or hundreds of deals a year. So a busy year is when we're probably doing five deals or so. That would be a high volume year. I think generally it comes back down to we want to find companies where We have a reason to exist in the capital structure. We have a reason to exist because we have a lot of intelligence in the specific sub-industry the business is in, and or we can be an accelerant to some vector of that company's growth. In many cases, it's a repeat of some analog that we experienced at a prior portfolio company. The way we compete is A, find interesting businesses and themes we like where it has that overlay. There are a lot of situations we're investing in new companies that have slight adjacencies to historical Windsor existing portfolio companies, and another way we stand out was just flexibility and creativity around how we structure our deals. Someone who wants to minimize dilution, but doesn't want the cash pay burden or restrictiveness of traditional private credit. And they want to retain usually materially more upside than they would in a lower mid-market buyout deal. And then it's really about demonstrating our knowledge and potential value app.

AI assessment note: “The way we compete is A, find interesting businesses and themes we like”

Q In some of these situations that aren't going as well, how do you think about trying to work with and support the management team to get them back on track?

A Up front, we're going to work with a company in a few different areas. One is HR and recruiting and team building. Another one is finance, infrastructure, and data. And then a third is around process, procedure, and redundancy in terms of M&A and M&A integration. Those are the three areas where we add the most value. And again, we're trying to invest in businesses that have a good thing going. We're not doing turnarounds. We're not doing repositionings. And if it's really dramatic, a shift, that's a case where either Hopefully in a really collaborative way, we're finding an exit strategy pretty quickly. So just dialing back to those few areas, the folks helping in those cases are a combination of our investment team, as well as our operating partners. We have just shy of 10 operating partners, and these are guys that for the most part are former executives in the industries we're investing in. Some of them are former CEOs and CROs of Portfolio companies we've had, a number of them are functional experts. We have guys that have led businesses in vertical software and in the real estate space. Roll ups of very small silver tsunami type mom and pop businesses. We have some functional experts that lead or run HR and recruiting firms or have done operational either turnarounds or Strategy repositionings, both at a small level and some at the highest level with much larger firms than…

AI assessment note: “the folks helping in those cases are a combination of our investment team, as well”