March 6, 2016
Interviewed by: David Snow
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How to Transform Smaller Companies

Justin Kaplan of Balance Point Capital Partners talks about his firm’s focus on the lower middle market, about what most companies in this category need besides capital, and explains why he can effect more change in this sector.

Justin Kaplan of Balance Point Capital Partners talks about his firm’s focus on the lower middle market, about what most companies in this category need besides capital, and explains why he can effect more change in this sector.

Best Ways to Effect Change in Smaller Companies
With Justin Kaplan of Balance Point Capital Partners

David Snow, Privcap: Today, we’re joined by Justin Kaplan of Balance Point Capital Partners. Justin, welcome to Privcap today. Thanks for being here.

Justin Kaplan, Balance Point Capital Partners: Thanks, David.

Snow: How about a bit of history of Balance Point?

Kaplan: The genesis of the firm was to invest in the tri-state area in the lower end of the middle market—small companies—and primarily to do debt investment. Fast forward 28 years (if I did the math correctly), we’ve changed the name and evolved into Balance Point Capital. We manage about $500 million in a couple of different fund products.

Our primary fund…invests across the U.S. The core difference between where we were 20-plus years ago and today is [that] we invest both debt and equity in the lower middle market. The theme with us today is [that] we’re happy to invest across the capital stack and to try to come up with a solution for our partners and our companies from a capital standpoint.

Snow: For the type of company you target, what do they typically need beyond just capital?

Kaplan: The companies we invest in are still owned by the original founder, so [they are] true entrepreneur-backed run companies. Typically, they don’t have a lot of infrastructure, so one thing we try to help with our capital is to hire folks. We want to hire out, build out a sales team, a technology team and a senior-management team. The other area where a lot of the companies need our capital is for the infrastructure.

Snow: How do you source the opportunities you are going after? What kind of a network do you use and how do you present yourself as a potential partner?

Kaplan: This year, 2015, we looked at 700 companies, we met with 175 and we only invested in five companies. We try to make the funnel (I’m making a funnel) as big as possible. The way we do that is to try to go after seven different channels. We have an outreach program for other private equity firms, investment bankers, investment brokers, wealth managers, lawyers, accountants—anyone in that ecosystem who is working on a transaction or might be aware of a transaction.

The other area where we work really hard—because we find that our best deals (not surprisingly) come from this area—is our own referral network.

Snow: What do you think the people who agree to do a deal with you see in your firm?

Kaplan: In today’s world, you have to be competitive on price. In mezzanine debt investment, for example, me trying to do a deal at 18% and the next guy has a coupon at 12%—I’m not going to win that deal. That just doesn’t happen. You have to be price competitive.

The other way is best practices—we see a lot in the lower middle market. We have lots of resources and contacts in our network where we can say to our companies or our partners that we invest with, “You’re installing a new software system. We know the people who did this seven times before. Here were their issues. Let us introduce you to them.”

I think the other reason—probably the most important reason—is that I firmly believe people want to work with people they like.

Snow: If you were going to give a pitch for the lower middle market as an attractive, overall opportunity, vis–à–vis other potential opportunities out there, what would be the main selling points?

Kaplan: I think it’s a lot of fun. When you invest in a company that has $2 or $3 or $4 million of EBITDA, you can effect a lot of change in that company versus a company that has $300 million of EBITDA. It’s just much harder, much lower—it’s a much bigger platform to try to effectuate change. When you’re dealing with a $2 or $3-million EBITDA company, there are probably 20 to 40 employees there, so it’s small. If you guys decide you want to start selling “X” instead of “Y,” that happens in a week. That doesn’t happen in three or four months.

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