Source Talks ep. 40

Source Talks is a series where we discuss deal origination with PE and M&A pros, in collaboration with David M. Toll.

In this episode, we speak with David Magdol, President & CIO at Main Street Capital Corporation about their minority equity investment strategy and the value of intelligent information in deal sourcing.


David, tell us about Main Street Capital and, and your role there.

So Main Street Capital is a publicly traded BDC. We’ve been around as a public company for just over 15 years, and we were established back then to do exactly what we still do today, which is to invest in predominantly family-owned businesses and provide them the capital they need to grow a partnership to help them to manage that growth together to create value for everyone.

David, tell us what, what is a minority recapitalization?

So, minority equity transaction is typically a transaction where the current owner of the business maintains the day-to-day control of the business, makes the operating decisions, but brings on a partner for minority ownership interest in the company. The reason they do that is to have capital from an external source to allow them to achieve either the liquidity needs or the growth opportunities that they have within the business. They look to a third party to provide the capital to achieve those goals.

David, tell us why these minority recaps that you just defined are an attractive solution in today’s market?

So over the last year to 18 months, we’ve seen interest rates obviously increase quite a bit in the marketplace. Typical transactions for the private equity community are capitalized with debt capital, along with equity capital. As those costs have risen for private equity on the debt side of the business, valuations have come back a bit. So for those sellers who are looking to get the absolute top dollar if they can for their business, they’ve got to make a decision in today’s market whether they want to transact at potentially a suboptimal time.

David bring it home to us with an example of a recent minority equity investment that you made at Main Street that you’re proud of there.

So we made an investment in a vet practice, just about two years ago. And the purpose of that transaction was to provide some liquidity to the owners, but more importantly, to provide them the growth capital they needed to do strategic acquisitions across the country. As a result of our investment, both in debt and equity, the owners maintained the control. They got to achieve their goals and objectives of looking to tuck in acquisitions. They’ve made a half dozen or so acquisitions with our capital support and more than doubled the size of the business in a two year period of time.

David, tell us the role the technology plays in, uh, your sourcing strategy of these particular kinds of transactions.

So technology plays a really important role in our, tracking of our intermediaries and our referral network. We spend a lot of time working in our case in Salesforce and working with third party data sources to have good information, not just have dumb information, but have intelligent information and use that as a resource for our internal purposes. An example would be the way we use SPS to integrate their knowledge and information sources into ours. So we can look at intermediaries and know what transactions they did, when they did them, what industries they focus on, and that makes us better partners for the intermediaries that we track.

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