Andrew Engram: Independent Sponsor Lessons from a Deal That Fell Apart

Hey, everybody. Welcome to another episode of Still Searching with Jed Morris. Today, our guest is Andrew Engram, independent sponsor from Lightning Rod Capital. How you doing, Andrew? Hey, Jed. Good. Good. Thanks for having me. Thanks for being here. I really appreciate it. You know, a lot of people don't really get a chance to hear what it's like, especially from independent sponsors. And so I'd love to dive into your background, how you found your way into this world of independent sponsor, and then more importantly, towards the end, let's dive into some of the scar tissue, the lessons learned, what not to do, how do we avoid catastrophic failure in all of this? Yeah. Yeah, happy to. Yeah, I'll dive right in. Yeah, a little bit about my background. I'm from a small town in Central Texas called Lorena. It's just south of Waco, about an hour and a half north of Austin. I grew up in the country. I was for, like, a better way to phrase it, but had an affinity for math and physics in high school and ended up going to Texas A&M for my undergrad.

I studied lecture engineering. I also walked on the football team there in my sophomore year. And so I played three seasons on the football team. Those two schedules aren't meant to collide. So I would, you know, as you know, with your background, be studying until late in the morning for engineering curriculum, and then have to wake up at 5am and go to practice and go lift and all that stuff. So it's quite the, quite the gauntlet. I didn't do either one very well. Still though, three years on the team at Texas A&M, that's pretty legit. Most people don't even get a chance to play college football. Yeah, it was quite the experience. You know, play with some really high caliber athletes and saw, you know, people perform at the highest level. So that was quite the experience. I ended up hanging it up and folks now graduating there and at the end of 2010. And that was kind of still coming out of the recession, the Great Recession. So jobs were scarce. But I ended up joining an offshore drilling company.

So I wasn't working the rigs. I was on their capital projects team. So with a degree in life engineering, I was able to apply that knowledge base to basically manage construction projects on the rigs. So it's been a lot of my time in shipyards. Yeah, so we, Rowan was an offshore driller, primarily shallow water driller when I joined. And that's kind of at the same time I joined, we got into the deep water drill ship game. We built four drill ships in Korea. So, so yeah, that job started in Texas and you end up going to Korea and doing drilling there. Oh, wow, where else did you go? It was quite the journey. So as I mentioned from a small town in central Texas. My first, basically my first day. So I had had like a week of orientation at Rowan. I went up to the tower Williams town, the office to get my phone and laptop. And as I was walking out the door, they said, Hey, by the way, we need you to go to Scotland next week.

I've been there one week through orientation. And as I'm leaving this is a Friday, they said, Hey, we need we need you to go Scotland to commission this new rig to go work in the North Sea. And I said, well, well, don't I need a passport for that? And they go, you have a passport, right? And I said, No, I don't have a passport. So I got my passport in one day. Oh, yeah, yeah. So that Monday was it was Memorial Day Tuesday, I got my passport in one day. The following day Wednesday, I was on a flight to, to Scotland to, to go commission this way. I didn't even I didn't even know what a drilling rig was. All I really knew about oil and gas was gasoline into my truck. That's all I knew. But I just dove head first in, I just soaked it up, learned the equipment, and, and really was, was just all in on kind of building my career in that sector. So from there, I did projects in the Middle East, Trinidad.

And then I kind of formally moved over the capital projects team, and I was able to go and live in Rotterdam. So I was in Rotterdam Netherlands on a project for over a year, and really cut my teeth on that kind of formalized capital project experience and then from there I went to Korea. So I lived in first on Korea for about a year. I was on the last last ship we we shipped out of there. I was on my own relentless. And, and then at that time, I was like 2015 oil started to crash. It's funny now by the time it was pretty dramatic. I mean, they, the market was flooded the principal was crashing through the floor, and, and Ron was going to a number of layoffs at the time. And then they have to a few round of layoffs and then came back to kind of the Gulf of Mexico and I had a small project in Mississippi, kind of late 2015 early 2016, and I finished that and got back to Houston office and then I got laid off.

And so that was quite the bummer. So five years really diving in and you know was kind of trying to climb the ranks and that corporate corporate ladder, and then. Yeah, got laid off. So really at that point in time I had a decision to make. Really at an inflection point and do I just try to stay in Houston and, you know, go maybe to another drone company that's not doing so hot or try to try to figure someone else there maybe go get an MBA at University of Houston or something like that. Or not just wipe the slate clean and start something else go try to do something completely different. And, and that's what I chose to do. And that that is not a decision most people make. I have to imagine that like you you learned a lot while you were working in oil and gas and, especially since you started off tattoo and then moved to the capital team so you're doing the work then you see like how you actually finance the work so you had pretty holistic perspective I would imagine, but to be able to make that kind of pivot into something new you're probably thinking hey you know this is great I learned a lot but I don't actually want to work on rigs for the rest of my life.

That's true yeah I mean, I didn't want to do it for us my life but I can't I love the work that I did. It was you kind of look like a rock star. Good and bad. It sounds like it. You're in you know you're in Singapore for three four months you're you're flying. You know to Dubai for three four months you may be back in the Gulf of Mexico or Gulf of America now, whatever. But, you know, it was it was exciting I mean I was in my mid 20s and and travel around the world it was it was funny exhausting. But, but yeah I was really it was really tough to kind of think about what existed outside of that world because that's all I do. And so, I had when I got laid off I had a lot of time to think about it. And one critical event that happened was I was invited to to moderate be a moderator at the Rice University business point competition.

It was kind of early 2017 and I knew that I was going to get an MBA. That was my plan. The timing, the timing of getting laid off helped me kind of clarify the timing of that decision. I guess, I guess the time is now. Exactly, but you know I wasn't sure on what school is going to go to you know what I really focused on, you know, being invited to moderate that event helped me understand kind of, or rather get exposure to the venture capital ecosystem. And at that event, really well run by Rice University, you have these collegiate teams that are from all over the country you know you have teams from Carnegie Mellon from Stanford from University of Texas they have developed technology and basically it's a competition but basically all the judges are investors, angel investors, etc. So I kind of saw that and I was like what world is this.

And that's all I knew was corporate gas. And I was fascinated by I really was and that's where I decided hey I'm going to I'm going to focus on the school and focus on the curriculum where I can just learn as much as I can about venture capital. And so that's why I just decided to move from Houston, San Diego, and get my MBA at University of San Diego Racial Management. And my focus for curriculum was just understanding everything I could about new venture finance, how to take an idea commercialize it. What does the customer journey look like. And then on the on the investor side, how do you evaluate these early stage companies. And what does that look like. That's what I dove in. And I interned for a venture capitalist there in San Diego during my MBA. My whole goal was to go work for venture capital firm. That was that was the vision that was the path. Work out that way.

Believe it or not, it did not know it didn't. Yeah, those jobs are super super competitive. And I applied to a bunch of VC firms. I applied to one really endless job so I finished my MBA I was 29. I had done, you know, worked all over the world managing hundreds of millions of dollars in capital projects. And I was applying for an endless job at a VC firm there in San Diego. And brilliant where where it hit me was this was at the end of my MBA about to graduate. I didn't have a job. The person who was recruiting for that job said hey you're not qualified for this jobs endless job because you haven't run a CRM for a tech firm. And I was like that was the qualification spot man I'll be there by Sunday. That that that was where I just I just, I was I was kind of, you know, I don't know what I was but I wasn't happy.

Because I I worked all the world. I was like I have this this project manager experience I have you know, I've done a lot of a lot of interesting things manage a lot of projects but nobody cared about that. That's why I realized nobody cared. That's a very very weird hurdle. It's like someone saying hey you've never put together a PowerPoint presentation for this type of management team so clearly you don't know what you're doing. Yeah, so it seems a very arbitrary trip wire. Yeah, I didn't understand it and I applied to a few other positions up to the Bay Area look at some other positions ultimately they get picked up by by any investment firm. So what I did was I ultimately joined a fractional accounting firm and started helping them help startups understand what it looks like to raise money. So I didn't really know anything about the time but they were building a practice there were two guys there in San Diego at the company and they were really trying to build a practice. That was that was geared towards helping early stage startups build pitch decks build financial models and then just make some some some more mentors to investors on a billable hourly model.

For companies that were trying to raise seed rounds and series a rounds. And so that was that makes a lot of sense because a lot of you know the vast majority of people have no experience when it comes to raising capital. And you see it a lot from from people who are either looking to acquire business or from founders are looking to scale. It's like how do I actually go out there and raise capital. How do I not get laughed out of the room what do I need to present do I need a pitch deck do I need a one page teaser. What words can I say which ones are dumb like there's a lot that comes into it when you start saying hey please sir ma'am can I have $10 million. Yeah exactly exactly. And so we got a lot of reps there. We saw a lot of companies helpful companies never is anywhere between kind of one to $10 million. And so that was that was a good experience. So a lot of reps really understood started to understand how venture capitalists thought about things. I looked at things I connect with a lot of venture capitalists got a lot of knows I could I could paint my house with an amount of ink I got knows from venture capitalists. Some were were ruder than others.

But that's just I guess their way of communicating. But ultimately that practice that we built under that fractional credit firm we spun it out into its own boutique investment bank. And so this was 2021. And that was that was called now capital advisors. And and I was a co founder of that firm which kind of had sweat equity in it. And at that time we pivoted to helping companies as self set advisors. And so we had a really nice win kind of at the end of 2021. We stole a company to a private firm out of Los Angeles. And and at that point I was a lead banker on that deal. We came in kind of after IY and help negotiate with you. While you were doing that practice you had gotten your series 79 and now you're actually working on the sell side to actually sell these companies to PE. That's right. Yeah, we had spun out that practice and we had become registered reps.

So we were still helping companies raise capital and we were we were offering self set advisory services. And so that so being involved in that specific deal and selling that company to that private equity firm I saw how that private equity firm operated. And I had the I noticed the differentiation on how those two how the private firm how they thought versus how all the venture capitalists that I had come across how they thought and how they operated. And at the time I clicked in my mind is like venture capital is just like gambling. For lack of a better it is. Yeah, it's gambling and it didn't resonate with me as much as I thought it would. Given my operations background building kind of large industrial installations, the way that privately looked at things and what they thought about things resonated more with me. So that was right because you're coming from that operational and finance background in oil and gas. And then you see PE firms and they don't have these pie in the sky dreams of like hitting a hundred X they're thinking.

What are the cash flows? What are the operations? How can I scale this? What makes sense? And you're like, oh, okay, they're actually living in reality for the most part. Exactly. Yeah. Yeah, that's what I appreciated. And so fast forward, you know, I continued to manage that that that firm and that team through the end of 2022. And at that point, I felt like I had a good skill set, had developed a good skill set in M&A, a good skill set and being able to raise capital. And I have started to learn about the independent sponsor model. I wasn't, I just heard of it kind of here and there, had to really dug in. But I knew one thing I knew I didn't want to be in an intermediate for forever. I knew that wasn't the reason I pivoted my career out of engineering and project management to go to finance was to be was to be a broker. I didn't want to do that. I appreciated my experience there and being able to learn the intricacies of doing an M&A deal. But I really wanted to build something myself. And so that's so the beginning of 2023, I left now capital and I founded lightning rock capital with the vision and the purpose to be an independent sponsor.

And looking back through years ago now, it was kind of like jumping off a cliff. It was kind of parachute. But sometimes in life, you just do it and you figure it out. And when I when I when I left now capital and started lightning rock, I didn't jump right in to being an independent sponsor. I continued to offer advisor services for the first year and a half, really get the platform up and running. You know, make sure I wasn't crazy. That I, you know, could could survive at least and and at the end of the first year and a half we had some small wins we had a huge cap raise deals close for us. And so this puts us kind of the middle of 2024. And at that point, so June 20, 24, really put the flag in the ground and said, Hey, now is the time I'm really going to pivot and spend a lot of time and effort acting as an independent sponsor framing lightning rock capital as an independent sponsor.

And looking for deals looking for target acquisitions. And so what did you what did you think was the type of company you were going to look at what does that buy box look like. Was it a reflection of your experience like kind of how are you approaching that. Yeah, yeah, I was looking to leverage my operations background and oil and gas for the companies that I was that was targeting not necessarily the company has to be an oil and gas that's not my that's not the selected investment criteria I have, but somewhere where I can can have a good feel and good understanding of what's going on and I can walk the facility or to walk the shop. And I can say, Hey, you know, this is a good process here. This needs to be refined. And not that I'm looking to go and be CEO of that company either. But I but I can evaluate that company, and I can understand kind of where improvements can be made. So that's that that was kind of the initial thing and wrap the bat I got a deal under L. Y. July of 2024. And I kind of went all in on it. It was a it was a meter to the meter skid business out of Odesta. So West Texas, basically the company sells products that that measure natural gas.

So, so thesis of mine is natural gas is going to have some good tailwinds the next couple of decades, all tied to electricity demand increasing. I think we're seeing a little bit of that right now with the increased electricity demand due to the data center buildouts. That's it. Yeah, it's all it's all something around that. And I think that thesis still holds. And today, on that deal specifically, I learned learned a lot. And, and we got close to finishing it. So like July 2024 had to deal under a lot of running diligence, capital raising for end up raising the capital for getting to get all the capital needed for needed for that puts us November 24. And then as happens on deals, that performance fell off a cliff towards the end of that deal. Yeah, it was tough. Believe me, it was tough. So started up a year ago. So February 25 we walked away from that deal. And I had to hold on right there because you're about to say it. And I want you to say it. I'm glad you started saying one of the clear things that that makes this, you know, that really puts your skin in the game as an independent sponsor is that obviously have to raise capital deal by deal

and inherent in that is that it's all your capital. So all the diligence is you the legal the QV all this is on you. And if the deal doesn't close, if it does close, you can get reimbursing the deal cost. And if it doesn't close, that's on you. So please go ahead. Yeah, it was, it's tough. I mean, it is, it's a tough, it's a tough game. I mean, because you're fronting it all yourself, you're basically you're financing the deals out of your personal bank account. And that's what makes it tough. And it's also the time. So I that was the only deal I was working on for eight months from, you know, really June or 24 all the way through February 25. Yeah, exactly. I wasn't offering any more advisory services. I was all in on this deal. I had high conviction on it. And I realized the private equity doesn't like oil and gas really quickly. Really clear. The equity sponsor in that deal was going to be a family office out of Dallas. And love to collaborate with them. But ultimately, what happened was, like I said, for myself a cliff and we had to stay disciplined as investors, you can't you can't move forward and

negotiate a price when even just dropped off $2 million over two months on a trailing toll basis. So so we walked away from it. So important too, because you're, you know, every buyer has this kind of thought process to it doesn't matter if you're an independent sponsor with capital behind you. Or if you're a self-funded searcher or a traditional searcher, when you actually start getting deal cost in the deal, you start feeling pot committed and that's a fallacy. It really requires that kind of discipline. Because I know that you're, you know, on the average deal, you're probably 100 grand in on diligence. You have to be able to step back and walk away, you know, and that's your money. That's so tough. It is really tough. Yes, some costs all in on it. And you know, I don't have that much to commit. I mean, it's, you know, I don't have a trust. I don't have anything like that. It's my personal bank. I have, you know, two small kids that they keep roofing over their heads and all that kind of stuff. But still, you have to stay disciplined. You have to stay rigorous. And, and as tough as it is, that's the discipline we're building at this lighting rod. So, so that was February. And, and that was tough. It was really tough. But, you know, we survived 25. I kind of went back and offered some advisory services in, in 25.

And, and ultimately we were in Phoenix at the time, but we moved to Dallas. And so now we're based in, based in Prosper, Texas, which is, which is north of Frisco, north of Dallas. And looking at a few other opportunities, you know, it's hard when you're offering, you know, capital raise services or things like that and trying to do independent sponsor, just trying to find a balance of time, keep the pipeline going. It's a tough model. So we didn't, nothing transacted for us last year, ultimately, you know, but we got through it. We're really bullish about this year. We really are we're, we're filling up our pipeline looking at some good opportunities. You know, have worked really hard since getting that initial deal under a lot of really curate a good network of family offices, private credit firms, banks that we know that, that they know us, they understand how, how we think as a firm how, how I underwrite deals, and are willing to work with us.

So, worked really hard over the last year and a half to do that. And we're excited. We're excited about the future where our focus is infrastructure services. So we think about going back to the thesis of electricity demand increasing all the picks and shovels that go into that, that ecosystem from electricity generation to stepping it down, maintaining those systems, you know, even cutting trees away from the power lines, you know, the stuff like that. We're looking at all that kind of stuff as well as kind of water and wastewater facilities maintenance services. And then under that umbrella of an infrastructure services we're not afraid of oil and gas opportunities. You know, that was my background I understand the risk I mean I was laid off on my job so I understand the security risk. But, but we're not afraid of them if you can get about the right price at the right time of the cycle, you can still make some money they're still demand there. And so yeah, so that's where we're at today we're, we're, we're, we're moving ahead.

We have a scar tissue as we talked about the lessons learned, but we're forging ahead. Well, let's dive into a few of those lessons then because, you know, you tend to learn a lot from the things that don't work out. And, you know, especially when you have a deal that you work on for eight months then it collapses at the end. Obviously you've got a lot of operational experience, just from oil and gas as well as a fractional you helped advise on the sale of a company. So you've seen a lot of this from a lot of different perspectives. Let's let's walk down the the buyer beware. Walk for a little bit. You know, talk about some of the, you know, some of the issues you've experienced personally some of the near misses and then some of the unfortunate accidents you've seen from clients and people around you. Yeah, as an independent sponsor the first thing I'll say is, if you're if you're winning an auction with a banker, you're probably not going to finance that deal. That's that's the first thing that I think you know I was the hardest lesson for me, not the hardest lesson but but one of the clear lessons is a lot of capital providers view independent sponsors as as deal flow until you have a committed pool of capital.

That's that's what's what's what you will be for family office or private equity firms. And so, if you're winning an auction with a banker. You know that your price point is probably too high for the equity markets to to come in. Not to say you can't just to be just to be really clear for everybody what you're saying is, Hey, if I'm an independent sponsor, I'm looking to acquire business and that business is being represented by most likely an investment bank, or like a middle market M&A advisor. I'm going head to head against P and everybody else, and I'm trying to win on price. That's a losing that's a losing route. Capital for that. Correct. Yeah, you're going to if you're trying to outbid another institution as an independent sponsor. That's a losing, losing proposition, because you might get the deal under a lie. You might start down diligence. You might have some calls with family offices of private credit firms. They'll take four to eight weeks to tell you now. And that time, that's time you'll never get back.

I can tell you, I talked to I talked over 400 people 400, 400 firms on that deal and found one family office that would do the deal with me. And everyone else basically said, No, we don't, we don't, we don't like oil and gas, or they said, We don't like one man. It depends. It depends box or shop. So, so that, so that's, that's one less the other the other specific kind of financial lesson from an underwriting perspective I learned on that first deal was I underwrote it at a high watermark on EBITDA. And, you know, coming from my, my, my experience, growth was good, you know, growth growth is a good thing. And so that company had a lot of good growth out of 2223 they saw a lot of demand coming out of COVID. So I basically underwrote it at a, at a high watermark, like, like a, like a peak of EBITDA. And my thought was, Hey, this is going to normalize demand for their product is going to normalize. It's probably going to stay level around the 12 million of EBITDA.

And that we're okay to underwrite that. And that's not what happened. I mean, it fell off a cliff. It really did. And so if I was to do that again, underwrite it again, I would look at like two, three years back EBITDA on an annual basis and underwrote it to that. Yeah, it's funny how you bring that up too, because obviously you have to, you have to be careful when it comes to marking at a high, at a high valuation. But at the same, same time, you can do the opposite too, because on a previous deal that my partners and I were working on, ultimately did not close. But we marked it quite low, you know, because we've been through, you know, bad situations in the past. And our process was, look, you know, we want to stress test the business. We're like, Hey, if, if everything goes bad over the next five years, you know, we used to always say, if we get picked, if we get kicked in the pants every single day for five years, how is this going to perform? And we use that as our barometer and then put it out there and like, yeah, it's about a 22% IRR. And, you know, and by the way, this is the, everything goes badly. And we put that as our base case. And, you know, the feedback we got was, well, that sounds not interesting.

Like, you know, like all the investors are like, Hey, we're looking, we want to see 33, 34, 35, we're like, Yeah, we definitely think we're going to get there. This is, this is our, our performer based on if things go badly, and kind of learn the opposite lesson, which is you have to have your base bear and bull cases. But, you know, if you've got something good, don't, don't hide it too bad. You know, one of our lenders said, Hey, this looks like a lender performer, not an investor performer. And we took that as pride. And I think my lesson learned was like, we need a little, we need to show a little bit more optimism in our, in our numbers. If we have conviction. Yeah, that's the thing is, is you're in a little bit of a sales position where you're in that sponsor, because you're trying to underwrite it to a really, really realistic base case and have good downside protection. But also you're trying to sell the deal to get someone excited about the upside. And so you got to walk that like just like you're talking about you got to walk that fine line and underwriting of Hey, you know, here's, here is base case where downside protected on price.

But, you know, things go well. We can have an upside as well. So yeah, that's, that's, you know, over the last year, I've learned that a lot. Yeah. And yeah, it's, it has been quite the quite the journey. Yeah, you know, it's, it's funny because I did my MBA and what you started, and Professor DeModerin is there and he's like the Dean of value valuation and he always talks about how valuation is a big part of it. You're walking this line between the art and the science. Yeah. And I didn't have a finance background. And so when I came into, I just assumed that all of this was like, if numbers are numbers, right, you have your numbers and that's pretty much it. And what I've discovered now is what we're just talking about is like, you have to be able to tell a story. And you can then take the numbers and you can make them say whatever you want them to say, but you have to kind of be able to figure out, Hey, you know, are a big part of it is the is the art portion. And obviously the numbers have to back that up. Yeah, that's it. I have his book on my shelf. Really, I use that as like a Bible.

Pull it off and I look at it really good, really good information, but I know I dive into second thing I'd say is just like the importance of who's going to run the company post close. And this kind of goes to like a classic private equity understanding of an investment is as an independent sponsor, I'm not looking to go be the CEO of a company. I'm not, I'm not looking to go run a company. I can if I need to, and there may be some opportunities that presents itself, but I'm really looking to invest in a solid existing management team that has a good handle on not just the company, but the industry. Good connections and then at the top level company wants someone that has experience managing a P&L someone that understands the financials understands that, you know, this acquisition goes through. There will be reporting requirements, there will be financial milestones that need to be hit someone that understand that usually that's usually a huge pivot for most founder led businesses. Usually what you see is like, you know, the owner of the founders, if they've been doing it for a long time, they're looking to exit to retire, get that liquidity.

And if they've got a decent manager team in place, that's great, but they've never had like quarterly reporting, they've never had financial metrics, even the ones that are well run typically don't have that. So that's a huge hurdle to get to go to get over. That is, and so that plays a critical part in and really from our kind of cadence and how we evaluate deals, you know, one of the first screens is what does the management team look like current and then what's going to look like post close. Do we need to potentially bring in someone from the outside to help with the deal with like an operating partner or something like that. Yeah, so that's really critical. And on how we think about things. So what else what will kind of other near misses or near death blows that you discover. Yeah, just interesting stuff. It's really, it's really, you know, being able to know where, you know, you can't predict what's going to happen. But, but, you know, for instance, last year, I was looking a few deals right as all the tariff noise was coming across. And so, you know, as, you know, as uncertain as that may, as that makes the market, you still are evaluating a single business.

But that uncertainty, it just that's the reason I walked away from a few deals last year was, was just there's too much uncertainty. If I'm if I'm thinking there's too much uncertainty, I know that the people are, you know, they're not they're not even thinking about doing something in that specific sector. So, so that's it. You know, the other things is cyclicality of businesses is so important understanding, you know, a specific industry will have cycles. I know you're a lot in the defense attack. And so, you know, you kind of aligning with the government budget and all that kind of stuff. You're talking about the macro side of it. Last year, you know, it wasn't just the tariff issue which impacted everybody, but there was also the government shutdown, the longest one on record, by the way. And we had a government contracting company under LOI during that shutdown. And, you know, like you said, it's, it's one of the great things about being a sponsor is that having specific domain expertise.

That's a really good thing. You're not a generalist. And so, you know, that's one of the things we like to bring, you know, from sunset coast, we're like, we only do golf con and we know it really well. And I went into it all the confidence in the world because like, I know what to expect. And although this ended up being the largest shutdown that we had seen, it wasn't much longer than the second longest one, which is what I actually worked through. And so, you know, I saw it as a plus and I was going to investors like, look at this, longest government shutdown, we're still working, we're still getting paid. Like, if you ever wanted a stress test, this is it. And I seriously discounted the fear aspect on the capital side, because they're looking at like, Oh, well, you know, what if, you know, what if they get cut, what if they get doged, what if they don't get paid? They're top secret, clear DoD work. What are we talking about? And so it's just, there is that education piece. And you can't, even if you know the right answer, and it turned out in hindsight, I was right, but it doesn't matter because you can't raise capital on that. So you have to understand, you know, I tell buyers all the time, you've got your buy box, but lenders have their lend box, you know, whether they're investors or bank debt, like they all have their boxes too, and you got to understand where they're at.

Yeah, that's the thing is, you know, what I saw on that deal on that first deal with that was in the oil and gas sector is a lot of private equity firms or a lot of like private associates, VPs, you know, they hear the word oil and gas and they just said no. And there's no effort to understand it or to dig in and do the homework. My thesis is like oil and gas, those are two separate things, specifically natural gas. When you're burning natural gas to generate electricity, that's different from pumping oil out of the ground and the whole oil ecosystem and all that. A lot of times there's natural gas coming up from oil wells as associated gas, but the demand for natural gas, that's what I think is going to continue, but that's a hard sell. They're opposite economics too, like oil sells at a very different price point than natural gas. We have so much extra natural gas, they just flare it. Exactly, exactly. And so that company's products, even if you're flaring, you still have to measure it. That's what I liked about that company. But that's the point of like educating them.

If you're, what I found is like, if you haven't tried to educate an investor, they're probably not coming in. You have to really find someone. Now, you have to find someone that has, that is interested in the deal. They like one working with independent sponsors because not every equity sponsor is preferential to work with independent sponsors and someone that sees the world the same way that you see it and thinks about things, thinks about the future, even though you can't really predict anything, but you can prepare. You can't predict, you can't prepare. Understand, getting something at the right price point, at the right part of the cycle, you can still have a really good equity return on that capital and have your downside protected. So, yeah, finding investors that, you know, one like you that want to do business with you, that's been, you know, really a learning curve.

Because I found the beginning like, hey, I had this awesome deal. You know, I'm excited to have it under LOY. You know, we're going to get this done. And, and the hurdles, the conversations, you really, you sharpen your, your mindset, you sharpen your thinking. When you face adversity, I think that's just a principle of life is you face obstacles. It really sharpens you and pain is a great teacher. It really is. Couldn't agree more. And I want to circle back to something though, because you have experience in capitalism, like before you became an independent sponsor, you were working in that fractional team, you're working as a licensed broker. So you knew how to raise capital. And if there are, if there are a handful of things that I know, like first time buyers, whether they're searchers or sponsors or anybody else that really holds them back is how to raise capital, how do I actually go out and do that. And so, for you, that wasn't a huge hurdle, but for all the people out there who are like, Hey, this is the first time we're going to do it. What kind of tips and kind of a wisdom would you provide to someone who's looking to raise capital for the first time?

That's a really good question. For me, it came through my best. Yeah, it came through a lot of running into a brick wall day after day and, you know, that for me, that's the best way to learn is just to do it. And so there's there's not a, there's not a right way or wrong way. But what the tips I'll give is you want to, you know, don't be afraid of sending a cold email. Don't be afraid of sending sending a LinkedIn message trying to connect because you never know where the door will open. So don't don't be afraid to send them. That's free. You get it's free to send an email. It's free to send a LinkedIn request with a note. I think you get like five a month or something like that. But, um, or, or try to connect with someone some other way that you think may be interested. The first thing I'll say about framing your opportunity is, is test it with some, some trusted parties before you go to the market. So if you have some trusted people that you, you know, trust what they say you think they think about things the right way.

Say, hey, I have this deal. I'm looking at it. I'm thinking about this price to still structure. What are your thoughts. And so if you can do that and kind of get some early feedback from some trusted parties before you, you go and try to have in depth conversations with more institutional capital like family offices of private firms. That's probably the best man. That's what I do now. And so, you know, I didn't really have that I'd say when I watched into my first deal back in 24. But now I have really curated what I'd say a good cadre of people that I can say, Hey, I have this. What are your early thoughts. And whether they invest in the deal or not, they're going to give me feedback that's valuable. And so then as I go into the market, if I go into the market based on that feedback, I already have kind of a set of of things outside of my own kind of siloed banking on underwriting that I can't address when I get those questions from from people that are looking to invest in my deals.

Yeah, so yeah, that's having kind of a like a personal board of advisors who, you know, ideally have a little bit of that experience in itself they they've already done a deal, or they have, you know, investment experience or something to where they can give you that that third party perspective and say, Hey, you know, have you thought about it this way? You know, before you go out there and, and, you know, I guess we're into the wall over and over. Yeah, exactly. Exactly. Yeah. So it's not easy. I mean, raising capital is one of the hardest things you can do. It really is. It's harder than running a company. It's harder than, you know, a whole bunch of other things, because basically you're trying to convince people that you're going to to make the money when you have it. We haven't really proven it before. I mean, it's like, it's like, are people more afraid of losing money? Or are they more greedy to make money? And that's where, you know, in this world in the private world, people are afraid of losing money. Yeah, you're exactly right. You know, if, if venture capital is gambling, it's all spec, if it's the speculation of the private market, then PE is the, yeah, we'd love to see 20% return, but more than anything, give me my money back.

Yeah, exactly. Exactly. So, you know, so really having a good thoughts around the risks, that's where I'll say is like, and that's where the feedback comes in, is, is you can think about the risk all day long, but you're from like myself, I'm a one person company. I think about the risk myself, outline them, hey, how are we going to mitigate them? But I don't know everything, and I'll never know everything, and I'll never be able to predict, you know, what's the black swan of it that's going to happen? That's going to, that's going to, that's going to, you know, take the world by surprise that no one's ever thought of before stuff that stuff that's never happened happens all the time. So it's like, what's going to happen there and and being able to kind of get that framework and present it in a way that's the other thing about talking to institutions is, is your presentation, the presentation of the opportunity, there's a certain expectation, I don't know what that looks like. And so, where where I was, you know, benefited was I had active as a sales advisor, I helped companies raise capital so I had a good framework of how to build decks, how to build sim, how to put together a

leverage buyout model, kind of a financially rigorous exercise that helps you understand how to underwrite it, and shows your underwriting and being able to present that. I mean, you can have the greatest ideas in the world in your mind. In a conversation with a private equity firm, that's not going to be enough. You have to really lay it out in a comprehensive manner that gets someone to say, Hey, you know, I'm interested in taking time to digest this, get up to speed and, you know, and dig into the opportunity. Same with family offices. Yep, couldn't agree more. And, like you said, having that that personal board of advisors goes a long way. And at the same time, you just got to get out there and do it. You really do. You got to learn the lessons, you got to, you know, run into the brick walls a little bit. I'd say meeting people in person is another thing, you know, one of my early stuff was just all zoom calls, all day long emails. Really, I'd say in the last year I've really made a made a focus to meet people in person, and sit down have lunch have coffee.

People in this in this world are investing in people. And, and that still makes a difference. And, you know, getting to know people. Ultimately, they need to trust you. If you have a $10 million deal, $20 million deal. No one's going to give you that money if they don't trust you. And the best way to really earn that trust to gain that trust is, is meet them in person. You know, show them deals, continue to collaborate over time. And it may take years. It may take years, it may take decades, but you have to start, and you can't be afraid. You can't be afraid of what you don't know either. You just be candid, candid that you don't know it, be honest, but be hungry. And, and put in the work every day, show up every day and just continue to grind. It is a great, this is a great, this is one of the hardest things you can do as an independent sponsor. It really is. It is a grind. And I could not agree more with showing up in person. And whether that's at, you know, sponsored events, conferences, or just showing up at the office and meeting somebody for lunch, because, you know, ever since 2020, we've all got these video calls.

And they're great. They're super high leverage. But it's amazing how once you at least have that first in person conversation, so much can be built virtually after that. But you can't replicate being able to shake somebody's hand, get lunch with them, and actually see them face to face. There's that, you know, interpersonal dynamic that goes a long way towards building a relationship. And ultimately, that's all this is, it's a relationship business. That's it. It really is. And it's so important as an independent sponsor. And also as a search fund, I know a lot of your audience is search search searchers. And, and, and the other thing is operators, you know, operators that are that have, you know, 20 or 30 plus years in a sector are really experts in that sector world class operators. And I came across this experience I'm involved in a deal right now where this dynamic exists is those operators want to buy a company, they want to buy assets. And so that's where, you know, I see opportunity to help people in that regard and bring in bringing an M&A

to help them go and buy by company just like an independent sponsor would, because those operators will have expertise and skill sets to operate a company and they'll run it post close. You know, they don't have a committed pool of capital they may have some personal funds that they've accumulated over time and it may may may be actually substantial maybe a couple hundred thousand, maybe a million. But if you're trying to buy a $30 million company that's not going to be enough, you're going to have to go to an equity sponsor. Yeah, you're exactly right. It's, it's funny. I had a, I had a client last year who reached out and was, you know, you know, originally it was like, yeah, I'm interested in buying a company I'm looking at, you know, searching things like that. And so we started talking, and it turned out that he had 20 plus years experience, most of it as the CEO of a manufacturing business that did nearly 100 million revenue. And we started talking, I was like, why are you looking at SBA, you know, self funded style deals. And he was like, honestly, he's like, I think I'll get bored. I think I'll get really bored at a small company. I was like, have you ever heard of raising capital and being a sponsor?

He's like, no, I never heard of that. And so, you know, part of it is that education piece. Like you said, there's a lot of people out there who have fantastic operational experience and would make great CEOs, especially if they're able to acquire their own company. But, you know, most of them don't know that they can raise capital and the other part, you know, even if they knew they could, they're not sure that they can, or how to go about doing it. And so getting that kind of advisory service is really valuable. Yeah, yeah. And that's where, you know, because I don't have a closed independent sponsor deal yet. And at this point, you know, we're all in our independent sponsor, we evaluate opportunities. But, but sometimes people like someone we offer advisory services and really niche we saw was being able to offer those services to operators that are looking to go acquire a business, but need help. They need some, they need an M&A skill set. Because when you're talking with a seller, it's not just, it's not just going to the capital provider and asking for money, it's really, are you able to negotiate a deal with a seller?

And that's a whole can of worms in itself. Because why would the seller talk to you? You don't have any money. Yeah, that's, that's another skill step that you learn as an independent sponsor is be able to tell your story and then have that story resonate with, with a seller. And, and it's, it's, it's valuable. It really is because if a company isn't being represented by a broker or isn't being represented by a banker. And there is, you know, they probably haven't even thought about selling the business or what a succession plan looks like. So there's, there's just a way to defame it and to communicate with and then they don't really, you know, structure a deal, put an IOI together, you know, do it, do, do, do diligence, put an LOI out, all those things that you don't ever deal with when you're in operations, unless you're on a corp debt team. But, but are needed to close deals in this lower middle market.

Yeah. Well, this has been just jam packed of information. I appreciate you. And I mean that too, because it's rare that we're able to, oh, I'm able to have somebody on the call that is an independent sponsors actively working in the trenches, which is so valuable, especially when it comes to the lessons learned. Before we wrap this up, what kind of, what kind of advice would you have for people who are, you know, they're interested in getting into the independent sponsor model. And for the same reasons you said, you know, maybe they've got a little bit of operational background. Maybe they've worked in corporate for a while or maybe they come from a finance background, but they're thinking, you know, I don't want to be an intermediary for the rest of my life. I want to get out there or build something and I want to do it in this scrappy entrepreneurial PE kind of way. Yeah. Yeah. Advice just at the top really have a good understanding of the finance, the finance side of things. I think that's where that's where it starts when you're when you're having, you're having to underwrite something. So, so the ability to underwrite something that's really valuable. It's really where everything starts.

So having a good understanding of how to evaluate a profit loss and income statement, a balance sheet, cash flow statement, how to, how to think about, then, you know, what, what does the deal structure look like as far as how much debt you put on the business. What does the leverage look like. That's actually that's the first that's that's the first thing. So if you come from an operations background, you don't need to go get an MBA. I know both you and I have MBAs. It's easy to say that you have one but then you know people I always get that feedback like oh you have one it seems if you to say that like yeah but I opened the door I look behind it and like all right, you don't really need this. Yeah, I wouldn't say you don't need it. If you if you if it's your path, go for it. But there's plenty of financial information out there. Financial courses you can take to learn just the basics. The second thing is start to I'd say read as much as you can about it. I think they're especially now there's so much content out there. Some of its noise as you know, a lot of it's actually noise, but there's some good content out there from from leaders in the space like like Howard Marx if you read Howard

Marx's memos. You're not going to regret it. Or you read Charlie Munger's book, you're not going to regret it. I just finished the steam Nicholas to leaves insert to volume. Really good. It's not really financial but it's really good way to think about things. So read, I'd say as much as you can about private equity about in defense sponsors. And then start looking for companies start start the best way to learn is just to do. And so if you see a company you want to you want to evaluate just send an email to the owner, or if you're not afraid, walk up to the door and ask for the owner and say hey can I talk to you I'd like to talk about you know what so business look like and he might he might he might have some curse, curse words for you or whatever or be derogatory. You never know. You never know you never know where that door is going to open, and and that helps you learn. And so, and don't don't give up. That's the thing is like it's going to be hard. It is a hard path.

Don't give up. And stay patient. Stay patient make sure you make sure you have good cash management as well because it can, it can, it can go sideways and you know what's happening. Yeah, exactly. I mean, it's all out of my all of my personal bank account. And, and it can get it can get hairy at times. If you're not watching it. So really manage that, make sure that you are, you have a good runway. And just continue to learn. That's the thing is just be open minded, continue to learn, get feedback from people. And also, you know, don't put people on a pistol. You know what they I used to I always put like private equity BPs, private principles even partners on a pistol. And now that I'm in this for three years now. I feel like I've passed a lot of them up, because I'm just grinding every day. I'm not afraid. I'm in the market. And I'm not trying to please anybody. I'm not, I'm not having to go to an icy meeting and play politics and try to please

the managing director or whatever. It's like, I'm trying to make a good investment. And I'm, I'm boots on the ground every day, really run into the brick wall on purpose to get better. And so it just takes time. Give yourself time. And that's probably the best advice I can get. Give I love it because, you know, the undertone that I'm hearing is, if you want to be a professional space, you have to treat yourself like a professional space. You have to read the books, you have to get good at modeling, you have to actually learn. There's 101 skills. If you want to be a fantastic independent sponsor, or navigate the PE space, you know, the negotiations, the convincing the seller, the learning how to raise capital, the, you know, the knowing that you actually have an asset, you know, being able to build that model, you know, base case, barricade, small case, like, you have to know everything about it. And you're not going to get that from, you know, a couple of YouTube videos, like it does take you spending the time actually say, Hey, if this is going to be my career, then I need to be, I need to

be world-class at it. And if you put effort into it, you will be. Yeah, exactly. Exactly. And it's not going to look perfect at the beginning. But for me, you know, just continue to refine over time and get better. Don't get discouraged when it doesn't work out. But, but you're right. Exactly. As an independent sponsor, I'm a professional investor. That's the way I frame myself. That's the way I communicate. I talk to other professional investors. Being able to have that communication and speak the jargon, speak the language, understand the cadence of timing on deals. That's super important. And it has come over time. I mean, finished my MBA in 2019 and really been doing this communicating on deals since then. So it's just, you know, this is seven years in now. So it's, it's been quite the journey. Well, Andrew, thank you so much for being here. Thank you for, you know, expressing not just your background, but all the wisdom you've gained over the years and helping out our listeners understand a little bit more about the independent sponsor space. So just to be clear, you're currently searching in infrastructure. And so if I happen to be the owner of the infrastructure company, infrastructure services, industrial services, yeah.

Right. I can reach out to Andrew to get an idea of what my business might be worth. And also, you know, see what a transaction might look like. And then, on the advisory side, if I'm, if I'm, if I remember correctly, you're helping people be able to understand how to go out and raise capital, especially if they're operators who want to acquire as well. Is that right? I'd say I'd say it's kind of thinking about, like, by side advisory. So an operator wants to buy a company. They, they're not sure how to do it. So I guess I guess the best way to frame it as it's independent sponsor as a service, really, because it's, you're not only helping them put a deal together with a stellar, but then there's always a capital need. So being able to, you know, have the network and have the, you know, ability, even if there's people in your network that are good for the deal, go and talk to them about the deal and having the relationship. So, you know, you have, you know, someone that might know someone else that can connect you and wants to connect you with that, with that sponsor. So yeah, I'd say independent sponsors as a service and that really would apply to like operators that have 20, 30 years in the sector. They're, they're eager to kind of get in the game as an, as an owner and they need help on the, on the, on the M&A's front.

Yeah. Fantastic. And what's the best way to reach you? LinkedIn? Yeah. LinkedIn. My, my email is Andrew at lightningrockcapital.com. I have a website lightningrockcapital.com. My phone number is on there. Feel free to reach out email LinkedIn. We'd love to have a conversation with anybody that's interested. If anybody wants to reach out and kind of get ideas, bounce, bounce ideas off of me, happy, happy to have a conversation. Perfect. I'll be sure to include that information in the show notes below. Andrew, thanks again for your time. Really appreciate you bringing on here and best of luck as you continue looking for that next deal. I appreciate that, Jed. Thank you for having me.