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  • Vania Schlogel | Why Your Ideal Client Profile Matters
    POSTED 2.25.20 M&A Masters Podcast

    In today’s episode, we’re joined by Vania Schlogel– the founder and CEO of Atwater Capital, who focuses exclusively on the media and entertainment sectors.

    In our chat, Vania shares with us the fine line between being able to have the formal, polished side of the business in conjunction with the creative and operational side.

    Vania also chats about the areas she specializes in, and…

    • Streaming services
    • The emergence of technology in the media and entertainment world
    • Her ideal client profile (and why it matters), and
    • Building relationships with managers and founders

    Listen now…

    Mentioned in this episode:

    Transcript

    Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here, that’s a clean exit for owners, founders and their investors. Very excited today, as I’m joined by Vania Schlogel, who is the founder and CEO of Atwater Capital. Atwater capital focuses exclusively on the media and entertainment sectors, two areas that are unique throughout business in America and it’s a topic that a lot of people want to go and lean forward in. And so Vania, thank you very much for joining me today.

    Vania Schlogel: Thank you, Patrick. Thanks for having me.

    Patrick: Before we get in talking about Atwater Capital and the media and entertainment industries, tell us about yourself. How did you get to this point in your career?

    How Vania Got to Where She is Today

    Vania: Well, I started life in a vastly different format. So I grew up in Idaho, in Boise and also Nampa. And really decided, you know, to apply to a school system where I didn’t have to make too many applications, which ended up being the UC system, because you could apply once and I think cover five colleges or so through the application.

    Patrick: It’s its own team now.

    Vania: is that right? Okay. So, this ended up taking me to UCLA, which quite frankly, probably also facilitated in moving into media and entertainment. And I decided, well to be completely frank, I knew I liked business. My father was always a small business owner. But I didn’t grow up with a lot and to be completely frank, googled in my junior year, what are lucrative careers upon graduation?

    I can’t remember exactly what the Google search was, but it really, and two things came back, engineering and finance and I mentioned this little anecdote to perhaps dispel the myth that one must grow up obsessed with M&A or knowing exactly that that’s what one wants to do in life. Because, for me, I sort of kind of fell into it, and that precipitated internship, and then full-time position at Goldman Sachs for a few years in the Los Angeles office, and then London. And then I spent six years at KKR, which is a large private equity firm, investing in media and entertainment.

    So that’s really where I cut my teeth, in terms of sector specialization. And from there, you know, it’s funny how networking is so important and a lot of the opportunities that are presented in life are really just sort of who you know, not necessarily what you know, because I got a call one day while I was at KKR, and it was from the folks at Roc Nation and that precipitated in me going to be Jay Z Chief Investment Officer at Roc Nation.

    And it was an interesting experience because I got to see firsthand how working in tandem with creative folks and creative communities could create a lot of equity value. And I also saw that this wasn’t a natural, it’s a relationship set that was happening between investors in Wall Street and a lot of creative communities. And so that’s why I founded Atwater Capital in 2017. We have offices in Los Angeles and Seoul, South Korea. We manage about 160 million dollars of assets under management. And as you mentioned, we focus on the media and entertainment sectors.

    Patrick: Well, I’d like to ask you a little bit about more is that that balance between the financial discipline and the investment, operational discipline and the creative side of a project or a venture. And the only parallel I have or analogy is the story I heard about the folks at Pixar. We’ve got little kids back at the time, but they would have their creative meeting where they’d sit down and talk about their next few movies that they wanted to do. And you’d have one about talking cars and I just would sit there as a, they want how much money for that kind of thing? And, you know, being able to evaluate what creative idea is actually gonna have value or not, and how do you keep them from going off the rails? Discuss how that works of what you’ve seen.

    Vania: I would say that for that balance between sort of the financial or commercial side of things with the creative and then the operational execution, the way to keep that fine balance in check, and quite frankly, moving to the best outcomes is a mutual respect and understanding amongst those different parties. What I, when I’ve seen it go badly, it’s typically because, you know, for example, the investors and the finance guys just give zero credence or respect to the creative aspect of things because it’s not the same language, quite frankly, or vice versa.

    And that’s when things go badly because things must be creative, but they also must be commercially rooted with the return on investment. And when there’s a fine balance between all of those different elements, it works out really well. And the way that we deal with it at Atwater Capital is we seek to be very respectful partners who respect the opinion and domain expertise of our partners.

    So we set up very deep partnerships with operators and creative folks and companies and essentially say to them, Look, we’re going to be supportive partners. We’re going to have a different kind of discussion with you than we think has been historically presented in your interactions with Wall Street. And that means that what you do does need to be commercially viable, but we’re not going to mess with your creatives. And typically, that works out really well.

    And the other thing that we do is you mentioned discipline, which is exactly the right word because at the end of the day, we have a strong fiduciary duty towards our LPs who give us capital. And so we make sure that we do or I should say, we contribute what we’re good at in terms of evaluating the financing of creative companies or projects. And that’s things like financial judgment, portfolio, curation and diversification, legal structuring, collateral perspective, things like that.

    And where we stay out of is the creative. We’re actually, this is going to perhaps disappoint lots of people, but we also have policies in place like none of us are allowed to attend red carpet premieres, for example, if we invest in a movie. We just need to make sure that as investors, we let the creatives and the operating folks do what they’re really good at. We stick to what we’re good at and make sure that our views are not somehow wrongly influenced by the things that we shouldn’t be focusing on as investors and financiers.

    Patrick: So you keep that arm’s length to avoid conflict.

    Vania: That’s right. Yep.

    Patrick: With entertainment in media is like software. There are many different elements of that. Are there particular areas of media and entertainment that you specialize in? Or is it pretty much everything in that channel?

    Vania: What we try and do is be investors who see where trends are going and get ahead of those trends. So the short answer is we’ll be quite generalist in the sector, but we will drill down into our view of sub-sectors and where things are going and try and place capital ahead of those trends.

    Patrick: Which leads me to this question because this was an opportunity we had and, you know, as with a lot of things in entertainment just kind of died on the cutting room floor. But give me your idea with the new streaming services that are out there as we go from bundle entertainment packages two is rapidly unbundling, but it looks like that unbundling is going to result in, a different type of re-bundling is people have to buy more things all a cart. What are you seeing out there in that field?

    The Evolution of Entertainment Delivery

    Vania: It’s interesting because I think specifically, you’re speaking to filmed entertainment. And if you look at what’s happened in the music industry, this process really unfolded in a much earlier fashion than it has been filmed entertainment. So we used to buy a bundled hard good in the form of, you know, vinyl or CD. Things, essentially that bundled good disaggregated and digitized into a digital download that was an owned digital goods. And now, things are re-bundled into a streaming which is access, not ownership subscription bundle.

    So I think we’re just finally seeing filmed entertainment come around to that. So it’s quite funny because initially, so many folks were excited, or at least I did a lot of equity. Research analysts were super excited about the golden age of streaming when it came to filmed entertainment because the bundle was breaking. And that’s right. The bundle was breaking on the traditional media side, but it’s absolutely re-bundling.

    And we’re in a period where it’s great for the consumer because competition creates innovation. It creates choice. And so right now we’re in a golden age for the consumer because we’ve got tons of different platforms, whether they are relatively, I’d say technology-centered players or tied to a traditional media player, who are all investing GADS as money to compete for our competition. Sorry to compete for our attention.

    And at the back end of this, we will see various players emerge. I think we are going to, what’s happening is probably not long-term sustainable in order to actually get a proper return on investment for all the capital that’s going into tier one content. We are going to see have to see some big winners emerge at the back end of this. And there will be a re-bundling and a massive wave of content.

    Patrick: So there’s going to be a consolidation and so forth. Can you talk to me, I know we didn’t cover this when you and I spoke, but tell me your impressions on the emergence of technology, within media and entertainment.

    Vania: Overall been, just as from a consumer standpoint, fantastic. Think about the experience, the consumer experience of let’s go back to music, paying $26 for a CD. By the way, inflation, if we adjusted for inflation would be much more expensive in today’s terms, but paying that much for a CD, potentially losing it or scratching it and even.

    You know, trying to play a playlist and verses now where I can walk into my home, voice command any song for $9.99 a month and get that song played over the speakers. From a consumer perspective, technology, or let’s say tech entrance to various sub-sectors within the space has done wonders for the overall consumer experience when it comes to consumption of content.

    Patrick: I just think also just the impact on the economy, the impact on business, not only in America but worldwide, is profound. And how we’re big Nativists here up in Silicon Valley, and we’re the hub of all things tech, if anybody were to venture down to Southern California, you’ve got a mini, I guess they call Silicon Beach. But technology has really transitioned down there very nicely and it’s everywhere.

    Vania: That’s right. And I’d be remiss to not talk about the flip side of it, though, which I think we always have to be aware of which is, there’s already rumblings where, is a consolidation amongst the tech powers that now distribute the content that we are consuming on a daily basis, is that consolidated power going to be good for the consumer in the long run. And so for a period there, I think you saw, for example, platforms like Netflix or Amazon Studios, quite frankly, creating content that was not seen and would not ever get greenlit by some of these major studios and players.

    And so there was really a creative Renaissance that came up from that. And I think one of the things that from a societal standpoint that we just have to keep an eye on, is that as we talked about, just now, on the back end, there will be a bundling, there will be an emergence I think of various large failed And who wins this war. And I think we just need to make sure that in that whole equation, that when it comes to what consumers, their experience and the diversity of their choice and whatnot, that there’s always going to be that natural tension between consolidation of power on one side, and what’s good for consumers on the other.

    Patrick: With Atwater Capital, give me a profile of your ideal client, because there’s the nostalgic idea of a producer or somebody running around trying to raise money for a project and so forth. But tell us what the profile of your ideal client.

    Atwater Capital’s Ideal Client Profile

    Vania: Sure, so I’ll contextualize client in our case as a company or project, for example, that we would invest in. And so the investments that we have made that have been successful, and I would say the common thread between those is a great management team, rather than for example, a very special strong CEO. We don’t like cult of personality. Quite frankly, we like to see great leaders. And great leaders have strong people and a very strong supporting cast around them.

    And so the best companies that we’ve ever invested in have strong management teams that, you know, go down into second, third layers and there’s still a strong core competency there. You have folks who can have healthy debates and discussions around strategy around operation and can be, you know, because as a shareholder, we don’t want to go in and run that company. That’s actually a disastrous outcome for a shareholder. The mantra is we invest in people, not assets. And so you want those folks running the company.

    And you really, as a shareholder want to be the supporting cast where you can just kind of optimize around the edges, whether it’s making introductions, kind of helping to think about strategy. And so management teams are very important to us and core to the thesis. The other thing about it is does this company solve an issue or meet a need?

    A very discernible need? And do they meet it in a particularly efficient or effective way? And I know this all sounds very basic, but quite frankly, investing is down to the fundamentals and basics most of the time. Yes, there’s a level of domain expertise that one must built up of one’s career, but it really comes down to the basics. And so I would say those are the common threads that we’ve experienced in our successful investments.

    Patrick: And you’re looking at investments all over the place.

    Vania: All over the place, yes. We have portfolio companies currently in the US and Europe. We’re looking at, we’re actively evaluating investments right now in Asia, in East Asia specifically. The only reason why right now I’d say we have not focused on certain geographies like South America or Africa is in my belief investing is a local activity and a very human-intensive activity.

    It’s one where you should have a local team who understands local trends who can build relationships with local founders and management teams. And so we have not grown to the size to focus on those geographies. So we focus sort of where we do have incumbent relationships and expertise.

    Patrick: That’s what I was told not too long ago was the reason why so many venture capitalists only investing in the bay area up here in Northern California. They only invested quite a few of them in just the Silicon Valley, the Bay Area companies and ventures, because they wanted to be within a couple hour car ride of their investment in case they had to make quick changes. And if you’re investing in something, you know, two or three time zones away, that gets a little problematic. So that’s not a surprise.

    Vania: Just in general, obviously complexity and communication grows the more timezones you have in between you and your portfolio company. But I, and that’s once you’ve already made the investment. So just from a portfolio monitoring and sort of operational involvement perspective, but I also think, so for Atwater Capital, 100% of our capital is invested in proprietary deal flow.

    And we really pride ourselves on that. And that is also another reason why I think investing locally is important and having local teams is important is the deal sourcing aspect of it. Do you have folks on the ground who are plugged in and who can build those human relationships with management teams and founders?

    Patrick: Vania, how can our audience find you?

    Vania: Probably your website is the best way. So we’re at www.atwater-capital.com and we have a submission tool there where they could write a message, give us their contact details. And we’re reachable that way.

    Patrick: Excellent. Well, Vania, thank you very much for joining us today and we look forward to speaking again.

    Vania: My pleasure. Thank you for having me.

     

  • How R&W Insurance Has Changed the M&A Landscape Part 2 
    POSTED 2.18.20 M&A

    In the last few years, there’s been a game-changer slowly but surely transforming the M&A world.

    The use of Representations and Warranty insurance is increasing across the board as Buyers and Sellers, PE firms, VC funds, and strategic buyers all recognize that this coverage makes negotiations less contentious and more cost-effective. Because the indemnity risk is transferred to a third-party, this insurance also gives a sense of security.

    R&W insurance is changing how deals are structured.

    We covered why – and some of the foundational details in the first part of this article, which you should read here first.

    Now, we’re to going to get into the weeds, so to speak. Taking a look at some of the specific ways deal terms are being rethought when R&W coverage is part of the deal.

    Materiality Scrape

    If there is a breach of a Representation or Warranty in a Purchase and Sale Agreement, Sellers seeking to limit their exposure, prefer wording in the agreement that requires breaches to be “material” in order for the Buyer to be able to claim the breach for indemnification purposes. Depending on the deal size, “material” generally being more than $100,000 to $250,000.

    Naturally, a Buyer will want to remove this qualifier by applying a Materiality Scrape (i.e. to literally scrape “material” as a determinant for breaches), giving them the ability to determine a breach and thus reduce their risk.

    If R&W insurance is in place, most Sellers will agree to Materiality Scrapes because the policy coverage will mirror the Materiality Scrapes in the agreement, eliminating risk on both sides of the table. According to SRS Acquiom, 2/3 of deals with R&W include even Double Materiality Scrapes (where Buyers determine both the breach and the calculation of resulting damages).

    Pro-Sandbagging Provisions

    Buyers like having pro-sandbagging language in Purchase and Sale Agreements.

    Say a Buyer is performing their diligence and they find a problem. They see that a Seller’s representation has been breached… but the Seller hasn’t recognized the issue.

    Without R&W coverage, what happens next is…

    The Buyer is under no obligation to tell the Seller what they found. They can go through the deal and then bring up the breach post-closing. That blindsides the Seller, who is left wondering why the Buyer didn’t inform them sooner to avoid having to pay damages. Making a claim against the Seller like this is referred to as “sandbagging.”

    An R&W policy will have a warranty statement – a pro-sandbagging provision – that says the Buyer certifies they have no knowledge of any breaches. If it turns out they do have knowledge and don’t inform the Seller before the deal closes, that breach will be excluded.

    As you can imagine, this is great motivation for the Buyer to be forthcoming if any issues show up in their due diligence efforts. They will tell the Seller as soon as possible because otherwise they won’t get the benefit of the insurance later.

    This also enables the parties to address “known” issues before closing rather than the having a future “surprise” sprung on an unsuspecting Seller.

    Disappearing Escrows

    Before R&W Insurance emerged, the prevailing belief of Buyers was that large escrow accounts provided both security and a more “honest” Seller. As R&W began replacing escrows, Buyers and their advisors argued that having cash on hand was safer than hoping an insurance company would pay claims.

    After a successful period where R&W policies have incurred and promptly paid claims, confidence in R&W has only increased, while escrow amounts have decreased. So much so, that according to SRS Acquiom, the average escrow amount has fallen from 10% of transaction value on uninsured deals to 1% of transaction value on insured deals.

    Catch-All Reps

    There are certain Buyer-friendly “catch-all” reps out there, officially known as 10b-5 representations, or full-disclosure representations. Among all the other specific representations in a Purchase and Sale Agreement, this catch-all states that the Seller doesn’t know of any potential breaches or other issues. Therefore, any future unexpected event could potentially trigger these reps, greatly exposing Sellers.

    These open-ended reps can’t be underwritten, so they are routinely excluded by R&W policies.

    In response to the insurers’ position, Buyers and Sellers have agreed to remove these 10b-5 reps entirely so the corresponding exclusion is eliminated. SRS Acquiom reports that some 90% of deals with R&W no longer contain 10b-5 reps as compared with 62% in uninsured deals.

    Non-Reliance Provisions

    In a recent report on M&A trends from SRS Acquiom, the company noted that they are seeing more non-reliance provisions, which are very Seller-favorable, in Purchase and Sale Agreements.

    With this provision, the Seller is telling the Buyer that the Buyer cannot rely on information provided by the Seller, like a tax report or financial statements. The Buyer must perform their own diligence and use those findings to make any determinations.

    This protects the Seller if the Buyer claims that they were provided inaccurate financial statements or similar diligence reports. This shifts risk in the direction of the Buyer. But if R&W insurance is in place, the Buyer is not worried because the coverage would cover and pay the claim for any breach.

    Deductibles

    In the event of loss, there are deductibles due before a claim is paid. In the past, there was a tipping basket. For example, if there was a deductible of $500,000, the Buyer had to eat the first $250,000. However, the minute it goes over $500,000, the Seller is responsible for the entire deductible.

    With R&W coverage in place, the two sides are now agreeing to split the deductible 50/50, simplifying the deductible issue.

    On a side note, it’s amazing how many claims of breaches are reported at least one year post-closing. Most policies have a deductible dropdown. If after one year there have been no claims, the deductible goes from 1% of transaction value to ½%.

    Next Steps

    It’s clear that Representations and Warranty insurance is taking the M&A world by storm. I see it becoming standard in the next few years. You can get ahead of the curve by learning about this specialized type of insurance and how it could change the terms of your next M&A deal – whether Buyer or Seller. Just contact me, Patrick Stroth, at pstroth@rubiconins.com for all the details.

  • Bart Vossen | M&A in the Energy Industry
    POSTED 2.11.20 M&A Masters Podcast

    The energy industry is going strong so far in 2020… and the outlook for the future is good as the industry responds to sustainability initiatives and reacts to market pressures.

    Bart Vossen of Houston-based SGR Energy shares how upcoming regulations are impacting the industry, as well as why the company looks beyond U.S. borders for most of its customers.

    We also chat about mergers and acquisitions in the industry, talking about some prime targets SGR considers and how they conduct acquisitions, as well as where the company is headed in 10 years – they have some big goals, for sure.

    Tune in to find out…

    • The biggest obstacle to growth they’re working on this year
    • The product mix that sets them apart from the competition
    • The difference between upstream, midstream, and downstream
    • Energy trends in the Caribbean and Central America
    • And more

    Listen now…

     Mentioned in this episode:

    Transcript

    Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters, where I speak with the leading experts in mergers and acquisitions. We’re all about one thing here, that’s a clean exit for owners, founders and their investors. Today I’m joined by Bart Vossen of SGR Energy. Bart and I had the pleasure of meeting each other during an event in Houston last October. 

    And as what I had been thinking about with M&A is it’s literally everywhere. And one of the areas that us Californians don’t think about for where M&A is, is in the area of energy. And the Silicon Valley of energy is Houston. And that’s where Bart and I met. So, Bart, thank you very much for joining me. Welcome to the podcast.

    Bart Vossen: Thank you, Patrick. Thanks for the invitation.

    Patrick: Now before we get into you and all things SGR Energy, tell me what led you to this point in your career? 

    What Led Bart to the Business of Energy?

    Bart: Well, I was living up in Bloomington, Indiana. And I was working for a real estate school there and got offered a job down here in Houston to work with the US Department of Treasury and I sold all their ceased property in the Houston area. That contract ended. I went into pressure vessels and structural steel. And I saw an ad, I believe, on Indeed that said timid salespeople have skinny kids. My kids aren’t skinny, I applied for the job. Here I am. So yeah, I came and interviewed and met the guys that interviewed me and then I got to meet the CEO. And soon as I met him, I said I got to work for this guy. 

    Patrick: So tell us about SGR energy. what does it do? How is it in the energy space, and go through the specifics. Keep in mind, our audience probably does not know the difference between midstream and downstream. So if you could just share with us some of the lingo with the energy, that’d be great.

    Bart: Okay, so there’s three basic areas in oil and gas. There’s upstream, which is the exploration and drilling for oil, there’s midstream, which is the transportation and storage of oil, and then downstream is where they do all the processing and refineries and then they ship it out from there. And SGR, we blend fuel for power plants. So technically we are downstream. But actually, if you go past downstream a couple miles turn right, we’re going to be somewhere over to the side over there. So after everything goes to the refinery, what’s left is the six oil, the heavy oil, the residual fuel, they’re all known as the same thing. 

    We take that fuel, we mix it with some diesels and middle distillates, which are actually things that come out of the process higher up in the process. We mix it with some proprietary stuff that we know about and then we sell that the power plants in the Caribbean and Central and South America at the moment. And they burn that and they make electricity. Perfect example is if you go to Sandals or Couples, they have to get their electricity from someplace, Jamaica. 

    The power plants that do that, their ship goes in, drops off fuel, they burn it and they make electricity. Our fuel is probably the cleanest in our area. In addition to power generation, we can also make bunker fuel. We blend bunker fuel, which is also known as the gasoline of the oceans. And I’m sure that your people don’t know anything about the new IMO 2020 rule. The International Maritime Organization is part of the UN. 

    And they designated, I believe, about seven years ago that fuel on ships at sea will go from 3.5%, which it was up until December 31 to 0.5%. So on January 1st, ships had to decrease the sulfur in their fuel by over 85%. Our fuels, and therefore the sulfur will, you know, there’ll be less sulfur, which is a whole lot less polluting. And we can blend to that specification today also.

    Patrick: See, everybody’s thinking about all the plastics in the ocean. And here you are, you’re going to be single-handedly reducing the sulfur in the ocean.

    Sulfur Reduction and Advancements in Energy

    Bart: We’re trying, we’re trying. And a lot of people are going to use more diesel in their fuel. So people at the gas stations when they drive past they’re going to see diesel prices are going to be higher. We don’t use as much so our alternative blendstocks are cheaper and a lot of them are cleaner than the diesel on distillate. So our fuel is burns better and burns cleaner and it’s kind of most of what we use as a byproduct of something else. So we’re also recycling. 

    Patrick: So with this, is the fuel so going toward manufacturing plants, things like that? Because those be domestically used or domestic, US domestic is going just all pure nat gas.

    Bart: In power plants, most of the power plants are doing nat gas. There are some like paper mills, industrial burners such as that, that can use our fuel. We’re in negotiations with a few of those, with a few paper companies in the area in the country, but most of our fuel goes to, goes out of the US because natural gas came in in the 90s. And it’s, they say it burns better and burns cleaner and so everybody switched to that. 

    But you can’t run a pipeline of natural gas from Jamaica to the Dominican Republic. And there’s no pipelines in the Caribbean. So our fuel is made, shipped and then it goes and we’ll put it into a large storage container and as those people need to make electricity they either ship via truck or rail to their facility. They’ll burn it and make electricity. 

    Patrick: Is your market largely, okay is your market largely now Latin America region or the island regions?

    Bart: Currently, we got a lot of customers in the Caribbean. We also have Central America. We’re in the process of closing on a facility in Colombia that will allow us to, it’s a terminal in facility that allows us to store a little bit more and take that good crude that we can use out of Colombia. And we, so the clients in Central America. And once we start those contracts and get all that started and taken care of, we also have clients in Asia that are wanting our fuel. 

    Patrick: Well, that’ll be a big, that’ll be another very large market for you. 

    Bart: That’ll be another huge market. So we’re probably going to double our revenues this year. And once we start those deliveries, they’re going to go crazy. 

    Patrick: These firms right on the cusp of, you know, great than spectacular. Now, with this growth coming up I’m just wondering in there and because you and I were, met at an M&A function. Tell me about SGR’s position with M&A. I mean, are they a buyer or are they a seller? What generally can you tell me?

    SGR and M&A

    Bart: SGR can do both. There are a lot of smaller companies that we could merge with or acquire. And those companies, we could go and, there’s a lot of wells up in East Texas, for instance, that Exxon Mobil drilled and once they got below hundred barrels a day or whatever they can’t use anymore. They’re called stripper wells. So they’ll sell them to somebody and those guys are millionaires just doing that. So we can go and get those guys, take them over, use that fuel. And so we can acquire some of those guys. 

    As for us being acquired, our CEO, Tommy, his goal is to be the largest blender of our fuel in the world in the next 10 to 12, 15 years. And he wants to do that as a tribute to his mentor. His mentor in the late 80s, they supplied all the heavy fuels to like Houston Power, and Light, Florida Power and Light. Large electric companies in the US before the natural gas came in. So his goal is to be the biggest and the best.

    If somebody came in and wanted to buy us, it would have to be a very good offer because the people that have supported us, our shareholders, he wants to be able to make sure that they’re very well taken care of. So, right now, our goal is to go public. But again, if somebody came in and said, Hey, we want to buy you. Here’s the price and he could agree with that and the shareholders agreed with him then we could look at doing something on that side.

    Patrick: Yeah, have you guys had some smaller add on acquisitions in the last maybe 18 to 24 months?

    Bart: Not, well, we’ve had one with the one in Barranquilla, where we just kind of took that over. The company sold it. The company that built it originally was an infrastructure hedge fund in Australia that, they’re not an oil and gas business though. They knew we were looking for something, they contacted us, and we took it over, ran it, made it profitable. And so now we’re going to go ahead and finish the acquisition of it. I don’t know, that’s, I don’t know what’s going on there yet. But that’s really the only thing we’ve acquired so far in the group. And more may come but I don’t know what’s on the schedule at the moment, if you will.

    Patrick: I don’t know if you could tell us this. So I apologize If we’re pressing too hard, but what are the methods by which you guys are vetting opportunities for acquisition? Are you actively, do you have a banker out there helping you look or are you just because of the network and the people that you work with every day, you already have your ear to the ground?

    Bart: Our CFO spotted a few. We’ve already set our eye on a few places. CFO came in I believe July and he’s found a few more. So there’s a few more places that we’re looking at now. Each has their pluses, each has their minuses. Facilities to expand our storage capacity, which we greatly need to do right now. So he’s keeping an eye on those. There’s talks going on with those.

    Patrick: So that’s not very different from Tech. I hate to interrupt but what everybody’s looking for is storage. Tech’s looking for more and more storage. I would tell you in our personal lives, we’re looking for more and more storage. And so now we have this. So that’s encouraging to see is that even with a very mature business like energy that is transitioning out, like, you know, with the, with natural gas, you know, domestically but there are other areas for the needs that are there for the powerplants outside of this area. In addition to that, you’ve got the storage, which I don’t think that’ll go away anytime soon. 

    Bart: No, no. We’re always going to be needing that. And we could, if we had a magic wand and can wave the magic wand right now get one of the storage facilities, we could increase storage capacity because we have the letters of intent for, we could do a 10 multiple on our deliveries right now. 

    Patrick: Oh my goodness. 

    Bart: It could happen that fast with the people that want our product, with the IMO that’s come about. The brain fuels that we can blend. The 10 multiple could double. So we’re in a, it’s a very exciting time. We thought this was going to be a couple years from now but when people call you, you stop and you talk to them. People come and say hey look we’ll give you money to do this and this and this and like okay. We’ll talk.

    Patrick: Okay, Bart, I gotta tell you it’s very similar to, you know, and I’m giving away a lot of our family, you know, insight here but it’s almost like ask me whether I want to invest in Disney right before Avengers Endgame comes out. And that was kind of a no brainer kind of idea there. We didn’t know how all the streaming services would do, but we knew Avengers Endgame was going to be here and it was going to be, yeah, and that sounds to me your situation looks really great. What else is there that you want us to share? What can you share about SGR Energy with the audience that you want them to take away?

    Big Future for SGR Energy

    Bart: Like I said, we’ve got letters of intent for, we could do a 10 multiple on or deliveries right now. We’re looking for investors. Anybody wants to do a shameless plug, we currently pay a 12% dividend to our investors. I got in about three years ago, I’m making about 30. I make over 30% because the shares gone up six times since I bought it. 

    This year is going to be crazy. So anybody that is interested in, we can’t say we’re sure thing but I mean I don’t, I can’t think of anything else that’s better than us at the moment. Anybody’s looking for a great investment, wants to make some money and then plan as you go public. If all goes well, the next two to three, four years, there could be a 10 multiple on that investment. So on investment today so. 

    Patrick: Well, and we’ll be right by along the way as you pick up any additional subsidies or acquisition targets to help build up your infrastructure. Bart, how can our audience get ahold of you? 

    Bart: My number at the office is 832-241-2189. And my email address is B as in boy, AR T as and Tom at SGR energy.com. So that’s bart@sgrenergy.com. Anybody wants to hook up on LinkedIn, I’ll be happy to connect with them there. But anybody has questions, shoot an email, give me a call. And I’d be happy to tell them how we can benefit them and what we can do to make them hopefully richer in the future. 

    Patrick: Excellent. Well, Bart, I really appreciate this. And while the normal display disclosure out here is this isn’t an advertisement or solicitation to buy or information on investment, it is something that if you’re interested in energy, M&A opportunities or energy investment options, you want to look at something that maybe isn’t on the beaten path, this is definitely ay SGR Energy. Bart, thank you again for joining us and we’re going to talk again.

    Bart: Thank you, Patrick, for your time. I appreciate the invitation.

  • How R&W Insurance Has Changed the M&A Landscape Part 1 
    POSTED 2.4.20 M&A

    Representations and Warranty (R&W) insurance is not just here to stay, but growing – not to mention changing the way deals are structured.

    More than a dozen insurance companies now offer this specialized product that transfers the indemnity risk away from the deal parties over to a third party – the insurer. And while only the big deals were eligible before, Underwriters will now take on deal sizes as low as $15M, which opens up a new world for Buyers and Sellers in those mid- to small-market companies. Plus, policies are cheaper than ever before.

    Strategic buyers, VCs, and PE funds are all talking R&W coverage. Sellers are insisting on it because it reduces their escrow obligations and indemnity risk, and Buyers find having this insurance in place makes it easy to move forward.

    All Signs Point to More R&W in Deals

    This widespread adoption of R&W insurance has had a tremendous influence in the M&A world, not just smoothing out negotiations and getting deals done faster but also altering very specific and often contentious deal terms when it comes to the Purchase and Sale Agreement.

    All this provides a critical mass that will bring R&W insurance to the forefront, with wider awareness and adoption in the coming year almost a given, even as it changes deeply ingrained accepted practices.

    First, a little context and background.

    You know there is a sea change going on when even the most resistant “old guard” companies change the way they do business.

    For years, SRS Acquiom was the go-to provider in M&A deals for holding escrows and other financial guarantees. It’s no wonder that for a long time they actively discouraged Buyers and Sellers from using R&W insurance. They maintained that having cash in escrow was safe and more advantageous than spending money on insurance.

    But they weren’t able to hold back the R&W tide, and now they’ve set up a brokerage within the company to sell… R&W coverage. So, they’re finally catching on. It’s a can’t beat ‘em, so let’s join ‘em type of thing.

    The major change resulting from the wider spread introduction of R&W insurance is how it’s disrupted the balance of “power” in the M&A world.

    The Buyer Power Ratio

    SRS Acquiom has a metric – the Buyer Power Ratio (BPR) – that they use to gauge the negotiating strength of Buyer and Seller. It’s a simple calculation: Buyer Market Cap / Target Purchase Price = Buyer Power Ratio. For example, if a Buyer’s Market Cap is 25 times the value of the target company, then the Buyer would have a BPR of 25. The higher the BPR, the greater the leverage for the Buyer in terms of size.

    Basically, the larger the Buyer is compared to the Seller, the more power and leverage they have to get favorable deal terms. For example, companies such as Apple, being a thousand times larger than any potential acquisition target (thus a BRP in excess of 1,000), will always have the complete upper hand. In deals where Buyer and Seller are similarly sized… the less leverage and the more negotiation will take place.

    R&W insurance has introduced a wrinkle here. When the Buyer Power Ratio is low, Buyers are now increasingly using R&W as a way to make themselves more attractive to Sellers while decreasing their risk.

    For example, it’s harder for the Buyer to exercise their walk rights once the Letter of Intent is signed and the target company is off the market. At this point, the two sides are joined at the hip.

    If the Buyer tries to walk away, the target feels like they’re damaged goods and will have a hard time attracting another potential acquirer. If the Buyer wants to abandon the deal at this stage, they face a severe financial penalty. It’s like canceling a wedding at the last minute and not getting your deposit from the caterer or hotel ballroom back.

    However, this puts Buyers in a tough spot if they spot something during due diligence in the run up to closing the deal. They want to walk away but is the issue worth the penalty? That’s where R&W insurance comes in.

    The Buyer can shift this risk to the insurer. By hedging the risk, they can feel comfortable moving forward with the deal.

    Overall, the mindset of Buyer and Seller going into deals when they have an R&W policy in place is:

    What steps can we take to shift risk to the insurance company? And, how can we make sure the insurance company will accept risk?

    Now, we see two parties angling to have terms that they consider a risk to be covered by insurance.

    In part 2 of this article, we’ll drill down into some of the specific deal terms that are changing with the introduction of R&W insurance and how it will impact a M&A deal going forward, including elements like the double materiality scrape, non-reliance clauses, and more.

    For now, if you have any questions about Representations and Warranty insurance and how it could change the dynamics of your next M&A deal – whether Buyer or Seller – you can contact me, Patrick Stroth at pstroth@rubiconins.com or (415) 806-2356.