Insights

Brooke Ansel | The Benefits of Mezzanine Financing
POSTED 5.25.21 M&A Masters Podcast

On this week’s episode of the M&A Masters Podcast, we are joined by Brooke Ansel, Vice President of Prudential Private Capital. She runs a Prudential team focused in the southern United States, but her career path to the investment company was unconventional – it started with the Neiman Marcus buying team. 

Brooke tells us about how Prudential is more than just a bank – it has a commitment to the lower middle market that might surprise some listeners. Prudential Private Capital focuses more on debt and minority equity, and acts as the private capital arm of the larger Prudential institution. 

We chat with Brooke about what Prudential Private Capital brings to the table, as well as:

  • Minority equity and mezzanine debt 
  • The Prudential Private Capital ideal client 
  • Investing in growth and being there for the long-term relationship
  • Important misunderstandings to avoid 
  • Optimism for the M&A world Post-COVID 
  • And more

Listen now…

MENTIONED IN THIS EPISODE:

TRANSCRIPT:

Patrick Stroth: Hello there, I’m Patrick Stroth, President of Rubicon M&A Insurance Service. 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. Today, I’m joined by Brooke Ansel, Vice President of Prudential Private Capital, in their Dallas office. Brooke it’s great to have you. Thanks for joining me today.

Brooke Ansel: Patrick, thank you for having me. Thrilled to be on today.

Patrick: This is unique. Usually, we’re talking with either private equity firms or other capital providers in the lower middle market. At the first blush, you think Prudential big institution, large cap, you know, interest only, not the case. So it’s a pleasure to have you. So before we get into that, though, let’s talk about you. How did you get to this point in your career?

Brooke: Yeah. So as of the beginning of May, I’ll be with Prudential for about seven years. It’s gone by very quickly. Like Patrick, like you mentioned, I’m a Vice President. And I run a team here in Dallas and focused really in the southern part of the United States. But I have what I would call a fairly untraditional career path to where I am today, actually started out of undergrad at Neiman Marcus in their handbag buying office. 

So after getting a finance degree, that’s what I chose to do. And it was a fantastic experience, I got to learn about a lot of different parts of business, including marketing and finance and inventory management. Among other things, it was great experience, but decided to then pivot and pursue more what I would call traditional corporate finance opportunities, including an opportunity at a large hedge fund here in Dallas, and then at Deloitte. So like I said, kind of untraditional, I think to the role I’m in now, but all great experience. And I would say just a great journey. And a lot of that experience I leverage in my in my role today.

Patrick: I can say, you can’t understate the importance of experience. And it’s great because you go from school right into where you’re an operations and working on something on a large scale. And and so you get to see a lot of little things, rather than being in some boutique where you’re just narrow in one area. So that’s excellent. Now, as I mentioned before, people don’t necessarily think of an institution like Prudential being active in in investing like this or more of just like a bank. Okay, not the case. Talk to me about this, and how Prudential Private Capital how it’s different from, you know, just a regular bank. And also, its commitment to the lower middle market, which again, complete surprise. And I’m glad you’re here to tell us about that. 

Brooke: Yeah, I’m so glad to have this conversation, because like you alluded to, a lot of people hear the name Prudential. And they either think of, you know, oh, they’re only investing in public securities, or they just think of our retirement and retirement products, life insurance products. So Prudential Private Capital, we’re a part of that broader Prudential. And we actually have about 100, I think we’re close to 100 years, in terms of our history as the private investing arm for Prudential. And we largely focus on on the debt side, but we do provide minority equity as well. So really think of us in terms of all types of private, private capital. And that’s what we’re doing on behalf of Prudential. So it’s great and that we have, you know, this large balance sheet that we’re investing on. 

But we have, we can get into this a little bit more, as we talk further. But we have these smaller regional deal teams and regional offices that allow us to get to know management teams, get to know sponsors in our territories. And that allows us to invest, you know, private capital in the lower middle market and middle market space. So we’ve been around for a long time, but I feel like a lot of people aren’t as familiar with kind of what what we do on the private capital side.

Patrick: Connection we have with Prudential is they start off as a life insurance company. So you got you gotta like that little connection with with the legacy there of insurance and then broadening out into other financial areas. So you’ve got this large institution, and you referenced this real quick as you got a deal team. So you’re a lot more nimble than people think. Why don’t you talk about what the what are the elements that Prudential Private Capital brings to the table? 

Brooke: Yeah, this is such a great question. And I know you know, one of your prior guests I know alluded to the fact that all capitals and saying no money is greater than any other money, one of my good friends, Heather Hubbard, but you know, I think in terms of our secret sauce, and what we bring to the table is really this idea of our network. And it’s our internal network as well as our external network. So the culture of just our organization, I work with a lot of people who’ve worked together for literally decades and just know each other very well, we can be nimble, make decisions quickly, just because our senior management team has been together for so long and through cycles. 

Not only that, you know, myself and the other team leaders, my peers, we’ve all been with Prudential for years and know each other well. So we’re able to network be nimble, get smart on different situations, different industries, really quickly through just our internal network within our group. But beyond that, you know, we talked a little bit about our regional office network, you know, I am very focused on really sponsors and companies in my backyard. So I know what’s going on in the market dynamics in my region. And as well, as you know, my colleagues across the country in the world, actually, very similar model, they just get to know people and their markets really well. 

And then beyond that, I mentioned our global footprint, you know, I have they’re individuals like me who are based in our London office, or Frankfurt office or Sydney office. So we have this global network and and global client base team base, that we’re able just to pull a lot of knowledge from leverage relationships, and help not only kind of our colleagues, but also are the companies and sponsors that we back in terms of the institutional knowledge that we can bring to the table. And then really, the last thing I’d mentioned, separate from just our network, both internally and externally, would be our ability to really bring capital solutions to bear. We do have, you know, a lot of capital to invest, which is helpful, but not only that, we have the ability to invest across the capital structure. So senior debt, mezzanine debt equity, so a lot of flexibility that I really do sets us apart in terms of creating capital solutions to get deals done.

Patrick: You know, and the other thing is, is, you know, I didn’t realize until we had met that, okay, Prudential, you know, may be a financial institution, but Prudential Private Capital is not a bank. So you got a lot more tools at your disposal. With regard to that, where, you know, your basis of lending or basis of investing is slightly more flexible. Talk about that real quick.

Brooke: Yeah, you know, um, a lot of our underwriting or really all of our underwriting is more cashflow based, yeah. And so instead of looking at asset values, or we’re frequently really underwriting to cash flows, so that in itself, I think creates some more flexibility in terms of the capital structures that we can look to provide. So while we also partner with a lot of banks to in terms of, you know, oftentimes there’s a senior facility and either we’re providing fixed rate long term debt along that big facility, or we’re providing mezzanine and junior capital, so, so just, I like it really an apple and an orange in terms of my commercial bank, banker friends, but great ways that we can partner together to get to get transactions done.

Patrick: Yeah. And the other thing that works out pretty well as you don’t have the regulatory constrictions or constraints that banks have, you can get out there. And the other thing I think, is appealing, particularly and we can talk about this with independent sponsors, which is an emerging class of equity out there is that you’re not interested in majority investments, you want to stay minority, which is very helpful. I mean, there are those that want an exit, there are others that hey they want to come in, they want to make an acquisition, they want to be the majority. And that fits right in with your appetite.

Brooke: Yeah, absolutely. A lot of what we do, at least on the equity side is minority equity. But also in situations where you can stretch the balance sheet a little and provide mezzanine, a lot of people will either call it an expensive debt or cheap equity. Okay, so yeah, so in certain situations, there really is the ability to provide mezzanine, it’s less dilutive to owners, or there may be situations where, you know, the owner doesn’t really want to give up control, but they need to whether it’s take some chips off the table, they want to make a big acquisition, they need to buy out a shareholder. There are a lot of other reasons why, you know, junior capital is important.

Patrick: When you bring it you bring it that way. Now, we brought up the topic of independent sponsors, which is kind of a segue into, you know, your ideal client. Why don’t you give us a profile on who does Prudential Private Capital best serve? 

Brooke: Yeah, so you know, it’s really across the board, Patrick. We, we work with a lot of sponsors, both small and larger funds just because of, you know, our minimum check size starts really at 15 million, and then we have the ability to invest up to a couple 100 million. So we do work with smaller, kind of first time funds, some of the larger private equity funds, but then we also work a lot with management teams on a direct basis with companies. So our, I would say, you know, it’s a pretty broad, a broad range of clients that we work with consistently, though, it’s, it’s people that really value relationships, and value potential and what we bring to the table and really want a long term partner that they can trust, build a relationship with, which I think you know, a lot of our clients definitely saw the benefit of that during COVID. 

Any potential client that I’m talking to, I would say, call some of my clients that we worked with during COVID. And they can talk about how we were patient, we listened a lot of dialogue during very, you know, very challenging time for many of our clients. So that’s a long way to answer your question. But, you know, we work with a lot of different types of firms, different sizes of firms and companies, but consistently, it’s folks that really value relationships.

Patrick: Yeah, well let’s not gloss over this COVID thing you just you just referenced quickly is, you know, with Prudential Private Capital, your your capital is more patient, and you’re going to find ways to make make your investments and your clients successful. So your cut, you’re kind of, you know, aligned with them in the interest, and you’re not trying to just roll them out and get him get an exit, you’re, you’re invested in their growth. And I think being there for the long term really helps with relationships. 

Brooke: Yeah, absolutely. I do think that our approach is it, like you said, more of a long term kind of approach, and with some of our clients, you know, we’ve been invested for a very long time and have had long standing relationships with them. And, you know, in periods of destructive of disruption and uncertainty, that just is so so important. And I think, you know, also think about just our regional office model, the fact that, you know, I’m either in the city or a short car ride away, and not sitting at a, you know, not in New York location, you know, I mean, it’s, I can’t, I’m really kind of in in their backyard. While we couldn’t necessarily always be with each other in person, I think there is this element of, you know, close by in a more normal world, being able to respond in person, if that’s what it requires, and just relationship oriented, not transactional oriented.

Patrick: Well, and as you talk about relationships, I mean, you cannot disregard the human element, particularly when, when we’re involved with investing in mergers and acquisitions, and so forth, where, you know, it’s not Amazon, buying Whole Foods, this is a group of people choosing to work and partner with another group of people. And for an ongoing relationship. And, you know, ideally, one plus one equals six, and so is important to, you know, nurture those relationships. And one of the things that happens with mergers and acquisitions, where, you know, there’s there’s a recipe for failure is where you have an experienced party on one side of an M&A deal, usually the buyer, and an inexperienced party that are not naive, they’re just an inexperienced, that’s the owner and the founder that have gone through an M&A deal. 

And things that are routine to the buyer, are scary, and, and, you know, disrupting to the, to the inexperienced player. And so there’s a recipe there for a lot of tension, a lot of unknown, just from a misunderstanding. And you know, one of the errors that comes in a lot as we see in mergers and acquisitions is where buyer goes through a very invasive due diligence process, and then following that says to the seller, okay, well, we’ve got this thing called an indemnification clause, where, and this is what the seller buyer saying, just in case we missed anything. This this clause says that I can claw back money from you if there’s a thing that blows up post closing that you didn’t tell me about, and I might have missed intelligence. And also the seller is like, wait a minute. I’ve just shared everything with you. I’ve answered all your questions. 

How can you hold me responsible for something that I didn’t know about? To where the experienced buyers as well, I’m making a bet 10s of millions of dollars that your memory is perfect, and that you’ve told me everything. And you can get through that a bit and the seller will eventually you know the deal gets closed and the seller will forgive the process but they’ll never forget the feeling they had and something like that situations completely avoidable because the deal can be insured, there’s an insurance product called rep and warranty insurance where it steps in the shoes of the seller and says essentially, look, if any of the seller reps get breached the reps that the buyer performed diligence on, didn’t find anything. 

And those breaches cost the buyer money, the insurance company, not the seller will go ahead and make the buyer whole buyer has certainty of collection. So that’s all good, they’re set to go sell, I guess, clean exit. And usually, not only did they get more cash at closing, because the policy attaches at a lower point. So there’s little or no need for an escrow. But like a peace of mind that, hey, I get to keep all the money that I got fantastic, let’s move forward. And what was pre COVID, rep and warranty insurance was restricted to deals north of $100 million in transaction value. And then just prior to COVID, the threshold, the rules for eligibility dropped all the way down. 

So deals as low as $10 million are eligible for insurance now. And so it’s a great way for, you know, even minority players to have their interest covered on this as well. And so it’s been just a boon for the M&A in the lower middle market space, which is why we were trying to get that word out. But as a reliable tool, don’t listen to me, Brooke, good, bad or indifferent, tell us about your experience with rep and warranty for your clients.

Brooke: Yeah, I mean, I would say that it is really just become the norm and a part of the natural conversation to at least talk about is this something that is necessary in the transaction or not. And, and I would say just consistently, like you mentioned, there, there are benefits to both the buyer and the seller. But more importantly, it can just help the speed up the timeline of the transaction, and help the buyer and the seller, get the deal done. So I just think that it is becoming more mainstream and and definitely a product that is, you know, a few years ago, you know, people were talking about, but now it’s just I feel like it is just a part of the M&A world now. Very interested to hear that now then the threshold for deal sizes has come down. So that’s, that’s exciting to hear.

Patrick: As we’re going through this year, right? At this point, we’re recording, I just mentioned to you in the pre recording talk that I just got, my daughter got 16 year old got her first COVID shot. So we’re I’m confident that we’re at the beginning of the end of the pandemic here and bring it back to work. And, Brooke, from your perspective, what do you see going forward for the rest of the year be it M&A, Prudential?

Brooke: Yeah, I’m, I’m with you, I am very optimistic about the outlook. For the balance of the year, I just got my second shot. And I really think that things are opening up. So definitely optimistic for the balance of the year. But as it relates to M&A, I mean, what I’m hearing from my network for people that are really involved more on the front end of the process in terms of sell side and investment banks, that they are very active. And it sounds like there are a lot of companies that, you know, maybe were in market pre COVID, or because of COVID had decided has decided that they want to explore strategic alternatives. And really, their focus was, you know, let’s get through kind of 12 months with really good trend lines, good performance, good, trailing 12 month kind of performance. 

And then let’s go to market. So I’m really optimistic that it’s going to be a busy second half of the year for M&A. And clearly the capital markets, there’s still a ton of capital available, whether it’s in the public markets or the or the private markets, and Prudential actually, we just raised our sixth mezzanine fund. So we have more junior capital to put to work which we’re very excited about. So I think that you know, q4 of 2020 was extremely busy and people have kind of taken a taken a little bit of a breath either they’ve been closing deals that didn’t get closed by the end of last year, or they haven’t taken a deep breath and I’m I’m certainly gearing up for a busy second half of the year.

Patrick: You know, I think that a couple things that happened was the dry powder and private equity didn’t didn’t blow away during COVID the other the other issue is the other thing that didn’t stop all a lot of things in life stop time didn’t and so got a lot of owners and founders out though that everybody got a year older. I think I agree with you that there may not be just rushed to market because you know, there might be buyers taking advantage of trying to get a discount because you know past performance and you know relying on earnouts or something post closing calculation right? 

I agree with you I think there are going to be a lot of companies that just they want to hold until they get that 12 month trend line and and get that get those our arrows pointing up into the up into the right and and it’ll improve their position a bit. So that’s a well noted. Brooke, tell our audience how they can find you and your group to learn more about Prudential Private Capital. 

Brooke: Yeah, so the easiest way is just our website, which is pretty easy. It’s prudentialprivatecapital.com. And then me personally, I have a LinkedIn page there get it’s Brooke Ansel. And you can find me on LinkedIn and I try to post interesting content from Prudential and when you know welcome to connect with anyone to talk further or network regarding M&A and, and capital availability, so.

Patrick: Yeah, I will vouch for Brooke also, the emerging independent sponsors that used to be called fundless sponsors, her relationships in that area if you’re if you’re an individual investor, I think the connections that Brooke has and the relationships and the resources she has available is ideally suited for that class. So definitely give give Brooke a call. Brooke, thanks again very much for for this it was a pleasure having you today.

Brooke: This is a lot of fun. I’m a big fan and consumer of podcasts. So to be a part of one is was a lot of fun. So I appreciate it.

Patrick: Now you can start your own.