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Laura Simms | What To Expect In M&A Post-Pandemic
POSTED 8.11.20 M&A Masters Podcast

On this week’s episode of M&A Masters, we speak with special guest, Laura Simms. Laura handles Business Development at Strait Capital, a fund solutions provider offering a full range of financial solutions to hedge funds, private equity, family offices, and alternative asset managers. From their Dallas headquarters, Strait delivers fund administration, middle office operations, CFO suite services, and regulatory compliance services just to name a few.

“We really view ourselves as a partner to our clients,” says Laura. “We want to feel like an extension of their team. You know that we’re just a couple offices down, so we’ve really earned the reputation for being the trusted partner of choice for private investment advisors and managers who are seeking that quality, personalized service provided by a team of experienced professionals. Our mission has always been to protect investors and reduce risk in the global financial system.”

We chat more about Strait Capital, as well as:

  • The importance of partnership
  • Common challenges for clients in the middle market
  • What type of clients Strait seeks and why
  • M&A trends in light of COVID-19
  • 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. And we’re all about one thing here, that’s a clean exit for owners, founders and their investors. Today I’m joined by Laura Simms, who handles business development at Strait. Strait is a fund solutions provider offering a full range of financial solutions to hedge funds, private equity, family offices and alternative asset managers.

From their Dallas headquarters, Strait delivers fund administration, middle office operations, CFO suite services and regulatory compliance services just to name a few. And in this era where more private equity and other organizations are looking to add to outsourcing, Strait comes at a time that’s no better than right no. So I’m very happy to have Laura join me here. Laura, welcome to the podcast. Thank you for joining me.

Laura Simms: Patrick, thanks for the opportunity.

Patrick: So before we get into Strait, let’s set the table. Tell us about yourself personally. How did you get to this point in your career?

How Laura Got to This Point in Her Career

Laura: Sure, absolutely. Well, born and raised first-generation Texan, although my family’s roots are from Hawaii, and both the west and east coast. And it was a privilege of mine to complete my undergraduate degree from the University of Texas in Austin. So after that time during the Great Recession, I moved to the Midwest to pursue some nonprofit work. Next, I spent a handful of years as an operator of a small business. I then transitioned my career into the investment management space and ran investor relations for a private multifamily office.

When my husband was deployed to the Middle East with the Army National Guard, we then made the decision to return to Texas. And that time around 2017, I joined Strait and was really attracted by their entrepreneurial culture, their audacious growth goals and just the ability to use my operational and client experience to advise prospective clients there. So when I joined, we were about 26 professionals and now we are a team of around 60.

So I’ve enjoyed my time there, the opportunity to run business development efforts. And what I really value is our partnership approach. So, that we provide for our clients and have found such great satisfaction in working in the middle market space with fund managers, advising them and really helping them through that fun launch process as well as working with established managers and helping them convert to our offering, which is extremely high quality and high touch.

When I’m not working, I pursue interests in health, wellness and fitness, as well as really enjoy volunteering in my community, which I now do through the junior league in the Dallas Museum of Art. And in the future, my husband and I plan to start a foundation to address areas of mental health, caring for veterans and assisting those who are in need.

Patrick: When you originally joined Strait, you said you went from 26 to 60. How long has that period been? How long have you been with Strait?

Laura: So I joined the firm in 2017. So about two and a half years.

Patrick: That’s a lot of growth.

Laura: That is. Absolutely. It’s been great to be a part of for sure.

Patrick: That’s impressive. Well, let’s talk about Strait. And, you could tell a lot about a company and their core and their founder’s vision. A lot of times it’s something as simple as the name. How, you know, tell us about Strait. What it is that they’re doing with the middle market, but start with the name and paint a picture for us.

All About Strait Capital

Laura: Yeah, absolutely. So Strait, so the definition of Strait is a narrow passage of water which connects to larger bodies of water. So Strait was founded to be just that. We are that passage that connects an industry-leading team of experts with our clients in order to provide best in class services.

So for us, it was imperative to establish this culture of true partnership that’s grounded in ethical business practices, which really starts with our team and then extends to our clients. So our goal, we like to say, is to be the one service provider that’s on the asset side of our clients’ balance sheets. And so we do this by investing in the best technology, hiring exceptional talent and anticipating our clients’ needs and building those trusted relationships.

Patrick: Now, one thing about investing in technology and, we’re seeing that in spades right now, is, as companies have had to adjust to work remotely, if you’ve got weaknesses, either, you know, just simple connectivity or other issues like that, then you can’t hide from those. You could push those under the rug for a while when everybody’s all in a team in house, but once you diversify out, that gets real tough. Now, in addition to, you know, that technological advantage, okay, what else does Strait bring to the table?

Laura: Yeah, absolutely. So, you know, what you’re probably gonna hear me say a lot during our conversation is partner. So we really view ourselves as a partner to our clients. We want to feel like an extension of their team. You know that we’re just a couple offices down, or, you know, a few floors down. So we’ve really earned the reputation for being the trusted partner of choice for private investment advisors and managers who are seeking that quality personalized service provided by just a team of really experienced professionals.

So, Strait, we provide integrated middle and back-office platforms, which for our clients translates into reduced costs and really a flawless efficiency of deliverables that their investors can trust. So, Strait, we’re rooted in our values and we’re a partner for our clients, really our team and extending out to the community. So our mission has always been to protect investors and reduce risk in the global financial system.

So for us, accuracy is king and we’re so proud to say that we have not had a restatement in our firm’s 14 and a half year history. We also provide an exceptional user experience through our process-driven partnership approach, as we talked about before, advanced technology and really our team of industry experts. We hire people that are extremely driven, have that achiever mentality.

Our team of professionals is comprised of CPAs or those pursuing their CPAs. At the staff level, all of our folks either have their accounting degree or their finance degree and at the leadership, we bring in folks with, you know, extensive experience in the fund administration field or who’ve worked internally at a private equity or hedge fund before. You know, our manager Stacey Relton has really done a phenomenal job at creating this type of culture at our firm.

Hiring the right people is so important for straight that no one person comes into the firm without being interviewed by Stacey. So what she looks for are these intangibles, ensuring that their values align with ours, which are ethics above all else, owning the business, pursuing mastery, relationships matter and giving back. So, you know, we feel like if we hire the right people, give them a great work-life balance, our people are going to take care of our clients.

So additionally, our institutional platform FIS Investran is the gold standard and private equity accounting and investor reporting. So we offer this technology, our boutique level of service, white-glove approach to all of our clients, from the emerging manager to the established global investment firm. So no matter your size, we’re going to take care of you. We’re going to give you all the bells and whistles of the big shop but with that really boutique service.

Patrick: I think, I’m not as familiar with this just in the logistics of this. The smaller private equity firms, are, if they don’t have in-house accounting, they’re going out to a CPA firm that, you know, obviously, the bigger firms are going to cost a lot more. They run the risk of going to a regional or local CPA firm that may not have all the capabilities and all the knowledge, right?

Laura: Yeah, that’s absolutely right. You know, you may have a team of bookkeepers, obviously not at the CPA firms. But with us, you get that fund expertise because fund accounting is very niche. And so our team does it every day, right? So we’re experienced with the fund accounting, with the investor reporting.

And because we’ve made the steep investments in this, you know, gold standard in technology, it just helps out our clients because we can slice and dice and provide reporting customized to how they want. And then their investors, especially on the institutional side, are very familiar with Investran ready. So they’re comfortable with the platform. They’re comfortable with investor portal. And we’re passing this technology to every one of our clients, no matter your size.

Patrick: Something that you’ve said multiple times, now I want to underline this because this is not a small deal. This is a big deal. You talk about the importance of partnership. And there’s a real strong sense with this. And it’s something that I think a lot of us, we’re all service providers in this world right now in one capacity or another. But what separates a, you know, a service provider from what we want to be as a partner, is where you look to your clients and say, Hey, you know, you’re not just a source of revenue for us. We are partners together. We have our interests don’t just overlap, they’re integral.

And we have every interest in you reaching your goals and succeeding. And if we are, you know, tied in directly with your success and we’re joined at the hip, that’s a deep, deep commitment. Let’s go a step further on this. And I’m not certain, but I would think that because of what you’re doing, you’re almost in a fiduciary capacity, where, you know, you are, you owe a duty of care to your clients. And so I think where, you know, it’s the ethics that you underline and it’s not enough just to go ahead and have a good committed version of that and be, have a desire. You have to execute.

And so what you’re doing is you’re setting this up so you can execute with technology and not have, you know, the bugs are other systems that are problematic, and that you can move forward with them. It also sounds to me like you’re also set where you will help firms that, you know, need to outsource because they just don’t have the capacity, they don’t have the talent,t they don’t have that. But as they start growing, well, you can scale with them. Why bring those services in-house if they’re working beautifully, seamlessly? And then, because you can grow with them, that’s the case?

Laura: Absolutely.

Patrick: Okay. The other thing that I noticed is going to be an issue coming up is going to be talent, and how, you know, if you’re trying to set up and have the internal accounting systems, the internal compliance controls and so forth. Where are you going to find those people and how are you going to vet them? And how do you know that they are going to be, you know, as committed and able to execute? They don’t have to do that. They just go right to you.

Laura: That’s absolutely correct.

Patrick: So although I’m sorry, I hope I didn’t rain on your parade and steal all your thunder but why don’t you give me some examples of, you know, where you’ve delivered, you know, for your clients. Give us a case or two of, you know, what you do?

How Strait Helps Their Clients

Laura: Sure. Well, and Patrick, you kind of even touched on that. So, you know, we have a lot of success stories within our firm and among our clients. And one I’ll highlight is a client that launched their fund in 2013 from the DFW Metroplex and when they decided to outsource, Strait was their fund admin, and that was back in 2015. So when we onboard them, we created an institutional platform from day one, allowing them to really focus on growing their assets, building their track record.

And now, this firm has made over 100 transactions, manage is over 3.7 billion in committed capital. This client is very well known in the industry. Not only do they provide Strait as a referral, you know, to their peers launching a new fund looking for a service provider because they’re so satisfied that the work that we’ve done for them, but when I’m out in the market, you know, talking to prospective clients, part of our process is providing references, client references.

Whenever I mentioned this client, that’s always, you know, super positive remarks on behalf of this prospective client and really just increases our level of expertise in their eyes because of, you know, the success with this client. So that’s one. And then, you know, that was a new kind of fund launch that we worked with.

We also work with a lot of conversions. You know, someone who they’ve been in business for a while or they are unhappy with their level of service. You know, we talked about the middle market. Patrick, you and I have talked about it before how it’s just a market that is overlooked and often in our space, they’re paying really high fees but not giving the service that they need and desire. So we’ll see a lot of those folks come over to Strait. And we’ve, you know, from large clients to small clients, we have the ability to process large amounts of data and kind of do that operational cleanup, you know, in the middle market. I personally love working with these folks.

There’s that entrepreneurial spirit. People are rolling up their sleeves and just going after it. Maybe they’re a deal guy, maybe they’re, you know, entrepreneur doing private equity firm independent sponsorship, but they haven’t really been focused on the accounting, the operation side when we could come in, do the operational cleanup, reduce those pain points that they are experiencing, bringing them up to speed on industry standards, which then elevates their investor experience and really sets them up for, you know, future growth. \

We’ll take time to help them understand the accounting side, help them understand the operational requirements and compliance requirements as a fund. So that’s kind of part of that, you know, partnership approach where we really go above and beyond. If someone has a question, we have the relationship where, you know, they just call someone on our team and they can ask the question. We’ll consult, we’ll advise and help them through, you know, issues that they’re experiencing.

Patrick: What’s the biggest, and this is completely unscripted or anything, but what’s the biggest problem that your clients have? Is it going to be on the accounting side, a compliance issue, tax? Is there anything that really grabs it? I can imagine personally, I can’t stand accounting, okay? I respect it. I know it’s necessary. You know, and I rightly have that outsourced. But I can imagine if there’s any discomfort for entrepreneurs.

Laura: Right. You know, I mean, I would say because we service so many different types of funds, we’re agnostic to size and strategy. The problems and the challenges can be different for each. You know, we can speak to the regulatory issues. If you are a registered fund, you have to abide by, you know, everything the SEC puts out. And that gives a lot of, you know, executives, heartburn, right? Am I doing everything right?

Am I following the law to a tee? So what our team has done is we have a compliance division. Our head of compliance, we relocated him from Bloomberg, he was a compliance officer there, and he built out our full compliance program. So those regulatory challenges that people face, especially as, you know, regulations change and update such as this year, we saw a lot of changes regarding Cayman, privacy law, their AML regulations, Sema.

And our team did a lot of diligence getting our clients up to speed to that and aligning them where they needed to. So, you know, there’s definitely those pain points in the compliance area. You mentioned the accounting. You know, maybe we’re nerds and we enjoy the accounting, but we definitely take that, you know, off of the plate for our clients. But really pain points can come on the compliance side making sure that you are doing, you know, everything right and correct.

Patrick: As a matter of fact, just Bloomberg issued a report where it’s concerned with mergers and acquisitions for companies that have either been getting the PPP loan for paycheck protection, or the employee retention tax credit. And if we’ve got companies on, you know, doing one or the other when they combine, then what happens? And even the government doesn’t know yet because they’re still waiting for guidance. And so, you’ve got this thing that’s constantly moving and you’ve got to keep your fingers on the pulse.

Laura: That’s right. And even if a client isn’t engaged with Strait for compliance, they have access to all of our experts. So we’re keeping our clients up to speed on all of these new regulations issues coming out, like you mentioned, regard to PPE. And so our team is keeping everyone abreast of what’s going on and making sure that, you know, people are in line with what’s coming out.

Patrick: We’ve got a lot of listeners, both on the entrepreneurial side and in the private equity space and so forth. Define first, give me a description of your ideal client. Who can Strait best serve?

The Ideal Client for Strait

Laura: Right. So what’s great about Strait is, you know, for us the accounting is the accounting, so that allows us to be agnostic to size and strategy. And because we’ve invested in the top shelf technology, our systems have the ability to process, you know, most every asset class out there. However, in terms of AUM, our ideal would probably be funds with committed capital of 100 million up to multi-billion.

However, we do work with smaller funds such as VC, which typically launches maybe around 50 million. Some examples of strategies we service on the private equity side are buyout, mezzanine, growth capital, distressed, oil and gas, minerals, real estate venture, hybrid kind of funds. So we really do most everything. You know, this isn’t an exhaustive list. As you shared at the beginning, we also service hedge funds, family offices. We work with independent sponsors.

Patrick: Gotcha. Within, in terms of geography, regional, nationwide, what’s your reach?

Laura: Great question. So, you know, we are headquartered here in Dallas and have a fair amount of clients in Texas, however, our client reaches nationwide. So we have a fair share of AUA assets under administration in the northeast and really sprinkled throughout the US.

Patrick: I focus on the rocky mountain area and in the Midwest. There just seems to be a lot of flight of capital and organizations and just talent getting away from the higher tax states into those quality of life sections of the country.

Laura: Right. Patrick, what’s really interesting is just this week, I talked to maybe three prospects out of Colorado. I don’t know if it was a coincidence, but yeah, new launches in Colorado. I guess one of them is vacationing there but

Patrick: Well yeah, that’s where, that made Montana they’ll go look at those places over there. So we will see. But it’s an issue being based in Silicon Valley how much talent and abilities we’re, you know, going down south into southern California and now they’re actually moving east into eastern Nevada and then into Utah and Colorado. So we could see quite a bit more out of there. And that’s going to be, I think that’s just because thanks to technology and a lot of other things that facilitates it.

Laura: That’s right.

Patrick: Yeah. The, as an issue and I look at this just being an insurance guy, okay? Does the subject of insurance as part of the overall with compliance or whatever, is it played at Strait or what do you observe on that, if anything?

Laura: Sure, yeah. Well, to be honest, we don’t deal much with compliance, excuse me, insurance issues on behalf of our clients. What we do see at our level is, DNO and ENO. We’ll process insurance payments on behalf of our clients because we should serve as the treasury function, but we’re not necessarily involved in insurance-related challenges our clients may face.

I will say though, during the pandemic, we’ve had a lot of look back to policies to see how COVID type events are covered. How our, you know, our space is so niching, I would love to hear your thoughts on how you think insurance and different related matters could benefit our clients.

Patrick: Yeah, I think that the area particularly with private equity being at, the sole function of private equity, or the big function is to you know, acquire companies add value to them and then secure an exit at a point well north of where they started from. And so mergers and acquisitions, those transactions have been insured traditionally, in the last several years by a product called rep and warranty insurance.

The biggest development in why we’re were reaching out, as Strait does to the middle market and the lower middle market, is that the threshold for eligibility for rep warranty insurance, which really accelerates the process of closing successfully and eliminates all or virtually eliminates the need for escrows. There’s no fear of clawback of proceeds post-closing, if there’s a breach. Just a backstop for both sellers and buyers. It’s an ideal tool that private equity has embraced.

Only though at the hundred million dollar transaction threshold and up. In the last 18 months, though, because of competition, because among insurance companies with the success of the product in terms of claims, there are a lot fewer claims made. not because they’re excluded, but just a lot fewer claims that are happening because the diligence is so good that, you know, is a very successful product financially.

And so the pricing and the costs have fallen along with the thresholds, now we’re able to see transactions that are 15 million to 30 million. I mean, these are, you know, add ons that can now be insured. Where, with an add on, perhaps it didn’t make sense to spend three, $400,000 in cost per rep warranty policy.

But if it’s under $200,000, all of a sudden that’s check the box. Particularly with buyers and sellers, a lot of times they negotiate and they share the cost of it anyway. So it’s a win-win. The more information we get out about that, we’re trying to do that largely because lower middle market, middle-market companies are getting overlooked. And if they default and go to the brand large institutional firms, who are great, we need somebody to ensure Disneyland, we need somebody to handle, you know, the billion-dollar Walmart acquisitions. You know, to them as an add on.

But for the smaller companies, they don’t get serviced well and they get overcharged with fees. Because the premiums are so low, the commission’s are equally low. So the large institutional insurance firms have to charge fees in addition. That’s a cost add you don’t need, particularly for the lower middle market. And, you know, it’s better to come in at that level. The other comment I’m going to do on my soapbox, particularly with directors and officers liability, is, and it’s something that you should look at, is with mergers and acquisitions, the target company has to purchase a DNO tail.

They have a policy that will last for three to 16 years after closing of the transaction just in case any wrongful acts pre-closing get brought in litigation against the former board. There are a lot of D&O policies on real Mainstreet standard carriers that are out there that will only give you a one year tail, maybe a two. That’s not gonna help if you need six. And so you need products or somebody that has the capability there. And that’s with, you know, that’s a very common thing.

A lot of times we find that you got sole owners of industrial companies never needed D&O policy because they were the only shareholder or they and their spouse for the shareholders. They didn’t need D&O. Now all of a sudden they come up to sell their company and they need it. So those are the types of things we really relish getting in because we want to be, as with you, the entrepreneurs, the folks that really created something out of nothing to have something so they can get a clean exit. And so that’s the area that we get in with the insurance. And it’s been just a great ride in the sector.

I focused in this sector starting in 2015 and it’s been an absolute joy. You know, I always ask about what you see for trends and so forth in and around private equity or M&A. As we record this, we’re at the I would call it the end of the beginning of COVID-19. We’re steadily reopening and there’s fits and starts no matter where you are. You’re in Texas so I know that maybe not everybody’s back at the office yet, even though you’re leaps and bounds ahead of California. But, you know, what do you see trend-wise either in light of COVID, not in light of COVID, but what do you see, you know, out there that you can share?

M&A Trends Amidst COVID-19

Laura: Sure, yeah, that’s a great question. I can certainly share what we see among our client base as well as, you know, what I’m just hearing in the market. So for one, force measure clauses and their effectiveness have been a big topic. Also valuation in terms of downside and illiquids, like oil and gas interests. Among our private equity clients, valuations, not surprising, have been hurt during the pandemic.

But as you know, for us at the fund level, you know, it’s a long-term investment and thankfully, everyone has been able to weather the storm. So we didn’t see much M&A activity happening. We did see activity though. We saw deals get done both on the acquisition and exit. However, these were deals that were already in motion pre-COVID. I was recently talking with one of our clients and he focuses, his firm focuses on the lower middle market in Texas and surrounding areas. And for them, deal flow, he said, has been surprisingly steady. Things did slow in March in April, but everything still remains on track for the year.

So they invest in a niche manufacturing healthcare services and business and industrial services. Key trends that we kind of see in the market, we touched on this at the beginning, and obviously, it’s what we do, but the demand for outsourcing and all, and additionally acceleration in adopting technology and then just an even greater focus on cybersecurity. So, demand for outsourcing has been on the rise in recent years. However, the move to remote working and the fallout from the pandemic has only accelerated this trend, right? So this surge in demand is not only expected in the fund admin space, but also areas such as HR and IT.

So why is this important to M&A? Well, outsourcing enables sponsors to focus on fundraising and supporting their portfolio companies, which is essentially, which excuse me, which is especially important for smaller firms with limited in-house resources. So investors more and more are desiring to partner with GPs that are able to focus mostly all of their time on investment decisions and leave the back-office operations to a team of experts like Strait. Digital collaboration, as most everyone has experienced during the pandemic, and as you and I are doing now, communication and document sharing tools are vital and extremely helpful.

This is especially true for GPs, LPs and other service providers during this time of quarantine. You know, GPS have been hosting investor presentations via video and have that critical need to sign things digitally. So these changes were already happening slowly in our industry, but because of the pandemic, we’ve been forced to move forward in this area. And I was reading a survey that private equity international put out and they said 50% of GPs intend to hold more online LP meetings once quote normal business life returns.

And then lastly, just with technology and cybersecurity. So, with these digital collaboration functions and a greater demand for data among LPs and GPs. This brings a greater need for focus on cybersecurity and data protection. If firms fail to manage their cybersecurity risks, they could face regulatory sanctions, reputational damage or liabilities to third parties which could really impact the value of an investment. And we all know cybersecurity has been a hot topic and it’s very much so a hot topic for investors and often asked in the DBQ ODD process. We field a lot of those questions when we’re on calls with prospective investors for our clients.

Patrick: I’m gonna put a shameless plug in for you. I’m sorry, I do apologize. But, you know, with cybersecurity, we’re noticing just the amount of capital being raised by firms in cybersecurity space, the number of acquisitions by strategics and private equity to bring in a cybersecurity company or cybersecurity talent to then augment the cybersecurity of a portfolio, okay? There’s another hedge to all of that.

And there’s an insurance policy called cyber liability that pays not only for the damages arising from a breach, and that’s just loss of confidential information getting out, but it’s going to pay the compliance fines and penalties that will follow a breach. It also has business interruption which is free from the COVID business interruption and a lot of other, you know, crime coverage from hacking, ransomware, that kind of stuff. It’s a great underlying product and the beautiful thing about it, it’s not expensive. And, you know, so as we see that important going, you got it really invest on that cyber infrastructure.

But this is the back, you know, just the hedge on that. I think, I completely agree because that’s, a number the acquisitions we’ve been seeing are tech companies specializing in cybersecurity. And, Laura, with all this going on, which is all fabulous, you know, so we’re turning lemons into lemonade here with what’s going on. How can our audience reach you to learn more about you and Strait and have a quick go for a conversation?

Laura: Yeah, absolutely. I would love to chat with anyone interested in Strait, our services. They could visit our website, straitcapital.com. That’s www.STRAITCAPITAL.com. And I’d be happy to take their email at laura.simms@straitcapital.com.

Patrick: Two M’s for Simms, just so you know.

Laura: Yes, that’s right. LAURA.SIMMS@STRAITCAPITAL.com.

Patrick: Well, Laura, thank you very much. It was an absolute pleasure speaking with you. I hope you had as much fun as I did today. And I really encourage you to check out more at Strait Capital.

Laura: Thanks, Patrick.