E285: The Lower Middle Market: Where Private Equity Still Generates Alpha
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What inspired Jeff Schwartz to start Corbel Capital Partners?
So you launched Korbel in 2014 after years at Aries. What was the aha moment that convinced you to strike out on your own?
I'd always wanted to do something more entrepreneurial, and I'd gotten to a stage in my career where it was the appropriate time. But in terms of the investment opportunity or the aha moment where there was an opportunity here, I was speaking to a friend of mine who owned a small business, and we were comparing notes on what he did and what I did. And he made the comment that it would really be interesting to have an investor like you on my cap table or on my board or involved with my company, but I would never sell to a private equity fund. So I thought about small businesses. I thought about the lower middle market.
How does structured capital fill the gap for lower middle market businesses?
I knew that traditional banks had largely vacated the space and were lending much more selectively and much more conservatively to small businesses. I knew that private equity firms were certainly buying small businesses. But there was really no one providing what we would call structured capital to small businesses where we could provide capital for an owner of a business to make an acquisition, to buy out a minority shareholder, to take a dividend and still benefit from private equity style sponsorship and support. And I thought that void in the market created a real opportunity for me to raise a fund around that strategy and generate off-market risk-adjusted returns for my investors.
Obviously, when you were at Aries, you had a lot of infrastructure behind you and a lot of support. What did you underestimate in terms of what you would have to do in order to build your own franchise?
That's an interesting question. I'd always wanted to do something more entrepreneurial, as I mentioned. But after 15 plus years of primarily being an investor, the only type of business that I felt like I could run would be an investment firm. So I thought that if I just rolled out an investment strategy and got a bunch of investors, I could spend my time primarily doing deals just the way I had done deals my entire career and probably underestimated, to your point, just how much work there was behind running a business. And our firm is now a business. We manage over a billion dollars of capital and have 20 plus employees and offices and infrastructure. And that all requires management. And I probably spend as much time managing the firm as I do working on individual deals.
I'm not sure I appreciated how time consuming that would be, but it's been really rewarding. But there definitely is more work involved in running the firm than I think that regular way private equity professionals or regular investment bankers give credit to management for.
Using an analogy, you went from being a player to a coach or a manager of a team. What are some of the skills that you had to gain in order to become a great manager over the last 11, 12 years?
Well, I think it's a little bit more of a player to a player coach than a full-on manager. Now it's probably more of a manager, but for the first several years when our team was smaller and we had fewer deals that we were working on and less capital, I was really doing both. Finance businesses are notoriously challenging to grow and manage. So we've made some, I think, really smart strategic decisions about how to grow the firm without sacrificing performance and sacrificing the experience that our employees were getting as investors.
As you've grown Corbell, you've kind of become a victim of your own success from a capital raising standpoint. Talk to me about the journey of building your capital base from 2014 to today.
So fundraising is a challenge for, except for the very, very large established private equity firms, for anyone in the middle market or the lower middle market, capital raising is a challenge. We, as you mentioned, we were somewhat victims of our own success early on and were able to leverage some of the relationships with high net worth individuals and small foundations and family offices that we'd had.
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Chapters
4 chapters
1
What inspired Jeff Schwartz to start Corbel Capital Partners?
0:00–0:46
2
How does structured capital fill the gap for lower middle market businesses?
0:46–10:28
3
What challenges did Jeff face in building his own investment firm?
10:28–26:57
4
How has Corbel Capital navigated fundraising in the lower middle market?
26:57–29:31
Speakers
2 identifiedMore from How I Invest with David Weisburd
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