NewSpring Capital’s Brian Kim and Lee Garber on Growth Equity and Buyout Investing

Brian-and-Lee_v3.jpgNewSpring Capital is a leading private investment firm headquartered near Philadelphia. Founded nearly 20 years ago and with $1.8bn in assets under management, NewSpring has backed over 140 companies since inception. The firm employs four distinct strategies: technology growth equity, healthcare, mezzanine debt, and holdings.

We recently spoke with Brian Kim, a partner in technology growth equity, as well as Lee Garber a principal who leads the firm’s holdings strategy. Both Brian and Lee were 2018 Top 40 Under 40 Growth Investor awardees. While focused on different types of investments, Lee and Brian provided a window into the overarching themes behind NewSpring’s investment activity, including how the firm thinks about supporting private companies across different structures and stages.

(Hear the full conversation with Brian and Lee on iTunes or

RJ: Brian and Lee, thanks so much for joining today. I’m delighted to chat with you. I’ve interacted with NewSpring in the past and I’m really impressed with how the organization has grown and how you go about the business of investing in companies. Maybe what we could do to kick off is talk briefly about NewSpring for those in our audience who may not be as familiar with the firm. Particularly, the roots of the organization are interesting in that a decent number of your founders are former operators.

Brian: We were founded coming up on 20 years ago this May. Our co-founders had the simple premise of partnering with compelling management teams across the region that were pursuing massive market opportunities. Over time, we’ve parlayed the success of that first strategy into what we are today, which is really a family of four distinct and non-competitive investment strategies all focused on the lower mid-market.

All of our strategies have a natural bias towards investing close to home, particularly in the mid-Atlantic region. However, they cover an expansive set of styles – technology growth equity, healthcare, mezzanine debt, and then our holding strategy that focuses on control buyout, which Lee helps lead. All in all, we have about $1.8 billion under management and we’ve backed about 150 companies since inception.

RJ: Wow, that’s fast growth. Maybe what we can do is dive a little bit deeper into each of the strategies that you cover. As part of that, we can also talk through each of your backgrounds. We were happy to feature you as part of our 40 Under 40 list. This is an opportunity for a lot of the entrepreneurs and CEOs in our audience to get to know you a little better.

Brian: In terms of our focus as a firm, I’d say our approach is pretty consistent across all four of our strategies. What we look for are really sticky, recurring revenue businesses that have developed a unique way of solving major challenges in large markets. On top of that, we’re looking for experienced leaders and broader management teams to drive those companies. We’re looking for teams that think of long-term value creation and the fundamentals of capital-efficient growth. More specifically, I’ll cover our growth and healthcare strategies and Lee can tackle mezzanine debt and buyouts.

Within our growth strategy, we’re deploying anywhere from $10 to $30 million of equity, largely in B2B technology companies. We’re generally investing and partnering with companies that are doing at least $5 million of recurring revenue. Over our 20-year history, the average has been closer to $15 million in revenue.

Some recent example investments include Vacasa, a full-service vacation rental management platform based in Portland; Interactions, which is a next-generation IVR technology based in Boston; as well as ExecOnline, which is an enterprise-focused executive education provider based in New York City.

Our healthcare strategy is also very growth oriented. They’re looking to deploy anywhere from $5 million on the low-end to $20 million on the high-end of equity per investment, with a large focus on both healthcare technology and specialty services. Verisma, a cloud-based release of information automation platform based in New York, is a terrific example of an investment. Additionally, SeniorLink, which is a caregiver and elderly care solutions platform based in the Boston area.

Lee: As Brian said, there’s a ton of consistency amongst what we’re looking for, irrespective of where our companies are or where our strategies fall in the capital structure. As NewSpring goes to market, it’s focused on great management teams and great companies within the markets Brian talked about with the characteristics of efficiency in capital. These can fall into any of our buckets.

What I consider the most flexible bucket at NewSpring is our mezzanine strategy. They can do control buyouts. Normally they don’t, and if they do, they’re partnering with somebody in a syndicate and will structure it in a way that provides more debt exposure than equity exposure.   They’re focused on a variety of capital events across a variety of industries at both private equity sponsored as well as entrepreneurial owned and managed businesses. This can include recapitalizations, acquisitions, debt financings, or any other type of monetization event.

If you were to pie chart what they invest in, it’s mostly business services. The next biggest would likely be niche manufacturing. Given the legacy of our flagship growth equity strategy, we’re partner based. One of my partners in the buyout strategy affectionately calls our mezzanine strategy “mequity” because we approach it like private equity – it just happens to be structured as debt.

The newest strategy in the family, which was founded in late 2013, is NewSpring Holdings. We founded it to be a little different than a traditional buyout strategy. It’s really designed to provide a permanent capital solution for investors and entrepreneurs in the lower middle market, which is hard to come by these days. We’re a holding company, and our capital is entrusted to us for the long-term. We’ve made a concentrated portfolio of four business units to function as a partner to owners over a journey of scale through both acquisition and organic growth. While we’re a lower middle market buyout strategy, another way to refer to us is as a diversified holding company that’s main strategic differentiator is acquisitions.

We have four platforms to date. We have a platform in the last mile logistics space called USPack. We have a platform in the managed voice and data services space called Magna5. We have a financial services and technology company called Financeware. And our newest platform is E3 Sentinel, which is a government services business that we first acquired in September.

Where Brian spoke about many of the characteristics we look for in companies, I would say for us – and maybe even across all four strategies – we’re operators by training and by background as a firm. We appreciate the side of the table that entrepreneurs sit on. However, we also invest alongside our entrepreneurs. While we may be control owners, we require industry natives in each of our platforms. Folks who are either the entrepreneur themselves or have identified a platform that will be led by somebody who has domain experience.

Where I think we add value is through our value creation strategy. We have functional experts that can be deployed to our companies on a fractional basis. This model is becoming somewhat popular across the board, but I think what’s different for us is how we deploy these folks, who they are, and what their background is.

We’re not asking the former CEO of a Fortune 100 company to come sit and have coffee with our CEO. We’re talking to the former CIO of Comcast who’s going to walk into the business and help manage a network project, help address highly strategic questions in a roll-up-your-sleeves kind of way, as a partner to our CEOs and management teams. We’re helping to build the infrastructure of these businesses to provide them the opportunity to scale. To start taking the elements that the CEOs don’t necessarily want to do every day off their plates, redistribute those tasks in an institutional and scalable way, and let the CEOs focus on building the business. At the end of the day, in each one of our businesses we try to apply the idea of, “Stop playing not to lose and start playing to win.” That nuance and distinction is really important as we think about who we invest in.

RJ: That’s helpful. This is a really interesting strategy and one that we’re seeing more of in the lower middle market. I presume you have longer runway than your typical private equity firm with the holding company strategy – a more permanent structure. Could you shed some light on how long that runway could be and the scale at which you try to build up these platform companies?

Lee: Absolutely. Our runway is really indefinite. The way we’ve designed this holding company is really about alignment of optimization. In a traditional fund structure in the lower middle market buyout world, many times you’re required to sell an asset before it’s ready – where your cash flow is just starting to derisk and your platform is just hitting the optimal element – because you’re ready to go raise the next fund. What we’ve tried to do is abstract that issue. That’s no longer something that will influence whether or not you sell a company.

We’re not here to say we’re going to hold companies forever just because we can. We’re here to say that we’ve removed an exogenous force that would otherwise influence a sale to let us focus on when monetization really makes sense. Has there been a shift in the industry? Have we hit our capacity on ability or interest in managing the business? Like we’ve talked about, we are focused on the lower middle market. If we owned a $750 million business, it’s very different than owning a $30 million business. If there are components that are better off in someone else’s hands, then let’s monetize. I think our growth brethren take this approach more naturally in that they have a duration that’s a little bit longer than traditional private equity.

We don’t have to sell. We sell when it’s right for the business because building a business is never a straight line.

Brian: I think what Lee touched on, specific to the holding strategy, pertains a lot to the investor return or LP side of things. There’s also a whole other perspective on the management team’s side of things that is equally powerful. We’re seeing in the market, just as this industry matures, very attractive platforms, assets, and companies that are now on their third, fourth, or fifth sponsor transition. That can be very disruptive. It can be very inefficient, especially from a tax standpoint. And it can be very distracting for companies. I think what holdings has created is a very elegant solution to that.

Lee: I’ll give you a quick example. NewSpring Holdings today, in aggregate, is about a half a billion dollars in pro forma revenue. One of our older investments that we made in 2015 is a big contributor to that. We acquired a small business with the family who founded it and was running it – the Glazman family. We embarked on a journey with them to grow their business. Our goal was, “Look, we bought $30 million of revenue. Let’s try and make that $100 million in five years.” It sounds like a reasonable goal to set.

We accomplished that goal in under two years through both organic growth and acquisition. We were a $120 million platform about three years after we made our initial investment. That came through four acquisitions. It came through significant infrastructure build. It came through the family still driving much of the growth. Then we acquired yet another business, a big $100 million business, and started to design a platform to continue to add scale. It goes to show that many times, after four-plus years into an asset, sponsors may not say, “Let’s keep investing. Let’s keep making the right decisions about building a technology platform to support the services that we offer because it’s time to sell.” We’re still making those investments because they’re the right decisions for long-term enterprise value.

RJ: I presume your capital sources are also on board in providing you with the flexibility of deciding when the return of capital happens?

Lee: That’s right. We are backed primarily by institutional level family offices. These are generally very successful entrepreneurs who understand the journey of building a business. They’re somewhat sympathetic to understanding how we invest their capital. We are governed by a board that is representative of our investor base. We have representatives of our investors on that board. They’re in the room helping us make those decisions.

RJ: Did that emanate from the partners and founders of the firm? Given that they were former operators?

Lee: Mike DiPiano and Marc Lederman, co-founders of the firm, had a deliberate asset allocation mentality. We started with our growth equity strategy in technology. We added healthcare. We added mezzanine. But our investor base wanted more access and we have a firm-wide deal sourcing practice that was sourcing all different types of deals. We did not have a lower mid-market buyout strategy at the time. In bringing buyouts to NewSpring we added a partner by the name of Skip Maner. Skip previously ran investment funds, but before that he was an entrepreneur himself. Given Mike DiPiano was also an entrepreneur, they understood the lens and wanted to invest in that way. They wanted to do it differently.

It was driven by Skip and Mike, as well as the team coming together and saying, “If we’re going to do this, let’s do it our way.” It was tough in the beginning to design it. It’s new. We didn’t really have docs to go off of – it was all driven by that operator mentality.

Our other partner in NewSpring Holdings, Jim Ashton, was the CEO of SunGard Financial Systems, which was a $2+ billion unit of SunGard. He managed people and business units and saw the NewSpring Holdings strategy much like how he ran SunGard.

Brian: Just to expand on that a little bit, you pointed out a very important thing, which is the influence of the operator mindset. I think you can see that in how deliberately we’ve structured and designed our control buyout platform. But frankly, the same has been true for all four of our strategies. Even after 20 years, over half the senior leadership for each of our four platforms is comprised of individuals that come from a former operator, CEO, or entrepreneurial background. That mindset is ingrained into everything that we do – how we work with companies and how we partner with companies. Thankfully, it’s ingrained enough that it rubs off on career investors like Lee and myself. That mindset, that background, in terms of how we were founded and who we were founded by, very much remains a key theme day in and day out at NewSpring.

RJ: I think it’s really important understanding that because the capital world is getting a lot more competitive. It seems like every day I’m reading a story about a new growth fund or new lower middle market fund. It’s not uncommon that you’ll have one or two people spin out from a fund and start new funds. It’s competitive. Just the other day we were meeting with an investor we’ve known for some time, and they were talking about how the last two or three deals fell away from them. They were just out-competed. To have that kind of differentiation is key.

On the growth side, are you seeing that competition or do you have a different set of criteria where competition isn’t as fierce or prevalent? And two, if you are competing, what do you think are the key things that enable you to win over other funds?

Brian: Yeah, I appreciate the question. The answer to the first is absolutely. I think every year that passes – irrespective of how the markets are doing more broadly – this industry is maturing. It’s becoming more efficient, more competitive. We take that competition very seriously. For us, we try and look inward. We try and build a firm in a way that’s very services oriented. An example of this was touched on earlier by Lee when talking about our value creation team. About five years ago, what you saw across the industry, especially in the more control-oriented side of the industry, was a bunch of operating groups pop up. The value creation approach was adopted by a lot of buyout firms and private equity firms in the market.

The first iteration of that was done from a sector or an industry standpoint. A subject matter expert or an executive that was very experienced in XYZ industry, whether it be last mile logistics or specialty manufacturing or something more specific than that. As we thought about better ways to add value to our portfolio, we decided to take the model a different way. We decided to build a bench of value-added executives on a functional basis rather than sector basis. What we saw in the industry at the start was a lot of these folks really just end up being faces on a website and not utilized as fully as they could be or were initially designed to be.

We looked at the needs of our portfolio, especially within growth, and we tried to solve the problem of earlier stage companies struggling to tackle specific functional issues within the organization – whether it be moving from a VP of marketing to the point where investment in a full-time CMO was helpful or deploying coaching and supplementation for existing roles that were already in place. We designed and built the value-creation team on a functional basis to fill the gaps we saw within our portfolio.

We have also invested very heavily in our business development engine. We’re leveraging data much more aggressively than we were just a few years ago. We’ve invested in the team much more aggressively than a few years ago as well. It’s all designed to build relationships at the ground level with entrepreneurs and with other influencers in each of the geographies that are a major focus for us.

RJ: Do you find that over time you’re able to develop these relationships with CEOs? Maybe you’ll meet a team and you won’t necessarily transact soon after, but two or three years down the road you will? Is it a long lead generation strategy where you look to develop relationships over time?

Brian: Absolutely. Without going into specific examples or specific company names, I’m thinking of one where we tracked the business for over five years through a number of different phases. This included both gaining additional scale over time, but also transitioning away from what was initially a 100% perpetual license-based business model into one that was predominantly subscription based. Five years into the relationship, we finally pulled the trigger and invested in their series D. That’s a terrific example of a trusted partnership and relationship developed over time.

At the end of the day, we want to compete for investments and partnerships on a personal level. We want to develop a relationship and have insight into the challenges and opportunities within a business in ways that others haven’t. We feel we have a high degree of conviction that, when we’re wearing the hat of the entrepreneur or the particular company in question, we are the right partner to add value and maximize opportunities. Rarely can that happen in a few weeks’ time. Rarely can that happen when you’re just getting to know a company when they happen to be raising capital. Those investments and the groundwork has to happen months, if not years, before the transaction event.

RJ: Thanks for that. I know we’re bumping up against the end of our time here. This has been a great conversation and I know one that our audience will find insightful.

Lee: Appreciate you guys taking some time with us today.

Brian: Yeah, this has been a lot of fun.

RJ: It’s our pleasure. With that, we’ll sign off. Thanks again for taking the time and I look forward to talking again soon.

Hear the full conversation with Brian and Lee on iTunes or


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