Transcript
A (0:00)
This is Scott Becker with the Becker Business, the Becker Private Equity podcast. We try and bring you brilliant business leaders in an efficient format every day. Today we're thrilled to visit with Tom Mallon. Tom's Harvard Business School graduate. He's the founder of a company called Regent Surgical Health, which he founded and ran for I think 15, 20 years. Incredibly successful, had an exit with that. He then became involved. I'm not sure. He founded or co leads a company called Perpetuate Capital and, and he's been very involved in Perpetuate Capital since and has been really successful with that. We're thrilled today to get to visit with Tom about both his history as a leader in Perpetuate Capital. Tom, can you take a second to introduce yourself and tell us a bit about yourself, your background, and quite frankly about Perpetuate Capital.
B (0:49)
First of all, Scott, I'd like to thank you for inviting me to be on your podcast. We've had an amazing friendship and you've been a valued counselor and wise counselor for so many years. It's a thrill for me to be here. Perpetuate Capital really evolved from the experience of exiting Regent surgical health. In 2015. We went through traditional exit process of hiring a banker, looking at strategic exits, looking at private equity funded buyouts. But Chris Bishop, our CEO, and Matt Lau and myself decided to look at the ESOP exit where we would create an employee trust, a trust for the benefit of the employees. And that trust would leverage up and do a leverage buyout of the founders. And that experience was such a great experience for the next four years. We had so many benefits of the esop. Everybody wants to work for an employee owned company. We recruited way over our skis. We needed additional talent. We didn't lose any of our valued people. And at the end of the day, we created 13 millionaires out of 42 employees. And it was just an amazing experience.
A (2:16)
That's remarkable. Take a second, Tom, on the original vision for Perpetuate and I know how it sort of evolved from your experience in having an ESOP with Regent. Talk about how you've evolved and got deeper into this.
B (2:30)
Okay. ESOPs tend to be have multiple financing levels. If it's 100% ESOP, it's 100% leveraged. We ran Regent for 15 years with no leverage, no debt at all. But to create an employee trust, you basically use senior financing with a commercial bank which has fairly low interest rates. ESOPs don't have to personally guarantee the senior debt and that's two to three times ebitda. The Sellers generally have a financing part in the sale. So seller financing with ESOPs is usually the majority of the financing. If a company like ours has steady, steady revenue and steady earnings growth, you can put an additional debt in the middle. It's traditionally called mezzanine financing, mezzanine capital. And so we looked at, we had, our sellers were willing to finance 25%. The bank was willing to 25%. We had a middle piece of 50% that we didn't know where it was coming from. We went to the market to do mezzanine finance and, and we got three or four bids. All look the same. They were 12% current interest with, with amortization day one, 2% accrued every year to total 14% interest plus 30% of the upside. As, as sellers, we were willing to do 8% with whatever the trustee would allow us in warrants in the, in the, as far as the growth of the company. I received several angry calls from doctor Partners who were angry with us that we weren't opening this investment up to our doctor Partners. And I said, well, this is what the sellers are willing to do. Would you be willing to do the same? They said, absolutely. We trust you guys. We don't want you to sell to a public company where you're going to change everything. We want you to do exactly what you're doing for us for the foreseeable future. So I went out and I talked to our doctor partners. I ended up talking to 72 of our 400 partners, 42 of those invested in the company to fill in that, that middle gap between the seller financing and the senior lender. And that made the deal happen. And we couldn't have done it with a traditional mezzanine capital. So when after we closed the company then resold four and a half years ago, we got all this money back from the sale, our original investment plus the warrant capital. And we had no place to invest it profitably. So I talked to the doctor Partners and I said, would any of you like to join me in finding reasonable ESOP companies to invest in like Regent so that we can continue this? And they all said yes. So, so we basically come in at we don't have to have amortization day one. So that gives the borrowing company room to grow into the financing that it's now had to take. We operate at 8 to 9% versus 12 to 14%. And the warrant income from our loans will protect us against inflation. So that's really why we started perpetuate capital. And it was a basic need to Replace the great investment we had made in region.