How Retail Investors and Relationships Strengthen the Independent Sponsor Model
On The Minds Capital Podcast, hosts Will Smith and Niklas James speak with Sequoya Borgman, Founder and CEO of Borgman Capital, about building an independent sponsor platform around direct investor access, relationship-driven deal sourcing and disciplined execution. The conversation is especially relevant to independent sponsors, private equity professionals and investors evaluating deal-by-deal opportunities in the lower middle market.
Sequoya explains why a retail investor base can contribute far more than capital, how local relationships improve the odds of sourcing and closing proprietary transactions, and why the flexibility of remaining deal-by-deal can become more valuable as a sponsor matures. He also shares practical lessons on fundraising timelines, diligence, leadership transitions and knowing when a strong investment is ready to sell.
Watch the conversation for Sequoya’s practical view of investor access, proprietary sourcing and the tradeoffs between a fund and the independent sponsor model.
Key Takeaways
A retail investor base can become part of the operating system
Capital is only one part of the relationship. Borgman Capital’s investors also introduce potential acquisitions, suggest board members, identify executive candidates and connect portfolio companies with customers. Quarterly investor updates include specific requests, giving people with capital at risk a practical way to help. That changes the value of a broad investor network. Rather than treating hundreds of limited partners as an administrative burden, the firm has built the back-office capacity to support them and uses the network as a source of ideas, talent and trust. The lesson is not that more investors are always better. It is that aligned investors can become more useful when a sponsor communicates clearly and creates specific opportunities for them to contribute.
Proprietary sourcing is about the probability of winning, not simply paying less
Off-market opportunities are attractive because relationships can improve access, trust and the likelihood of closing. Sequoya does not argue that a proprietary transaction automatically comes at a discount. The buyer still needs to pay a fair price. The advantage is having a real relationship with the owner and a credible reason to win, particularly when a business may change hands only once in a generation. That matters because every pursued deal consumes time and money. Borgman Capital therefore concentrates on opportunities from its network, trusted advisers and known bankers, or situations where the firm has a clear industry or add-on angle. Competing in a blind auction without differentiation may create activity, but it does not necessarily create value for investors.
Discipline shows up when the facts change
Trust is built as much by the deals a sponsor declines as by the ones it closes. Sequoya describes a transaction that was fully subscribed before the company’s performance deteriorated during diligence. Borgman Capital extended the process, completed additional quality of earnings work, kept investors informed and ultimately walked away. The firm also waits for a draft quality of earnings report and bank term sheets before approaching investors, so the capital structure and equity need are substantially defined. A modest capital buffer helps absorb working-capital swings or higher-than-expected fees. The broader principle is straightforward: move quickly when the facts support conviction, but do not let a fundraising timeline turn into pressure to close the wrong deal.
Questions Addressed in the Conversation
How does Borgman Capital define a retail investor?
Sequoya defines a retail investor as a non-institutional investor seeking direct access to alternative investments, including high-net-worth individuals and many family offices. He also includes some smaller institutions that do not have direct deal access. Historically, many investors could reach private equity only through funds with large minimum commitments. Borgman Capital’s approach is designed to offer qualified investors direct participation in individual lower middle market transactions rather than requiring a blind-pool fund commitment.
How can independent sponsors raise capital within a short transaction timeline?
The process works by preparing early, verifying the key numbers and compressing the commitment period. Borgman Capital typically gives investors about a week to review materials, holds a presentation, and then provides seven to 10 days to commit. Before outreach, the firm seeks a draft quality of earnings report and bank term sheets so the financing structure is largely set. Investors receive access to the data room during the review window, followed by time to complete subscription documents, accreditation checks and funding before the transaction closes.
Why are leadership transitions such a significant acquisition risk?
Leadership transition can determine whether a founder- or family-led acquisition succeeds because the replacement must fit the culture and operate effectively with fewer resources than a large company provides. Sequoya notes that strong credentials, interviews and assessments do not eliminate the risk of a poor fit. In one equipment rental investment, the right successor helped add locations and double EBITDA in three years. In other cases, Borgman Capital has had to replace leaders when the transition did not work. The practical lesson is to treat leadership as a core investment variable, not a post-closing staffing task.
From the Conversation
“Your network is your net worth. In this business, the better your network, the more people you know and the better connected you are in the deal community, the more likely you are to find good businesses at the right time.”
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This transcript has been edited for clarity and readability. Please refer to the original podcast recording for the complete conversation.
Pre-Interview Discussion
Will Smith: Welcome to episode 13 of The Minds Capital Podcast, the show devoted to the growing world of independent sponsorship and deal-by-deal private equity. I’m Will Smith, here with my partners at Minds Capital, Max Lummis and Niklas James.
Today’s conversation is with Sequoya Borgman of Borgman Capital, a very successful independent sponsor out of Milwaukee. Before we get to it, let’s call out what got our attention.
Niklas, what did you think of this conversation with Sequoya?
Niklas James: Borgman Capital is headquartered in Milwaukee, as you said, and it also has an office in Minneapolis. As the firm plans for future growth and expansion, you might expect Sequoya to suggest Chicago, Dallas or New York as future hubs. Those are the places where you find the highest concentration of talent, capital partners, professional service providers and deal activity.
Instead, Sequoya points to cities such as Portland, St. Louis, Kansas City, Des Moines and Omaha. In his view, these markets offer greater strategic advantages, such as less competition for deals, stronger access to local brokers and business owners, and more room to carve out a dominant position.
Most people in Des Moines are probably not contemplating a career as an independent sponsor, and if they are, they probably wish they were in Dallas or Chicago. But if they listen to this episode, they might learn that being in Des Moines is actually a differentiator and could be a key to success. I found that very interesting.
Will Smith: I’m reminded of Nikolai and Romero, whose interviews are in emerging markets. The pattern is more supply and less demand. Being in a market with fewer sponsors and less competition can by itself be enough of a differentiator to have a lot of success.
Max, what did you think?
Max Lummis: So Des Moines is the new Bulgaria, basically.
Niklas, your point is excellent. It is a huge advantage for Sequoya that he is hunting in these second-tier markets. They are still big markets, and there are plenty of great businesses there, but they may be a little overlooked by mainstream sponsors.
He also said that he and Borgman Capital are mostly focused on proprietary deals. At one point, he says he gets 10 to 20 deals across his desk regularly that are brokered or banker-led, and he does not see the value to his investors in participating in those processes.
He has a strong focus on proprietary deals and secondary markets, which is a major differentiator. He is also raising from retail investors, which is exciting because Minds Capital is doing the same. It is a huge untapped market. The retail investor is really the largest class of capital in the United States.
Sequoya also described what is happening in the private equity markets. Capital has been tied up for a while, and exits are not happening as quickly as some models forecast when deals were purchased in 2020 and 2021. Capital tied up in private equity deals creates a feedback loop in which less capital is available to raise and redeploy.
Where do you go? The retail investor is a very logical place to look. Sequoya and Borgman Capital have professionalized that approach and carved out a niche, which is exciting because I think we are doing the same thing for a slightly different purpose.
One other point was extremely useful—a great tip for sponsors from my fellow former CPA. They slightly over-equitize deals to put more cash on the balance sheet. I believe he said between $500,000 and $1 million in extra equity at closing. I have invested in deals where that is the case, and it gives you a nice buffer. You never know what is going to happen. He mentions black swan events. It is a great tip: Put some extra cash on the balance sheet for the uncertainty that may come.
Outstanding episode. Niklas, you did a great job.
Niklas James: Can I chime in on the retail side? I also find this really interesting. At Minds Capital, we started raising from retail investors because they were our friends and family. It evolved that way, and at this point we are excited about and committed to that strategy for our future fund as well.
Retail financing is a hot topic in private equity in 2025. You can read about it regularly in The Wall Street Journal. Companies such as Moonfare are effectively producing crowdfunding platforms that have existed previously in real estate and, to some extent, in other asset classes, but not really in private equity. There is an evolution here.
You also see companies such as BlackRock and Prudential talking about how, if they can get into 401(k)s, they can democratize access to private equity for retail investors. They present it as a noble effort, but the truth is more cynical: 401(k)s are the mother lode for anyone who needs more assets under management.
Large private equity firms are constrained by the lack of exits and liquidity they have produced in recent years. Because they have not produced liquidity, two things are happening. First, they need to raise money elsewhere because their traditional sources, such as insurance companies and endowments, are saying they want to wait before investing more.
What better source is there than the almost infinite pool of retail capital? They have seen Robinhood funnel significant cash into the public markets from retail investors, and they are trying to unlock that through regulatory changes.
The other development in private equity is the establishment of secondary funds and continuation funds. Because nobody is buying their companies, private equity firms are effectively selling the companies to themselves, creating semi-artificial liquidity events by raising money through an SPV or a new fund to buy assets from an older fund and provide an exit to its investors. This keeps the cycle going.
It is a dynamic capital market, and Sequoya, through Borgman Capital and Pass the Hat, is playing right into it.
Will Smith: Great color there. One other thing that struck me about what Sequoya shared on retail investors is that we keep talking about retail as an untapped pool of capital—which it is—but he also highlights the indirect benefits the firm receives from the ecosystem of retail LPs it has developed over eight years.
The firm gets ideas from its LPs. It gets leads on talent. Sequoya might put out a message saying that one of the portfolio companies is looking for a head of sales, and the network will produce good candidates. It also produces board members and, of course, deal flow.
Aside from being commoditized capital, a retail LP base can become an ecosystem if an independent sponsor is at it long enough.
At Minds Capital, we have built our retail base organically. Borgman Capital’s origin story was also organic. You asked Sequoya why more independent sponsors do not raise from retail investors, and he says they do. Everybody’s first fund involves calling friends and family. That is what Sequoya said he did for his first deal.
From there, the investor base grew organically. It was not a grand strategy. One LP would introduce another to Sequoya. It has grown that way over eight years, and now Borgman Capital is doubling down with Pass the Hat by putting more structure and strategy around it.
Anything else, or should we press play? Here is Sequoya Borgman of Borgman Capital for episode 13 of The Minds Capital Podcast. Enjoy.
Interview
Will Smith: Welcome to Meeting of the Minds, your connection to the growing world of independent sponsors and deal-by-deal private equity. We are your hosts, Will Smith and Niklas James.
Sequoya Borgman got into dealmaking through being a CPA. Tired of seeing his clients have all the fun, he established Borgman Capital in 2017. Borgman Capital is a Milwaukee-based independent sponsor that has acquired 10 platforms and has a team of 13 investment professionals.
One of Borgman Capital’s key features is its ability to raise funds from retail investors. Five hundred limited partners have participated across 10 platforms. Borgman Capital recently launched Pass the Hat to expand that retail investor network.
On average, Borgman Capital reviews about 20 new deals in its weekly investment committee meetings. That culminates in a deployment pace of three to four new platforms every year.
Welcome to The Minds Capital Podcast.
Sequoya Borgman: Thanks for having me on the podcast.
Will Smith: Let’s turn first to the retail investor approach. You had 26 LPs in your first platform. Today, you have hundreds. How has this approach affected the types of deals you pursue and how you create value? How does it differentiate your strategy from firms that do not lean so heavily on retail investors?
Sequoya Borgman: The retail strategy started with our first deal, one of our smaller deals when we launched in 2017. It was a nice business to own. We were backed by one family office, but we filled in the rest of the capital with about 26 retail investors—high-net-worth individuals and smaller family offices.
It has grown over the years. Just under 500 LPs have invested with us to date. When retail investors like having access to the direct opportunities we are investing in, they tell their friends, and then their friends ask for access. It grows from there.
We recently launched a proprietary platform to market more directly to retail investors. I know many larger funds are now raising funds focused on retail investors, primarily through RIAs and wealth managers, but we decided to go direct and launched the Pass the Hat platform. We soft-launched it last year and really went live earlier this year.
Will Smith: The growth of your retail investor base to date has been organic—one retail investor tells another, who tells another. Correct?
Sequoya Borgman: Correct. Before Pass the Hat, it was all organic growth through our network, people we know and people who have invested with us in the past. This is our first attempt at marketing to retail investors outside our personal networks.
Will Smith: You post individual deals and platform acquisitions on Pass the Hat?
Sequoya Borgman: Yes, deals that are large enough for new investors. If we are going to be significantly oversubscribed by our current investor group, we will not offer the deal on the platform. We will open larger deals to new investors.
Will Smith: Have you done a deal on Pass the Hat yet? Have you gone through the full acquisition cycle using retail investors who found the site rather than through personal connections?
Sequoya Borgman: Yes. We went live earlier this year. We have one deal that is about a week away from closing, and we received quite a few new retail investors through Pass the Hat.
We received good press when we launched. Many people signed up, and we have some good investors in this new deal.
Will Smith: You are promoting Pass the Hat to a broader audience. You already know your existing audience, so did you use a public relations strategy? How are you bringing attention to the platform?
Sequoya Borgman: We had articles in a few private equity publications that made people aware of it, and we have done a few podcasts talking about it. It is a new strategy.
With almost 500 investors to begin with, we are already retail-focused. This platform simplifies the process not only for new investors who come through marketing and Pass the Hat, but also for current investors when they talk to somebody who wants to invest with us. Having one platform makes the whole onboarding process much easier.
Niklas James: Why do you think other independent sponsors are not using the retail angle to the same extent?
Sequoya Borgman: I think most independent sponsors do. They call everybody in their network and try to raise the money for deals.
We have been doing it for eight years. We have done 10 platforms, but we have acquired 20 companies, and each of those add-ons required equity. We have completed quite a few equity raises over that period, and we have naturally grown in the retail sector with our investor base.
Will Smith: How exactly do you define a retail investor in this setting?
Sequoya Borgman: I would say retail is simply a non-institutional investor. I would even classify some small institutional investors that do not have access to direct deals as retail investors. Most family offices are retail investors as well.
Anyone who wants access to alternative investments and direct private equity investments is a retail investor. There are many platforms for investing in venture and early-stage investments. There are also many platforms for investing in different real estate sectors. But there are very few platforms through which someone can invest directly in a private equity, lower-middle-market leveraged buyout of an established business.
Historically, if you wanted access to a private-equity-type deal, you would have had to invest in a fund, and funds have large minimums. Many retail investors did not have access, or they did not know someone launching a new fund. Most established funds do not take non-institutional money.
You really had to get into a first-time fund or a smaller lower-middle-market fund to get access historically, and most people do not know those individuals. That is why we launched this new platform—to give a wider audience access to direct investments.
Will Smith: What are your minimum tickets?
Sequoya Borgman: It depends on the deal size, but for smaller deals, the minimum is $50,000. It goes up from there. With larger deals, we cannot have 1,000 investors in one deal, so we try to keep it around 100 or fewer. Whatever the equity size is, we usually divide it by 100.
Niklas James: One issue is the timeline. When you are raising a seed round or Series A in venture investing, you have several months. As an independent sponsor, you are typically under an LOI that expires within 60 to 90 days. You have a very short fundraising window.
If you need $10 million of equity and are raising it from people writing $50,000 checks, that takes a lot of time, especially if one-on-one meetings are required. How do you solicit so many investors in a short period and get them all the way to a commitment?
Sequoya Borgman: We compress the commitment period. We learned over the lifecycle of our firm that you cannot give investors a lot of time.
We have been oversubscribed on every deal since the first one. My partners and I personally invest a significant amount of equity in these deals. The more liquidity we receive on exits, the more we roll into new deals. On some of the deals we did last year, I was the largest or second-largest investor.
Normally, once we get a company under LOI, we have an offering memorandum and investment deck pulled together about two weeks later. We send that to our current investors—the 500 or so people who have invested with us—or anyone who has signed up on Pass the Hat to see our opportunities.
We give them about a week to review it. We hold an investor presentation about a week in, and then give them seven to 10 days to make a commitment.
At that point, you are about 30 days into the deal. If it is a 60-day timeline—although timelines are extended right now, so I would say probably 90 days—we know who is interested and who wants to invest.
Then we send formal subscription documents, complete accredited investor checks, and provide formal wire information. We give investors 30 days to return the documents and wire the funds. We usually have about two weeks before closing after those funds come in.
We have found that is the best way to run the process. Originally, we gave investors 30 days or longer to make a commitment, conduct diligence and diligence us. That put pressure on getting the equity in time to close.
We shortened the commitment period. We recognize that many sophisticated investors need more time and will not be able to participate in these opportunities unless they have participated in previous deals and can work around the timeline.
We conduct full diligence on all our opportunities, and we have a data room available for investors who want to dig in and conduct detailed diligence. That is all available during the seven- to 10-day timeline.
Niklas James: It seems like a self-confident approach to set such a tight deadline: Here is the memo; we are raising money from you; but you have an exploding timeline. Do you get pushback? How much shorter could you realistically make the timeline before it started to repel people?
Sequoya Borgman: Again, we are oversubscribed. If we needed investors, of course we would extend the period, but we have never had to do that.
We worked very hard to line up the money on the first deal. Since then, it has been all about the opportunity. First, my partners and I have to like it personally. It has to be a great personal investment for us. If we have conviction around the opportunity, it seems easier to get our LPs on board.
Niklas James: It sounds like you reach out to investors fairly early after signing the LOI. How do you communicate with so many investors who are putting money on the line if something material arises during diligence after they have committed?
Sequoya Borgman: We try to over-communicate with all investors. Last year, we had a deal in which the company’s numbers deteriorated during diligence, and we did not close.
Even after investors had committed, we kept them in the loop. We extended the period, extended the QofE, completed a follow-on QofE and ultimately decided to walk away from the opportunity.
That happens, but we keep investors informed. Not every transaction is exactly what you think it is once you begin diligence. Several times, we have had to walk away from transactions or retrade them. We try to avoid that, but it happens from time to time.
Niklas James: Even after you are fully subscribed?
Sequoya Borgman: Right, after we are fully subscribed.
Niklas James: I imagine that builds trust with people in your database who have known you across multiple deals. If they see you continue to work on deals after they commit and remain transparent, that must help the next time around.
Sequoya Borgman: It does. The fact that we are oversubscribed also means investors know that if they want access, they need to get in early and let us know they are interested.
We have never called capital and then had to return it on a deal. Before going to investors, we complete due diligence and have at least a draft QofE report. We also have term sheets from the banks. We are very confident about the structure, financing and equity needs before we approach investors.
We do not want to go out and then change the terms, structure or IRR expectations. Sometimes we go out later in the process. We have another company under LOI right now that is moving more slowly. It is a proprietary deal, and we want to be very confident about the numbers before going to investors. That one will probably go out more than 30 days into the process.
Niklas James: There is flexibility in the timeline. Initially, you said you would send the memo about two weeks in, but it sounds like you want two milestones completed before reaching out to equity investors: a preliminary verification of the numbers through a draft QofE and a bank term sheet to solidify the sources and uses.
Sequoya Borgman: We want the whole capital structure pretty much set. Things change throughout diligence, but in most deals, we also raise a little extra capital. We either put the money on the balance sheet at closing or slightly overcapitalize the business in case things change during diligence.
It is not like the deal frenzy two years ago, when deals were getting done in 60 days or less. Now, we have time. Most of our LOIs are 90 days with a 15-day automatic extension, so we have about 105 days to get the deal done. That is plenty of time.
Niklas James: By how much do you overcapitalize businesses? Can you give a numerical example?
Sequoya Borgman: It is not a huge amount. Usually, I would say $500,000 to $1 million, in case transaction fees or diligence fees come in higher than expected, or working capital is not where we expect it to be at closing.
There are swings in working capital, and perhaps you need a little more cash on the balance sheet when you close. You cannot really time where working capital will be 90 days before close, so we like to leave a little more room.
Most of our deals are in the $25 to $50 million range. Another $500,000 or $1 million does not really move the needle on the IRR.
Will Smith: You are doubling down on the retail strategy. Given your track record since 2017 and your success since then, access to capital has presumably become easier. It would seem easier to work with institutional capital than to herd the cats of retail investors. As access to capital has become easier for Borgman Capital, why are you doubling down on retail?
Sequoya Borgman: There are multiple benefits to having retail investors. Most firms at this stage would have raised a first-time fund by now, and we have decided not to do that.
One reason is that many of our leads and opportunities come through our investor network. With almost 500 investors, they tell us when they hear about someone who wants to sell a business. We receive proprietary leads that way.
Many board members who serve our companies are investors. Every quarter, when we send an investor update, we include an ask. If a company needs a sales lead, a new CFO or an introduction to a potential customer, we put those requests in the reports.
It is amazing how well connected our investors are. Most are successful business owners and entrepreneurs who made the majority of their wealth by owning equity in a business. That really helps our companies.
If we have 500 people watching out for the companies and trying to make them as successful as possible, that helps the investment.
There is also flexibility. As an independent sponsor, one of the biggest values you add is finding proprietary, off-market businesses that are not running competitive investment bank processes. You can do that and remain flexible without the restrictions of a fund structure.
Will Smith: The size of the retail base adds value in other ways—deal flow, talent and connections.
Sequoya Borgman: Yes. I enjoy it when investors call and give me ideas. They are all very successful. They have great ideas about how to grow the businesses, make them more successful, determine who should sit on the board and decide who should lead the businesses.
If you have 500 people with skin in the game who want the businesses to be more successful, that is powerful. Nothing against institutional investors, but that is not really their focus. Their focus is getting the highest return possible, which is also true for our investors, but they do not have the same value-add side of the equation.
We are already essentially a retail group, and we are dealing with thousands of K-1s. With 500 investors and everything that comes with that, we have built the back-office side of the business to handle it. Administration is less of a concern.
Will Smith: Before we leave retail, you mentioned larger firms making retail offerings. Give us 60 seconds on the broader trend of you and much larger players offering retail investors access to private equity.
Sequoya Borgman: The Blackstones, KKRs and Carlyles of the world have raised large retail funds. One reason is that it is becoming harder to raise funds from institutional investors. They are not receiving the liquidity they received a couple of years ago, and they are deploying less to new managers and less to private equity overall because they are already highly concentrated.
Private equity allocations have increased significantly over the last decade, and with the slowdown in exit processes, that liquidity is not there. Large funds are looking to retail investors for access to additional capital.
Retail investors want access to this asset class. It should not be available only to institutional investors. There is demand from retail investors and a need among funds. We are on the smaller side, of course, but our investors really like having access to these investments.
Will Smith: Are you seeing other sponsors take a similar approach?
Sequoya Borgman: Since we received press around our launch, half a dozen or more have reached out to me while pursuing similar strategies. I think it will become more popular in the near term.
Over the last decade, so many investors wanted access to private equity that there was less need. Once you raise a fund, there is no reason to tap the retail market. Dealing with 500 LPs rather than 10 or 20 creates a lot of administrative work.
Fortunately, we have already built that side of the business. We rely heavily on new technology. Asset Class handles most of the back office for us, and InvestReady and other online tools make the process much easier than it was five or 10 years ago.
Will Smith: Are you considering Pass the Hat as a white-label offering to other sponsors? Could it become a product rather than simply a way for Borgman Capital to raise capital?
Sequoya Borgman: I do not think that is the strategy. There are SEC restrictions around doing something like that. We are not an RIA. We are not a placement agent, and we are not raising money for other groups.
We conduct full diligence, and these are our sponsored deals. We have partnered with other groups. If we are a partner, co-GP or GP on a deal, we would welcome that. We would partner with other independent sponsors that want to close a deal and need help on the equity side.
We have to be part of the general partner pool to do that. We are responsible for our investors’ money, and we do not want to do deals on a non-control basis.
Will Smith: Thank you. It is great to hear a behind-the-scenes view of a retail-focused firm. Let’s turn to deal flow and your funnel. How are you generating deal flow? Is anything differentiated from how other sponsors do it?
Sequoya Borgman: Our investors bring us some deals, but it is really our network. We have an office in Milwaukee and an office in Minneapolis, both focused on deal flow. We added a new managing director in Portland last year.
For independent sponsors, the greatest value is finding good off-market opportunities. Anyone who can source those opportunities can add value for investors.
That is our focus. We would love to add more people around the country who can source direct, lower-middle-market opportunities.
Most of our deals come through our network or through centers of influence—trusted advisers to business owners. We also review some brokered and investment bank deals, but we focus only on those in our market where we have an angle: perhaps we already own a company in that space, it could be an add-on, or we know the investment banker well.
Otherwise, we do not participate in competitive auction processes.
Will Smith: Most of your platforms have been proprietary?
Sequoya Borgman: I would say 80% to 85%. Only one or two have been blind-auction processes run by professional investment banks.
Niklas James: What role does geography play? You mentioned offices in Minneapolis and Milwaukee and someone in Portland. On our pre-call, you mentioned other cities, but not New York, Dallas or San Francisco. How are you thinking about geography?
Sequoya Borgman: Opportunities are in secondary markets where deals can get done directly and relationships and networks matter. That is less true in larger markets.
Chicago probably has 250 private equity firms. New York has a multiple of that. You are not going to find many off-market, proprietary deals there.
Secondary cities such as Minneapolis, Milwaukee, St. Louis and Kansas City are places where relationships matter. If you know someone and that person introduces you to the business owner, that is where the best opportunities arise.
It is not necessarily that you pay less for the business, but you have a much higher likelihood of closing the opportunity and winning the deal if you already have a relationship with the business owner. You still have to pay a fair price.
You spend a lot of time, money and effort pursuing a business, so the likelihood of getting it under LOI matters. We only have so much time. If we attend 20 management meetings, it costs $5,000 to $10,000 each time after flying in the group, conducting diligence and researching the business.
It is costly, so we want to spend our time, resources and effort on opportunities we can actually win at fair prices.
Niklas James: This seems like a point of differentiation. Most dealmakers sit in Dallas, New York or Chicago and source nationwide, but you have taken the view that your sourcing and closing rates will be higher with a local presence.
Sequoya Borgman: At least in the markets I am in, it matters to know all the deal professionals locally. You are personal friends with them. You sit on the boards of organizations and charities with them.
If they know about a business for sale—or if it is the business owner directly—they are more likely to talk to you than to someone in New York, Chicago, Atlanta, Los Angeles or Dallas. It matters.
Niklas James: There seems to be a link between local community presence and your retail investor approach, where you have many touchpoints and connections. Are they analogous?
Sequoya Borgman: Of course. Throughout my career, I have told our group that your network is your net worth.
In this business, the better your network, the more people you know and the better connected you are in the deal community, the more likely you are to find good businesses at the right time.
Most business owners sell only once. Maybe they roll over equity and sell a second time, but you have to be in the right place at the right time. Sometimes family businesses sell once in a hundred years. It could be a third-generation family business. You have to be there when the owners are ready. Those opportunities come through your network.
I can sit at my desk and receive 20 emails a day from investment banks about companies for sale, just like everybody else. We track them, and we receive about 1,500 a year.
That does not add much value for investors. If you are going through a competitive blind-auction process, unless you have a strong thesis or can add value to the business, paying up does not provide real value to your investors.
I am personally investing in these businesses. I would much rather invest in a company where I know and trust the owner, and where the owner cares about the business, the legacy and the local community.
We have shaken hands and looked each other in the eye. I know that after the transaction, the owner will want the business to be just as successful as I do.
I prefer that to a blind-auction process with a Chinese wall where you really get to know the owner after sending a very large check. Those are not the types of opportunities I personally enjoy investing in.
Will Smith: Say more about the playbook for putting boots on the ground in a new market. I presume you find someone who is already well-networked in the community rather than dispatching someone from Milwaukee. What does the playbook look like, including compensation? Are they business development people?
Sequoya Borgman: We have added a few people, but I would love to add more. We are looking for people who want to do deal-by-deal independent sponsorship on their own but also want infrastructure and backing. They do not want to start from scratch.
Being an independent sponsor is tough. We went through it. You do not make money for the first two, three, four or five years. You have to cover all the overhead, diligence costs and broken-deal costs.
After finding a company, you have to work through diligence and raise the money. Many independent sponsors either do not find a deal or cannot close it because the terms are not right or they do not have the network to raise the money.
We have that platform. We have gone through the startup period. We have the infrastructure, back-office support and diligence resources. We are also a larger group, so the deal goes through a full investment committee process rather than one person deciding whether it makes sense.
From my perspective, we have the platform, and we would love to have more people who want to source opportunities around the country.
I would not move someone into a new geography because you are not well-networked there unless you grew up there or worked there for several years. We are looking for people who are already networked and can source deals, but who want resources and do not want to be a one-person operation.
We have completed 20 deals and have never come up short. Every deal except the first was oversubscribed. On the first one, I called everyone I knew to raise the last of the money. Most independent sponsors go through the same process.
We are looking for people who want to do what we are doing, but do not want to do it entirely on their own. We help cover some overhead, broken-deal costs, travel and other costs incurred during the first couple of years.
Most compensation is based on success: sourcing deals and receiving part of the closing fee, management fee and a meaningful portion of the carry once the deal closes. They can do very well, and they have more certainty of closing the opportunity.
If you leave a group to become an independent sponsor, it may take two years to source your first deal. You can incur hundreds of thousands of dollars in diligence and other costs, and if you are not successful, all of that comes out of your pocket.
We give them some downside risk and help them be more successful. In exchange, they share some of the upside with us.
Will Smith: It almost sounds like a program. If someone listening is in a market you have not mentioned, should they reach out and say, “I’ll stand this up in Seattle”? Or do you select a geography and then look for a newer sponsor in that market to join Borgman Capital?
Sequoya Borgman: We are very opportunistic. It is more about the person than the geography.
Anyone listening who is thinking about doing what we are doing should reach out to me. I know many people would love to do it. I have to warn you: It is much more difficult and stressful than most people think. I wish I had known that 10 years ago before I launched. But it is also a lot of fun.
Will Smith: Do you give them a base salary as a business development hire, or is it all commission-based, with Borgman Capital helping improve the chance of success and covering deal costs?
Sequoya Borgman: It is primarily commission-based. Sometimes we help with health care or extraordinary circumstances if they need support.
For the most part, rather than doing it themselves, being paid nothing and covering all the costs, we help with expenses. But it is really up to them. If they are not successful in sourcing deals, it will not be a good opportunity for us or for them.
Will Smith: I imagine it also helps their sourcing efforts to have an email address at borgmancapital.com.
Sequoya Borgman: Yes. When I first launched, legitimacy mattered. Business owners want to know you are legitimate and can close the deal. Brokers feel the same way. They are trusted advisers, accountants and attorneys. They will not tell a business owner to sell to someone who has no business card, no website and no deal experience.
That is a significant hurdle. We can help with all of it by providing the legitimacy of a track record, completed deals, a business card and a website. Those are the first things people check when you talk to a business owner.
Will Smith: It is analogous to the search-fund world. As you know, I have a podcast on the entrepreneurship-through-acquisition side. Traditional search funds provide legitimacy, infrastructure and knowledgeable people behind you, and you do not have to self-fund the search. In a self-funded search, you are completely on your own.
Those two paths are well developed in the search-fund world, and prospective searchers ask themselves which path to take. I do not see that as much among independent sponsors, but it sounds like you are providing some of the benefits of a traditional search fund rather than going completely self-funded.
Sequoya Borgman: I love the search-fund model. I wish it had been an option when I was coming out of college, but it was not really a thing back then.
I talk to many people coming out of MBA programs who conduct searches for one or two years. If they find something too large to do themselves, we would love to partner with them. We also run across many opportunities that are too small for us, and we send those to them. I may personally invest if they are doing something.
There is a lot of overlap. The same is true for private equity firms above our market. We may partner with them or send them something, and they send us opportunities too small for a new platform.
I encourage everyone to be networked within the industry, both with groups that are a little down-market and those that are up-market.
Niklas James: You said you wish you had known how stressful being an independent sponsor was before starting 10 years ago. How would that have affected your decision-making?
Sequoya Borgman: I do not think I would have decided to be a CPA. That may be less stressful, but it is also a lot less enjoyable.
No, it would not have changed my decision. We talk to many people who want to do what we are doing, and it is not as easy as people think.
Businesses do not go straight up after you buy them. There are many challenges, especially people issues: hiring the right people and putting the right people in the right seats. It is very challenging. You also have to work through economic cycles. There is a lot of stress in owning and managing lower-middle-market businesses.
Niklas James: Jensen, the founder of Nvidia, says something similar: If I knew how hard it was to be an entrepreneur, I never would have started the company. I find that hard to believe, given where he is now and how much he appears to enjoy it. It is a paradoxical statement.
Earlier, you touched on why you prefer being a sponsor to raising a fund, which you would obviously be equipped to do at this stage. Could you make the case for why remaining a sponsor long term can be better financially, emotionally, for lifestyle and for flexibility?
Sequoya Borgman: Many people ask. Every time we have a strategy session, half the time is spent discussing whether we should raise a fund.
There are advantages, especially for younger people in the group. It would have been nice to have a fund and a consistent management fee to pay for overhead when we first launched.
But now we are through that hurdle. Truthfully, there is more upside for me in doing deals one by one. The way carry works, we can have very successful deals and exit early, receiving carry sooner. We are not tied up by a 10-year fund or one fund mandate.
Our investments are generally in established industries—manufacturing, distribution and food—but we are not investing in only one sector, such as health care. We are not tied to one geography.
We can also be opportunistic about structure. Most of our deals have been leveraged buyouts, but we have done a couple of growth-equity-type investments. We might not be able to do that under a fund mandate that allowed only one type of transaction.
I can personally invest in deals outside our group, which I might be restricted from doing if we had a fund.
I like what we are doing. As I said earlier, the more money I make on exits, the more I roll into the next deal. Long term, that is what I would love to do.
It is not necessarily a family-office focus because I like having the resources of a larger group, but ultimately, I would love to be a much larger investor in each deal. I have drunk the Kool-Aid. I love what we are investing in, and I can do that without going the fund route.
Will Smith: Many sponsors confront this question as they become more mature and achieve some success: Should they raise a fund? Many do.
But precisely when you have achieved success, built a track record and overcome some of the early hurdles of sponsorship, many weaknesses of being an independent sponsor go away. The lack of credibility, legitimacy or ability to raise capital for every new platform becomes less of a problem.
As a sponsor becomes larger and more successful, raising a fund can become less interesting because the problems a fund solves are no longer present. I think you are a perfect example.
Sequoya Borgman: You hit the nail on the head. Then you face the pressure and stress of having a fund and large institutional investors putting pressure on you.
You also have pressure to deploy capital. Right now, it is very difficult to deploy capital, especially if you have a $500 million to $1 billion fund. That is a lot of capital to deploy annually, and given the slowdown in deal flow over the last 12 months, it is extremely difficult.
Friends of mine who have funds are under a great deal of pressure right now.
Will Smith: You said the question of whether to raise a fund comes up in each strategy meeting. Who is advocating for it?
Sequoya Borgman: I think it is the younger people in the group. We could add more resources if we had a fund because of the steady management fee. There may also be more upside for newer team members.
Much of the wealth I am creating comes from investing my personal income and wealth into these deals. Younger people on our team do not have the net worth to invest personally, so most of their upside is the carry they receive at the end of a deal. They are not getting the investment return that I and some more established partners receive.
I think the pressure comes more from younger team members because a fund structure could produce better results for them.
Will Smith: We are nearing the end of our time, but we wanted to hear about a particular deal. We discussed the equipment rental business on our pre-call. Can you give us the bullet points?
Sequoya Borgman: I would be happy to. Most of our deals are confidential, but we sold that company to Herc Rentals, a public company, so the information is public.
It was a great investment. We bought it from a founder who had grown and led the business for 40 years. He was a great person. It was an off-market opportunity that came through a banker we knew.
The reason the deal did so well is that we found the perfect successor for the founder. The founder wanted to retire and spend more time playing golf. We brought in an industry veteran who knew the business inside and out, and he did a fantastic job.
We added locations, and he really grew the business. He doubled EBITDA within three years.
We decided to sell. One of my philosophies is that if you have a home run, do not get greedy. Do not hold on too long. We sold a little after three years.
The business took off within the first year. The second year was great, and the third year was tremendous. We sold to a large public company. Investors netted a little more than four times their money, and the investment generated an annual IRR of more than 57%.
I did very well. My partners did very well. Everybody who participated did very well. If we could find more companies like that, this would be easy.
Will Smith: Or is it about finding more leaders like that? You told us on the pre-call that much of the success came down to the operator you found to lead the business.
You also said that despite the rigor you apply to hiring leaders for your platforms, your success rate is only about 50%. This person was the right person for the right business and landed in the successful 50%, but you still have not cracked the code on improving the hiring success rate. Say more about that.
Sequoya Borgman: If somebody knows the secret, give me a call.
It is very difficult when you buy founder- or family-led businesses and have to transition to a new leader. The biggest risk in the investment is that the transition will not go well.
You may bring in someone who does not align culturally with the business. Or someone may have been very successful in a previous role or running a division of a large company, but does not understand the intricacies of that particular business or of running a lower-middle-market company without the resources that larger businesses have.
This applies beyond leadership roles. Someone may look great on paper, interview well, go through all the processes and complete cultural assessments. Then, soon after hiring, it is clear the person is not the right fit.
Perhaps the management team resists and does not support the new leader, and the company does not perform as well. That has happened to us several times.
Unfortunately, part of our responsibility is doing the right thing for the business, and sometimes we have to bring in a new leader.
For this particular business, we had the perfect leader. He was a born salesperson. We almost had to rein him in because he was growing so quickly. That is a better problem than having to push a leader.
I would not say we are micromanagers, but we are very involved. Investments are tougher and less enjoyable when you have to become deeply involved, push the leader and enforce accountability.
Will Smith: Can you share what EBITDA was when you bought the business and how it developed?
Sequoya Borgman: When we bought it, EBITDA was around $4.5 million. It was around $9 million when we sold it three years later.
Will Smith: You said that when you have a home run, you should not get greedy—you should cash out. Other investors say that when you have a winner, you should ride it and hold on. How do you reconcile those philosophies?
Sequoya Borgman: They are two different philosophies. There is some benefit in leaving upside for the next buyer.
IRRs decline the longer you hold a business, even if it is a home run. If you hold it for three years, the IRR will be much higher than if you hold it for 10 years, even if it remains successful. Cash-on-cash returns matter more to some investors.
There is also risk. These businesses do not grow in a straight line. There are ups and downs. We do not invest in highly cyclical businesses, but every business we have owned has had a year with some type of challenge—turnover involving a customer, supplier or key employee, or an external macroeconomic challenge such as tariffs or supply chain issues.
There is always something, and you cannot foresee the black swan events.
My philosophy is that if you have a really good investment—it does not even have to be a home run; it could be a good double or triple—once you have professionalized the business and it is a good market and time to sell, take the money and roll it into the next opportunity.
Niklas James: You said you sold just after the three-year mark because you could receive better tax treatment. I presume you are referring to carried interest, which at three years moves from ordinary-income treatment at roughly 40% to long-term capital gains at 23.8%. Is that correct?
Sequoya Borgman: Correct. During President Trump’s first term, the holding period for capital gains treatment on carried interest changed from one year to three years.
For many of our deals under $50 million, we try to structure the investment as qualified small business stock under Section 1202. That can offer even better treatment. If we hold a company for five years, there may potentially be no capital gains tax on the investment.
Niklas James: You mean QSBS, correct?
Sequoya Borgman: Correct.
Niklas James: You have to hold it for at least five years, and there are several other requirements, correct?
Sequoya Borgman: Right.
Niklas James: It has been proposed recently that carried interest could lose its special tax treatment and be taxed as ordinary income. As a CPA and someone in the industry, if that happens, what will the workarounds be?
Sequoya Borgman: As a former CPA, I do not think there are many workarounds. Pay your taxes and be happy you are making money. It is always better to make the money and pay the taxes than to try to work around it.
Carried interest has been under attack for decades. It is not new. The holding period was extended from one year to three years during the previous Trump administration, and I think it will be under attack again this time. We will see how it ends up.
Niklas James: I have heard that when Congress needs more donations, it shakes that tree and says it is going to change carried interest, and then many donors send money.
Sequoya Borgman: Fortunately, there are much more successful private equity people who can afford to do that.
Will Smith: Is there anything you wanted to share with our audience that we did not cover?
Sequoya Borgman: No, this has been great. I enjoyed the conversation.
I am excited to continue seeing growth in the independent sponsor sector. It has come a long way over the last decade, and there are many more resources available than when I was launching.
Reach out to me if anyone wants to partner on a deal. We are always looking for good investment opportunities.
Will Smith: We will include your LinkedIn profile, URLs and email in the show notes so people can reach you.
Sequoya Borgman: Great.
Will Smith: Sequoya Borgman, thank you for joining us on The Minds Capital Podcast.
Sequoya Borgman: Thank you.
Will Smith: I hope you enjoyed the interview. For more, subscribe to Meeting of the Minds wherever you listen to podcasts. You can also watch us on YouTube.
Visit Minds Capital, where Niklas and I are partners alongside Max Lummis. Minds Capital invests equity in independent sponsor deals.
If you are a sponsor with a deal under LOI, visit mindscapital.co to start a conversation. There is also an investor tab on our website with information about partnership opportunities and future fundraises. See you in the next episode.
