Dec 2, 2022
Brian is Managing Partner at DealGen Partners, a deal origination company that currently manages $2.7 billion in Buy Side Mandates. Since 2016, DealGen Partners has generated over $900M in deal value. Through the combination of their outreach strategy and network of partners
In this episode we talked about:
* Brian’s Background and Journey in Real Estate
* Value of Metrics
* His View on Strategic Investors
* The Macroeconomic Real Estate Environment
* Trends in Real Estate
* Geographic Preferences
* 2023-2024 Opportunities
* Brian’s Advice to Individuals who are Entering the Real Estate
space
Useful links:
https://dealgenpartners.com
www.linkedin.com/in/brianscanloncmo/
Transcription:
Jesse(0s): Welcome to the Working Capital Real Estate Podcast. My name's Jessica Gall, and on this show we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Hey everybody, my name's Jess Fraga, and you're listening to Working Capital, the Real Estate Podcast. My guest today is Brian Scanlan. Brian is a managing partner at Deal Gen Partners, a deal origination company that currently manages 2.7 billion in buy side mandates.
Since 2016, deal Gen partners has generated over 900 million in deal value through a combination of their outreach strategy and network of partners. Brian, how's it going?
Brian (46s): Good, man. Thanks for having me on. I appreciate it.
Jesse(48s): Yeah, thanks for coming on. I think it'll be, yeah, it'll, it'll be a interesting conversation. Today we're gonna talk a little bit about kind of your background, private equity deals in general. So I think we'll, we'll have a lot to get going. First question from you, where are you joining us from?
Brian (1m 4s): Yeah, so I'm in Boston, Massachusetts. Our, our office is right outside of Boston in Wellesley, mass. My partner and I both went to Babson College in Wellesley, and we were looking for office space. We decided it would be kind of nice to not have to commute into the city every day, but stayed close to, to the alma mater. So we're in a nice old town.
Jesse(1m 24s): Beautiful. So, yeah, I thought, you know, like, like we have other guests on the show that, you know, we have things that are kind of real estate adjacent or investments from, you know, asset classes that are not necessarily focused specifically on real estate. I thought we'd have a conversation a little bit about kind of your background and deal gen and, you know, basically what you do for your clients and you know, what the company does, you know, why don't, why don't we kick it off from, from that almer mater. Did you get into this right after right after school?
Brian (1m 55s): Yeah. Yeah, kind. So, I, I sold a, a marketing company right after college, and the guys who helped me sell it were a small two-man shop outta New Jersey. And I, I joined up with them during my, you know, non-compete to go start another marketing company. And, and they said, Hey, why don't you come with us? And our specialty was lead generation at that time from the marketing company. So said, why don't you help us drum up some new business? You can learn this investment banking world and see if it's something you wanna stick in. Cause I kind of always like that space. So we, I did that, jumped in, we were doing kind of low to mid-market sell side m and a advisory.
So companies that were anywhere from five to 75 million that were looking to exit, we would come on, act as their banker, help them through a, through a transaction to find, you know, an acquire injection to capital partner, whatever it might be. And I realized every, you know, every deal we represented when we talked to a private equity fund or a strategic acquirer, they would say, okay, you know, thanks for telling me about that one. What else do you have? And they really wanted more and more and more deal flow. So we stepped back and said, maybe there's a way way we can combine this marketing expertise and the investment banking expertise and service those private equity companies by providing them deal flow and lead generation for businesses to acquire.
And we started off really doing a hybrid of working with PE funds and working with any type of company on their lead gen, really just to keep the lights on and get the business rolling. And then slowly morphed away from working with, you know, just sales organization, software companies or coaching companies or whoever it was. We, we worked with everybody to really focusing in this private equity world. And that sense has morphed into this becoming, you know, strictly private equity, strategic acquired deal generation. So we spend our days farming deal opportunities and acquisition opportunities for our clients, vetting them, delivering to them, helping, you know, manage that deal flow process, ultimately handing it off to them and letting them go close the deal.
So, you know, we're essentially real estate agents for businesses, for lack of a better description.
Jesse(3m 58s): So in terms of the, the sandbox that you play in, you know, in terms of, I don't know the, which metric would be most appropriate for companies, is, is it the value of the companies in terms of size? Like where, where do you guys play?
Brian (4m 11s): Yeah, pretty much. That's where it starts, right? So we, we tend to focus on a few verticals. B2B software, it's a big, big, big, you know, vertical for us. About 90% of our deal flow is in that space. We also work adjacent to that in tech enabled services. So, you know, software and consulting component or software and service component. And then we have a another bucket of kind of everything else, industrials, manufacturing, real estate opportunities, whatever it might be that could just be a good fit for one of our funds. And we've done a pretty good job at building a buyer network across the whole value chain of a business, right?
So we have guys that look for the one to 3 million software companies. We have guys that look for the 300 to 500 million software companies and real estate investment we're working on right now at Boston, you know, is a upwards of a billion dollar project in, in a, you know, major, major undertaking in the Boston area. So it kind of runs the gamut, but that's strategic, right? We wanted to fill the gaps in our business model with buyers for every deal that we uncover. And of course, you know, some deals are not gonna transact and we don't close everything I wish we did.
We've, we've in a really good spot. But, you know, we, we've kind of plugged those holes and said, all right, we're missing a group that looks for flat or declining companies. We went out and got that guy, we're missing the group that's looking for the mega deals. 500 million plus. We went out and got that group and now we have eyeballs for everything we uncover.
Jesse(5m 37s): So in real estate, a lot of what you see is kind of a gradual movement from, say you're finding your first deal, say you're syndicating it on an asset per asset basis, then you know, you get enough volume where you're creating a fund cuz you now have capital coming in and you're getting a portfolio of, of properties. Is is it kind of the, the same, the same process with with your business? Cuz I imagine that, you know, you're gonna need the actual capital on a consistent basis to have actual funds without that cash just kind of sitting around.
Brian (6m 9s): Yeah, so we, we are not a fund ourselves, we are hired by the funds. So for example, if there was a real estate developer in Boston who said, Hey, I have, you know, $2 billion to spend, can you guys go out and find me the opportunities to spend that on? That's where we sit. So rather than, you know, going and finding the money ourselves, we already found the money. Our job is to find where to spend that money. And, and it, it's different, you know, we, some of our PE funds are just conglomerating software companies and, and buying them up in the hundreds of acquisitions and some of them are looking for one or two plays that they can hold for five to seven years grow and then exit some of the, you know, the real estate play we're looking at now is, it was an opportunity that came to us and said, Hey, we're looking to kind of recapitalize that cap stack.
Do you know anybody that might be able to come in with, you know, 150, 250 million? Yeah, we do, we have a fund that looks at that. So, you know, we made that introduction and now they're at that point of, are we gonna do this deal, you know, together on a, on a 220 million capital injection?
Jesse(7m 15s): So for those that kind of aren't in your world and private equity, when you say strategic advisor, strategic investor, what, how do you, how do you look at that?
Brian (7m 25s): Sure, so a strategic is a private equity fund is more acquiring companies in a certain vertical, whereas a strategic would acquire a company that is, you know, a bolt-on to what they're already doing. For example, a car dealership franchise saying, Hey, this guy across the street is for sale, we don't have a Nissan dealership, maybe we should buy that one. And it's more of a strategic acquisition for an existing business versus private equity that's putting together a portfolio of various investments to operate as, you know, a holding company.
So we have some strategics in the software space that are looking specifically for bolt-ons to their current investments that can supplement what they're already doing. Maybe it's a service that you know, hey, our software does this, that software does that. If we had that, we could cross sell it to our current customer base. So we're gonna go out and make that strategic acquisition.
Jesse(8m 19s): So in terms of kind of where we are right now in the economy, you know, it's been last two years been kind of a rollercoaster, interest rates inflation. How does that impact what you guys do? If, if it does, are you insulated in in any way from that or is it kind of, you know, exposed, like, you know, other businesses would be exposed to some of the macro economic circumstances?
Brian (8m 42s): Yeah, we're definitely exposed and we're exposed in the sense that the valuations are lower than they used to be, right? So that company that was getting 10 times their bottom line for evaluation is getting six or seven and it's really affecting the borderline companies more than the really good ones. The really good transactions are still happening. Those, you know, first round draft picks are always gonna be first round draft picks, but the borderline 10th round guy probably isn't gonna get drafted this year.
They're gonna have to wait that one out. So, you know, we're, we're, we still have a very active pool of acquirers. The problem right now is are their offers matching up to what the sellers wanna wanna take? Yeah. You know, and I'm sure in the real estate world right now with interest rates, if you're not coming to the table with a hundred percent cash, you're probably at a disadvantage as a buyer,
Jesse(9m 34s): Right? Absolutely. We're, we're constantly talking about the bid ask. You know, we've had a environment where valuations were so high for such a long time that this idea of cutting your price from the seller standpoint is just, it's unfathomable. But the reality too is that we're not seeing as much on the demand side. So something has to give. The nice thing is the cash flows for the most part are up because, you know, we're able to increase the rent so that inflationary, you know, call it a hedge, but that inflationary aspect of it, you know, we, we see a little bit of benefit from in terms of deal volume.
So you mentioned first round draft picks are always gonna be there, but in terms of the volume, have you seen the volume of transactions go down? Or is it more so just kind of the, the multiples are, are aren't what they were a year or two ago?
Brian (10m 25s): It's more the multiples, the, the, the volume of companies looking for some kind of transaction, whether it's a capital raise or an exit completely, or just a, you know, hey, we wanna sell minority interest. In my business, that has not slowed down. That's actually increased. We work with the world's largest and most active acquirer of flat or declining software. So they're, they look for the broken and battered companies that they're burning money, they can't get another raise round and they're just looking to exit.
And their deal flow has tripled since really July. But the guys that are looking for the a hundred percent year over year growth companies that are gonna be the next Facebook, those have slowed down a little bit, you know, but the volume is there. We, we, we have not slowed down in our deal origination on a monthly basis at all this year, and we haven't slowed down on how many deals are closing.
Jesse(11m 20s): Yeah. And do you see the, do you see any trends in terms of the, the type of, the type of businesses that, that are showing strength over, you know, over the last year? Because for, you know, in our world, one thing I was talking about with the podcast we did before, this was the, with an economist and we're we're saying like, unlike oh 8, 0 9, the yes, interest rates are up, yes, inflation is up, but we're still seeing a lot of health in the, in the employment rate, we're still seeing a lot of growth in these companies. So are there, you know, are there top picks in terms of sector that you're seeing?
Brian (11m 54s): Healthcare on the technology side is, is really, you know, really taking off right now. Some stuff with the government, you know, software that, that provides to, or software providers to government entities is another place that our, our clients are really kind of hot and heavy on. And the other is like learning management systems, online learning. I don't know if that's because people are, you know, investing in themselves and learning more or if it's just that's the way things are being taught now.
But we have multiple clients who knocked on the door and said, Hey, we want to add this to our, our criteria for searches in the learning management world. So, you know, those are, those are there, but at the end of the day, the real, the real, you know, commonality between all of them is recurring revenue. Everybody wants that recurring aspect. If you're a project based entity right now, it's gonna be really hard to transact at a number that, you know, gets you excited, you can sell for sure. But that high multiple, the frivolous money getting thrown around is just not there anymore.
Jesse(13m 0s): The times were good for, for the last 10 years.
Brian (13m 3s): Yeah.
Jesse(13m 4s): Lot, lot of funny money. So in terms, you mentioned you're in, you're in Boston now and that real estate deal was also in Boston. Do you guys focus on a certain area geographically or are you, you know, are you agnostic to, to that side of the investment?
Brian (13m 19s): Yeah, we're agnostic. Our, our clients are all US based businesses, but a few of them invest all over the world and you know, they're opportunistic with that. So we really have no geographic boundaries on, you know, what we do or what we find. You know, our, our last transaction that closed was a company in Texas buying a company in California. They didn't meet, they did the whole thing virtually. It was a software acquisition. They never sat in the same room. So it was kind of, you know, interesting from that standpoint.
But no, we have no boundaries really, which is good and bad for us because, you know, we tend to run into the ability to chase shining objects with some of our deals because we have a lot of upside. But the more focus we stay in the verticals we're good at, you know, the better off it is. So we're really more vertical focused than geographically focused. But at the end of the day, almost a hundred percent of our deals are done in the US and Canada.
Jesse(14m 13s): So in terms of the kind of your role, like I know with on the real estate side, when we start raising capital or start connecting principles, there's always that risk of being dealer broker. Like how do you, how do you guys position that in terms of, you know, what deal gen is as an entity?
Brian (14m 31s): Yeah, so we are not investment bankers and we don't have to be for what we do, right? So we, we are not conducting the transaction. We are paid from the buy side, not the sellers. So we're not paid outta the proceeds of the deal. We're paid from our client paying us, you know, a fee and it's essentially a referral fee. So we are there to originate the opportunity, introduce that opportunity, and then everything from diligence to close is done by the buyer.
Yes, we're very hands on and liaising the deal to get to that letter of intent stage. But after that it's a hundred percent on our buyer. So we are really, you know, essentially we're a marketing company, you know, we're, we're just finding opportunity and handing it over and we're getting, we do get paid on a percentage of the deal, which is, you know, a great model for us. But we're not licensed to, you know, transact public companies or anything like that. Cause we don't have to. That's not, that's not where we exist in the deal flow.
Jesse(15m 29s): So is it similar to us on the brokerage end? Like on the real estate side? Like once you, once that deal transact, transacts, then you know you're paid your fee. Is that kind of, or is it, is it just the introduction to loi?
Brian (15m 42s): No, so we, we get paid based on a, we get a yearly, you know, kind of commitment fee is what we call it from our clients. They pay us to say, yes, you're gonna go out and work for us and do this, which is, it's small. The reason we do that is we need skin in the game from our, our buyers. And we used to do it without that, just on a referral fee only, just based on what the deal closed and what we found was there wasn't enough attention to the deals we were sending over. So even something as small as, you know, 10, $15,000 for the year for us to go out and work on this thing all day, every day, at least when we send those deals over, they're evaluating them a little differently.
We don't wanna be treated like everybody else. We wanna be treated differently. We want preferential treatment for our deals. So we have that, you know, commitment fee plus a percentage of deal value and it's small. It's a referral fee percentage, it's not a investment banker, five, 7% of deal value.
Jesse(16m 35s): So we always ask guests, you know, for a little bit of a crystal ball where, you know, regardless of the industry you're in, where you see the opportunities in the short to midterm, you know, the next couple years, you know, where, what are you guys seeing from just a, a trends perspective or any areas or businesses that you're seeing that we're gonna see opportunities in?
Brian (16m 55s): Yeah, so we're, we're seeing a big opportunity in, you know, like I said, we play in the software space, right? So there's these software companies that are doing, call it two to 4 million a year in annual recurring revenue. And they're just a little too small for the big PE funds to really sink their teeth into, and they're a little too big for the individual investor to come in and strike a check, right? But if you put four or five of these things together in five to seven years growing that entity, you're gonna have a hell of a, of an exit.
And we actually happen to have a fund that we work with whose strategy is that, and they're doing really well. So we think that that, that small, that low market opportunity is just unbelievable right now for if, if we were to go out and start a fund, that's where we would focus. Because those companies are just, most of them are just, they don't know what they don't know. They don't have someone that can go out and raise money. It's not as easy as you think to go raise money. It's very hard even if you've done it before.
So if you don't have access to the capital, maybe you look to transact and exit the company and hand it to someone who does have that, you know, runway to grow it. And, and that's where we think we see a great opportunity. And we're hoping that one day, you know, we have enough cash in the bank to go start our own fund. You know, we're big on being self sufficient, so we wanna do that on our own and, and have a hundred percent control.
Jesse(18m 21s): So is this real estate deal that you have in, in Boston, is this the first foray into, into kind of larger scale real estate projects? Or is this something that you've, you know, you've done in the past with, with the company?
Brian (18m 33s): Yeah, so we, we have a good connection with a group that, that does, you know, financing for real estate deals and funding typical, you know, 50 to 200 million type of checks. But this is the first really lot of moving parts, large scale, you know, two plus acres in South Boston that is gonna be permitted to life science buildings. And it, it, this is a, you know, one plus one equals a hundred type of deal. So it's been interesting. There's, there's a lot of learning for us, but at the end of the day, our job is to find the money and, you know, we think we've done that.
Now. It's a matter of making sure all the, you know, ts get crossed and I get dotted and everything happens. But yeah, this is our first foray into, you know, a a mega type of deal where the big, the big guys in the area are involved in this thing. And it, it'll be something that, you know, people hear about. I think once it, once it's all said and done,
Jesse(19m 30s): I'm sure we will in, in our world. But in, in terms of the, what the capital stack look like, I'm, I'm curious just because, because of where interest rates are at right now, you know what that looks like from, you know, from pref to, you know, debt and equity, what that mix looks like. How did, how did that, how did those moving parts look?
Brian (19m 49s): Yeah, so this is, it's about as hairy as you get with what that looks like. Yeah. And the reason being, the interesting thing about this deal is this isn't a, you know, a big household name in the private equity space that put this together. This is a single individual who hustled and figured something out that a lot of people didn't and went places that the big boys didn't go because he's lean, he has no employees, he's a single, you know, sole proprietor essentially.
And he knocked on a lot of doors and made a lot of deals early on to acquire a number of parcels in this, you know, two, two acre space. And the deals he made there are being cleaned up by the new equity coming in. So it's essentially to just recapitalize on, you know, an equity prep, equity debt, the whole combination of the three really to come in and kind of clean up all of that and have two main names on that ownership document, the company that came in to clean it up and the original sole proprietor that, you know, owns majority share.
So the numbers and details are outta whack. And I, I don't even understand it half the time with how many movement parts there are, but this was also our first entrance into, it's not as simple as, you know, A plus B equal C. It's, no, we gotta get this guy that, we gotta get this guy this and we can't go to that group cause they already saw it. And there, there's a whole lot of, whole lot of moving, moving parts with this. But yeah, it's a, there's a lot of money in the deal, which allows them to be very flexible on what the structure looks like because you don't have to pay, you know, 8,000 people before the principal gets their money.
It's only a few people involved.
Jesse(21m 36s): Yeah. I can very honestly say the commercial real estate space, I have not seen the same deal twice. So it's, there's always something.
Brian (21m 44s): Oh yeah, oh yeah. And then, you know, you get on our side with people selling businesses, a a lot of what they hear is that their baby's ugly, you know, and it's not worth what you think it is. Yeah. And that's a, that's a hard pill to swallow sometimes, you know?
Jesse(21m 58s): Yeah. Well, a lot, you know, they've oftentimes taken care of it for so long, if not founded it. But just to wrap up here, Brian, will we typically ask guests in terms of kind of advice for your, you know, younger listeners, people coming up from, you know, mentorship or even just kind of getting into the space, whether it's private equity, real estate, anything you would tell those, you know, those individuals, any, any advice you'd give them?
Brian (22m 27s): Yeah, I would say, you know, one, one thing I think we were really good at early on that I would suggest is just say yes until you're in the position to say no. Right? So we, we said, yep, we can do that. Yes, we'll do it. Yep. Rely on us, we can get it done. And a lot of the times we were saying yes to things that we had to figure out along the way, you know, but then eventually you become sitting in a spot where you don't have to chase those opportunities and you can say, no, I need to focus. And we're at a point now with our business where we, we don't chase those butterflies anymore.
We know what we gotta do. We bury our head and we we're sticking to one thing for a long time. And when we look up in, you know, 10, 15 years, hopefully it's scary what we built. But I, I think, you know, have, have the, have the stones to say yes to things, even if you're not a hundred percent sure. And go figure it out.
Jesse(23m 20s): That's good advice. Brian, for those that wanna learn more about deal gen or what you guys do, we're, where can we send them?
Brian (23m 27s): Yeah. Deal gen partners.com or Brian, b r i a n DGen partners.com. You could hit my LinkedIn, email me, whatever you wanna do. You could put all that in the, in the show notes, whatever. We're very responsive. We're open to, you know, talk to anybody that, that thinks we can get something done. So yeah, happy to, happy to chat.
Jesse(23m 47s): My guest today has been Brian Scanlon. Brian, thanks for being part of Working Capital.
Brian (23m 52s): Thanks a lot, Jesse. I appreciate it. That was fun.
Jesse(24m 2s): Thank you so much for listening to Working Capital, the Real Estate podcast. I'm your host, Jesse Fraga. If you like the episode, head on to iTunes and leave us a five star review and share on social media. It really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R A G A L E. Have a good one. Take care.