Inside Spire Capital: Strategic Growth Through Tech and Compliance

[00:02:15] And that was my first exit. We sold it to a strategic player. There are three players in this scholastic industry, common names. We took our biggest market share for Balfour and they bought it back. So it was a great exit. The private equity people were involved for two years and it’s one of their best returns.

[00:02:36] From there I went to another private equity-backed company. In the complete floor care solution, a company not too far from us in Castle Rock. It was actually called Castle Rock, and it was located in Castle Rock. I ended up being the CFO and COO of the service division. 

[00:02:55] There was a company in Castle Rock called Windsor, and they make vacuum cleaners, burners, and scrubbers. They see hotels and Home Depot’s and Lowe’s. And, we had national contracts to fix them throughout the country. And I was a CFO of a 200 million division. And that was my second exit.

[00:03:13] After three years, I went to a medical device company, another Private Equity-backed company that went from 0 to over 80 million in three years and ended up selling that as a CFO/COO and in 2006, looking for my next opportunity. Spire put their CFO role out to both the New York market and the Philly market and I’m in Philly, and then the partner called me and said, come work in private equity.

[00:03:38] I’m like, I don’t want to work in private equity. I want nothing to do with private equity. I don’t want to be a CFO in private equity. I don’t want to do the mundane things that we’re probably going to talk about in a little bit, capital calls and distributions and things of that nature that took away from my operating background.

[00:03:53] And he said Don, don’t pitch yourself as that pitch yourself as you can help those guys on the investing side. You’ve walked a mile on every CFO shoe. You can cut your teeth both on the back office and the investment side. And I wanted to pitch, I pitched myself and here I am 18 years later running both the back office, and the chief compliance officer, but the good news about my job is I’m on every deal.

[00:04:14] The bad news about my job is that I’m on every deal. So I run everything from quality assurance to risk management and, from the time a company is birthed into Spire, I’m usually along the way to the exit, helping the CFO and accounting department grow up, I would say, and put in all kinds of systems and controls and dashboards and financial reporting.

[00:04:34] Ray Grant: That’s great. So from class rings to convenience stores to home services, back to private equity, and Spire is mostly buyout investments.

[00:04:46] Don Stewart: We’re a small market buyout, leading control. We’re in the small market middle market. We’re investing out of our 4th fund which is 350M.

[00:04:53] We invest in four verticals: Media, communication, education, and tech-enabled business services. And, I’d say 65% of our investments are in the tech-enabled business service vertical. We’re generally the first institutional capital into a company. Founders growing a big company looked at the risk and said, to get to the next level, my risk is too big.

[00:05:18] And they pushed it onto us and. We do the same thing, we take it to the next level and hopefully push it to a strategic or another big PE shop.

[00:05:27] Ray Grant: Great. Thanks for that background, Don. And we’re a big sports office here at Altvia, so obviously you’re well-known for your Philly sports fandom and your time with the Eagles. So before we get into it, I have to ask, who is your favorite Eagles player of all time, and what’s your 2024 prediction?

[00:05:43] Don Stewart: That’s a tough one. So I worked there during a lot of it during the bloody era. And I really liked Randall Cunningham, so I would say Randall Cunningham was probably my favorite Eagle during that time.

[00:05:53] And my prediction this year, it’s gotta be better than last year when they started out 10 1. I think they’re at 13 and 14 and heading to the Super Bowl in the NFC. But I’m a really biased, so take that for what it’s worth.

[00:06:05] Ray Grant: Optimistic. Yeah, you got Saquon. Yeah, this could be the year.

[00:06:09] Don Stewart: I went to the Super Bowl when they lost to the Chiefs and I had my tickets booked for last year when they were 10-1 and it fell apart.

[00:06:15] Ray Grant: So it was your fault.

[00:06:18] Don Stewart: Yeah.

[00:06:20] Ray Grant: That’s awesome. Randall Cunningham, I was wondering if you’re a Ron Jaworski.

[00:06:24] Don Stewart: I do. I actually so I’ll give you how I got to my role, so I played college football. Wanted to be a professional athlete, just never got there. And my parents next door neighbor ran the visiting locker room for the Eagles for 40 years. At the end of that 40th year, he wanted to retire.

[00:06:41] And the Eagle’s said, if you want to retire, find your replacement, and he walked across the driveway. I’m one of eight. I’m the oldest. And by birthright, he knocked on the door. I have three other brothers. He said, Hey, Don, you interested in running the visiting team locker room for the Philadelphia Eagles and sideline?

[00:06:57] Yeah, I would have done it for free. I followed him around for a year and then he retired and I took over in 86 and worked to 2000. So it was great, it was very good experience. It ended up being in Veterans Stadium, which was a city-run Stadium.

[00:07:13] But I got to meet a lot of really nice people. I wouldn’t have any other value than being in the visiting locker room because I got to meet everyone, during that era, the NFC East was big, so I got the Giants, the Reds, the Cowboys, they were all winners, other than the Eagles, so I got to see some really good football and some really good teams and meet some really good people.

[00:07:31] Ray Grant: That’s awesome, yeah, they were beating my Broncos in the Super Bowl every year. And I could probably talk about sports for the whole podcast and make this into a sports podcast. But alas, it’s the private equity and technology podcast. Let’s get into some of that.

[00:07:44] I know I’ve worked with you for a while on the Altvia side. And I think, from my perspective, you’ve been way ahead of the game with Spire in terms of, 6, 7 years ago, you guys were looking at leveraging analytics, and leveraging technology in a forward-thinking way that I think we’re seeing become really popular with within the industry, increasing transparency for LPs through the LP portal experience, better more dynamic portfolio company information at your fingertips.

[00:08:19] Interested to hear, obviously you wear a lot of hats at Spire, starting with that investor relations responsibility. What does the IR function look like at Spire? What does the LP base look like? And a little more background there.

[00:08:33] Don Stewart: The IR function, I would say I sit on the back end of that with a lot of LP requests and we’ll get the fundraising, building the fundraising database and all the DDQ to come in.

[00:08:44] I usually fill them all out, but, there are 2 partners primarily that are, let’s call it on the marketing IR side that are touching LPs certainly quarterly with our quarterly correspondence, and then I would say ad hoc, right? Probably more episodic as we get close to going into fundraising.

[00:09:06] We certainly have an investor conference every year. We’ve done it both in person and we do it through a live broadcast as well. Pre COVID and post COVID. And so I would say there’s a cadence to it, but it’s more stringent as you get to fundraising time.

[00:09:23] Ray Grant: And mostly the institutional LPs?

[00:09:26] Don Stewart: Yeah, I would say today it’s mostly institutional. If you look at the evolution of the fund, Fund 1, friends and family, high net worth individuals, right? And from Fund 1 to Fund 4, it’s definitely more institutional base. I would say that the institutional base has largely been insurance companies lately. In Fund 4, it’s probably, 50% of our capital is through insurance companies.

[00:09:46] Ray Grant: Gotcha. Interesting. And so you mentioned you’re on the front lines of a lot of LP requests. Obviously the common challenges are just, making things self-serve, having consistency, fast response times, providing a good experience, and good service, from your perspective, what are your biggest challenges and managing LP requests?

[00:10:07] Don Stewart: The fund-level information is pretty easy to, go out, right? I’m keeping that it’s the portfolio company level. If you’ve got an institutional partner, they want employee headcount checks, they want to know, diversity, and inclusion, there are more and more statistics about funds that institutional LPs are looking for, and getting that data in some sort of central database.

[00:10:32] So you’re not opening up, thousands of Excel spreadsheets to, manage that. I would say that’s probably the biggest thing, and the fun stuff’s pretty easy to grab. It’s the portfolio company-level stuff that gets, it can get cumbersome.

[00:10:46] Ray Grant: Yeah. And so I guess these days, how would you describe your approach to that process to respond to those requests or allowing them to self serve it, whether with technology or with people?

[00:10:57] Don Stewart: We did try iLevel. It didn’t work because of a lot of different reasons. So I would say we’ve created our own central kind of homegrown database that we’re using through Power BI that we’re grabbing stuff from our portfolio companies and bringing that into Power BI and, own data as data comes in for request.

[00:11:18] Ray Grant: Got it. And I know today, obviously, piping some of that into the Answers tool within ShareSecure to make some of that available on the portal.

[00:11:29] Don Stewart: Yeah. Certainly, so on the Answers side, we’re certainly using our portfolio company data, quarterly we’re reporting, and cost, fair value distributions, IRR, and ROCIC, right?

[00:11:40] So we’re doing that quarterly for each investment. As well as, your typical capital account statement. And the other thing that we’re doing with the capital account statement that I would say we’re leading edge. We’ve pre-Altvia, we had the ability through a really archaic access database to, have an LP query their capital account on quarter, inception to date, year to date any way they want.

[00:12:04] And at that point is dropping into a PDF, but, through your guys and what we’ve done is, Excel, pivot, anything we want and, an LP can use for their, capital account statement.

[00:12:15] Ray Grant: That’s great. I was reading a case study you did with this must’ve been, 7-8 years ago.

[00:12:22] And there’s a lot of the similar sentiment where you were trying to get away from the clunky Excel document processes internally. And your perception of private equity as an industry is that the attitude, for most folks, is if it ain’t broke, don’t fix it. And so you’re trying to separate Spire from the pack in that way.

[00:12:41] What’s your approach to using technology? It feels like you’ve been really effective in adopting the tools. So, what’s your methodology for knowing when to evolve the technology and you know how to get the best use of it?

[00:13:00] Don Stewart: So it’s continuous improvement you’re always looking for continuous, and a lot of it is centered around forward thinking, right? If I’m an LP, which I am in some cases, what would I like to see? What are the data points that are coming in that people want to see? And then, being a registered advisor, one of the things is being transparent, and what’s the best way to be transparent?

[00:13:23] I don’t want to open up a jillion Excel spreadsheets to solve a data request, right? So moving forward and it moves, right? There’s a lot of information out there that people want to see. Especially, when the SEC comes out with all their different attributes, where it’s a new marketing role, they just said, Hey, we want to see returns with the use of the line, without the use of the line and all that’s done to start, in Excel and how do you move that to, automation? So you’re not like driving yourself nuts, pulling stuff together. And that happens at our portfolio companies, right? We leverage our brand name at Spire, and we have an MSA with Sage Intact and NetFortress.

[00:14:04] So we have the ability, myself, to go into each one of those companies instance read-only and pull information out too. So I can pull, I don’t have to wait for a portfolio company to send me information. I can go in there and get data in real-time too. So using our brand name to leverage for both better costing and ability to go in and get stuff on the fly versus waiting for a CFO or a controller or even the accounting manager to give me information. I can go get it myself.

[00:14:31] Ray Grant: Yeah. That makes sense. And just obvious for the time savings and efficiency for what you need. But have you ever had a negative experience there where maybe you went back to the old ways?

[00:14:42] Don Stewart: I would say our experience using iLevel was okay it was probably too sophisticated for what we needed and we stepped back and said let’s reinvent something better.

[00:14:55] You know iLevel was designed for I’ll call it gap financial statements right, a system a record at that point in time, but as you do acquisitions and other stuff we’re looking at, pro forma numbers and other information and it just got too complicated using iLevel. So we’ve designed something ourselves to solve a lot of that stuff.

[00:15:15] So it had to, serve multiple masters not just what I’m looking for from a GAP point of view, but, driving valuations, we’re not just looking at GAP numbers, sometimes we’re looking at, pro forma numbers and things like that. So it had to solve multiple masters and iLevel didn’t do that for us.

[00:15:31] Ray Grant: So it just came down to the flexibility to get more build over buy in that direction. That makes sense. That’s great. Yeah, I guess shifting away from the technology and more back to the LPs. You’ve had these processes in place for a long time now, how have you had to adjust it? What are you seeing in terms of how LP requests are changing?

[00:15:56] I think what you continue reading about now is the push for liquidity. Focus on DPI over IRR. Are you seeing those trends with your LP base?

[00:16:05] Don Stewart: I would say push for liquidity for sure. Our third fund is a 2019 vintage fund that’s smacking that fun thing called COVID where, we haven’t had an exit since 2019, right?

[00:16:16] We probably took it on our chin for 18 months, stale growth, and we’re back in a growth mode. Yeah LP’s are looking for liquidity, right? We want to raise another fund. It’s nice to have all these unrealized gains, right? But, people want to put cash in their pockets to show liquidity.

[00:16:31] And I would say DPI has not been central on some of the requests I get. People look at it, but it’s both, IRR and DPI. They’re looking at all that too. I would say no one’s generally asked for DPI, they’ll ask for IRR first. And MIOC, right?

[00:16:52] They’ll ask for those two things.

[00:16:53] Ray Grant: So pushing for liquidity, but it’s still a long-term outlook for most folks. Yeah, I think that’s common across the board, right? What we’re seeing is a lot of those 2019 to 2021 vintage funds with the lower realizations than some of their earlier cohorts.

[00:17:12] Don Stewart: I would say you look at the debt markets and things of that nature where, has an impact on, exits and entrances as well. And we have 2 assets in the market today. There are 8 assets that I think will trade better than what we’re holding at.

[00:17:27] Ray Grant: Yeah, I guess how has that made the LP relationship management more difficult?

[00:17:31] Don Stewart: I think it hasn’t been difficult because we’re transparent and it’s more transparent quarterly letters, but we quarterly meet and discuss what’s going on in the fund.

[00:17:39] So it’s about transparency and what we’re seeing across the board, not just globally, but we talk very specifically about each portfolio company and where it’s going, what’s happening. Good, better, indifferent, it’s not always good news.

[00:17:51] So you gotta be transparent.

[00:17:52] Ray Grant: Yeah. Are these trends impacting the investment approach for Sprire at all or the investment criteria?

[00:18:01] Don Stewart: It hasn’t impacted the investment criteria. I would say new opportunities have been down this year although we did close on two new platforms in April for Spire 4 that we may have one left.

[00:18:13]  I would say 2023, we didn’t do any new platforms. We did a pretty accretive hold on acquisition, but, I would say the opportunities are smaller and I’m not as big as breath. And then sometimes the closure is hard too. I think seller expectations are still higher than they should have been. But, we got things done.

[00:18:34] Ray Grant: Yeah, I guess on the investor relations side, that’s a lot of stuff I’ve worked on with you guys is that data transparency aspect, managing those requests, but what other sort of key things you mentioned your annual meeting what are some of your other key proactive measures?

[00:18:52] Don Stewart: The year in review for Spire, we do that in April 1st timeline for the prior year or so, audits done, taxes are done, do a year in review, what’s happened in Spire, and that includes, any internal promotions, new portfolio companies, new add on acquisitions, and just how we’re doing overall.

[00:19:13] Ray Grant: Yeah. Is that challenging when obviously you’re in this long period of not fundraising to make sure you’re keeping those LP relationships warm?

[00:19:22] Don Stewart: We closed Spire 4 in 2022. So we fundraised it during COVID, so we were able to close the fund. So it hasn’t been that too far removed since raising the fund.

[00:19:35] Ray Grant: Gotcha. Great. I wonder if we could shift, to one of the always sexy topics of compliance, but it’s obviously one that we hear at Altvia, and trying to help people.

[00:19:50] We’re getting questions about what other firms are doing. And a lot of times say who does have the answers here about how to properly prepare for these new regulations?

[00:19:59] Don Stewart: Yeah. We went through an audit last year. So first time we were audited was 2012. I got a phone call on January 22nd, 2023, that the SEC was going to come.

[00:20:11] Bad timing, middle of the audit season, tax season, add in the Silicon Valley bank and signature bank crash last year. It was a perfect storm. So we went through an audit last year. It lasted from the end of January to the beginning of June, it was tedious, I will say that a lot of data requests. I bet there was over 800 questions, and they often went sub-bullet A to sub-bullet Z.

[00:20:37] They touched on many different things, but at the end of the day, we came out unscathed, with three minor findings that were very innocuous. But what helps us prepare for that, is we have a compliance consultant. She’s phenomenal. And we do a mock audit every year. Every year that we’ve been a registered advisor, we go through a mock audit and then we go through four quarterly risk assessments, everything from cybersecurity to the marketing role to data requests that the SEC asks for. That had us well prepared for a real audit. I had a library I can pull 95 percent of their data requests out of a library and just refresh it with current information. Tedious, but we are well prepared for it, really well prepared.

[00:21:28] That’s the thing, you gotta, failing to prepare is preparing to fail, right? And we take it, I would say we have a culture compliance. We’ve taken it very seriously. We do our annual training. We do annual cyber training. We do quarterly cyber testing.

[00:21:42] We do a lot of different things. I always yell at people for texting for business because every form of business occasion has got to be archived and talk about technology, right? We use a software solution called Cell Trust, that allows us to convert our landlines and the texting line.

[00:22:01] So people can text our landlines and I can suck that in from a compliance review. So everyone doesn’t have to have two cell phones, one for business, one for personal. We’ve used technology on the compliance side too.

[00:22:14] Ray Grant: Yeah. How has that or has it changed your data management practices at all, having gone through that?

[00:22:21] Don Stewart: No, actually, I felt really good about it when we went through the process. Certainly, there’s things that came out of left field that I wasn’t prepared for. It’s good to play Monday morning quarterback, the Silicon Valley Blow up last year, right?

[00:22:34] We banked at Silicon Valley Bank, and one of their data requests is basically like, why don’t we catch it? I’m like, what? So I had to answer all the questions about Silicon Valley Bank, and how do we prepare for this to happen again?

[00:22:48] Ray Grant: That’s great. What’s on your radar now for new regulations?

[00:22:52] Don Stewart: The new marketing role for sure.

[00:22:53] It has an impact on me. We had a process in place that pre-marketing role that, we used to use, we use my compliance officer as a software solution that, and any type of marketing material has to be pushed in there for my review, whether it be a press release, we do have co-investors in some of our portfolio companies, we’re sending out a document to them, so we have a process in place that everything has to run through me for review. And then if I’m unsure of it, it goes to our compliance consultant. Do we make sure that we put all the necessary belts and suspenders in there, everything from terms and conditions to like risk profiles that we got to put in there.

[00:23:35] Ray Grant: Gotcha. Yeah. And the other part of that obviously was the net versus gross IRR. And then you have these new SEC transparency rules, which are just shot down by the Supreme Court.

[00:23:49] Don Stewart: Yep. Actually, it had no impact on us because we were doing it anyhow.

[00:23:55] So everything that they, that new SEC thing that came out, that got overturned, we were doing everything anyhow, so it wasn’t going to impact me.

[00:24:10] Ray Grant: Yeah, you had all the transparency practices in place ahead of the game. That’s great. Yeah, I feel like, yeah, you guys have been there for years where a lot of other folks we talked to are just trying to get there and catch up now. Yeah, with that in mind, what’s on your mind now in terms of how the firm operates and what’s the next big thing that you’re looking at in terms of here’s how we’re going to evolve and change and grow, whether it’s how we operate or the technology we use. What’s on your mind in terms of the next evolution at Spire Capital?

[00:24:42] Don Stewart: I would say next evolution, right? I would think we’re going to probably go to market in 18 months, right? So what can we do ahead of that, right? Pre, we didn’t use ShareSecure for our last fundraise, but I want to use that. Most institutional partners have access to ShareSecure.

[00:25:02] Why do we have to have two separate, databases for fundraising, right? So how do I get my partner’s console to use ShareSecure and post everything that we need in there? So it becomes a seamless integration when the funds close, right? Because everything’s there.

[00:25:18] I would say, the other thing that’s been hot and heavy on the bot with this, ESG that we get a lot of requests on ESG, more and more on that, so, what’s going to be coming down the pipe from due diligence from a ESG point of view. Yeah, we do ESG diligence for every new platform.

[00:25:38] We monitor each portfolio company at least annually. Every company is on a review that they get after becoming a portfolio. They go through a review, another ESG review process. So I think that’s been hot and heavy the last two years. So where is that going?

[00:25:56] Ray Grant: Yeah. So what are you thinking there in terms of how you operate? Is it just, more easily accessible ESG data for your LPs across the portfolio?

[00:26:05] Don Stewart: Yep, absolutely. We get diversion and inclusion questions. That’s going to come. All that stuff we’re capturing now that the last two fundraises. We didn’t have to do that.

[00:26:17] Ray Grant: Yeah. And do you position that now as part of your investment criteria when you’re looking at a company?

[00:26:22] Don Stewart: We look at it, right? It doesn’t make or break the decision, right?

[00:26:26] Ray Grant: Just be able to respond to the requests as they come in, obviously.

[00:26:28] Don Stewart: Even on the exit there’s questions that come from the exit. So we got to be able to make sure that we answer those questions from an ESG point of view, whoever acquires one of our businesses, and we’re not selling it to someone who’s considered to be a bad actor in the ESG world.

[00:26:42] Ray Grant: Yeah, that’s a tricky one to navigate where you want to be transparent, but different LPs may have different points of view. Is there anything else on your radar in terms of the future state of Spire over the next five years? Any big focus for you guys?

[00:26:56] Don Stewart: Not at all. I think nothing that’s imminent that we’re looking at. It’s business as normal, I would say. We’ll continue to, leverage your tech capabilities for sure, as you guys grow your product set, we’ll certainly look at it and use it.

[00:27:10] Ray Grant: Yeah. We’re continuing to evolve on our side as well to make things more easily usable across different workflows, whether it’s for the next fundraise.

[00:27:21] For making the data dashboards more easily adjustable, whether it’s adding in ESG metrics in there at some point, or whatever it is, we want to provide you the flexibility to do that. Yeah, that’s all I had on my end, Don, but really appreciate you taking the time today, and for the great insights on yourself and Spire and the 2024 Eagles, I wish all of you the best of luck.