Seeking to expand their investor base while responding to LP pressure, PE firms are increasingly seeking out new structures that break from the traditional. Tide Rock’s aversion to leverage is just one example of its uncommon model.
To call Tide Rock an alternative investment shop is an understatement.
It’s not quite an independent sponsor, nor has it ever raised a closed-end fund. Tide Rock bills itself as a perpetually fundraising “evergreen holding company” that has invested $500 million in 30 businesses in 12 years.
Perhaps most significantly, Tide Rock acquires its companies without leverage.
“There’s always an existential risk of business not being able to ride through rough patches because of its debt burden,” says Tide Rock President Brooks Kincaid. “Instead, we want our operators to be able to focus on growth, which is significantly easier when your capital structure is clean and simple.”
Tide Rock distinguishes itself by making regular quarterly distributions at a time when PE cash returns to LPs are scarce.
Because of this scarcity, LPs are gaining the upper hand in PE fundraising efforts. They’re demanding greater liquidity, more transparency and better alignment of interests between GPs and LPs.
Tide Rock calls its investors “members” who own “units” in the firm’s returns rather than LPs holding stakes in individual funds. The distinction may make little difference, but it helps with alignment by fostering a sense of community and shared purpose among the firm’s 100 or so investors.
The firm targets profitable B2B companies generating Ebitda of between $2 million and $10 million for platform investments. It will buy smaller companies as add-ons.
Another way Tide Rock sets itself apart is by offering sellers tax-efficient shares of the firm’s investment returns in place of cash as part of most acquisitions.
Kincaid says that option has become a big incentive, especially since the firm makes quarterly cash distributions and reports high returns.
“They not only, in effect, still own a portion of the business. They also get access to a high-yield investment structure that they may not have had access to prior,” Kincaid says. “Thirdly, and perhaps most interestingly, they are deferring taxes.”
CEO Ryan Peddycord set up Tide Rock’s offices in the surf town of Solano Beach just north of his native San Diego in 2013. He was backed by investors of companies Peddycord started and sold, including the small business resource portal Business.com Media.
Kincaid sold the technology start-up he co-founded, Imprint Energy, for $27 million in 2016. Kincaid joined Peddycord as the third member of the firm in 2018. Tide Rock has since grown to 40 employees and opened an office in New York.
“We had been operators before Tide Rock,” Kincaid says of Tide Rock’s aversion to leverage. “We know what it’s like to operate in smaller companies and the strain and stress that adding complicated cap structures can provide.”
Tax-Efficient Options for Sellers
For business owners considering selling, Tide Rock offers the option to receive payment through tax-advantaged investments in the firm itself, rather than immediate cash. This strategy can provide sellers with potential tax benefits and align their interests with the ongoing success of their former businesses under Tide Rock’s management.
Tide Rock’s unique model reflects a broader trend in private equity towards more flexible and investor-friendly structures, challenging traditional industry practices.
Contact Kincaid at brooks@tiderock.com.
Source: The Middle Market
