Jonathan Lewis - Sheridan Capital Partners

0:09Jonathan Lewis: Welcome to Northstar's Private Equity Fast Pitch, and thank you for joining us on this journey into the high-stakes world of private equity, where bold ideas, big capital, and brilliant minds collide. In each episode, we sit down with the trailblazers shaping the industry, key leaders, CEOs, founding partners, and visionaries from top-tier private equity firms, influential limited partners, and investment banking powerhouses. These aren't just conversations. They're front row seats into the strategies, insights, and personal stories from the thought leaders driving the deals that define markets and transform businesses.

0:57Jonathan Lewis: Whether you're a seasoned investor, an aspiring young professional, or just curious about the forces moving the global economy, you're in the right place. So get ready to dive into the fast-paced, high-impact world of private equity with your host, the podfather of private equity, Jeff Henningsen. Welcome to Private Equity Fast Pitch. My guest today is Jonathan Lewis, co-founder and partner of Sheridan Capital Partners, a Chicago-based private equity firm focused on investing in founder-led healthcare businesses. Jonathan has spent more than 25 years in investment banking and private equity, and over the past 15 years has helped build Sheridan into a highly specialized healthcare investment platform.

1:43What I find particularly interesting about Sheridan is how they've combined a disciplined approach to finding investment opportunities with an extensive operational infrastructure that helps founders take their businesses to the next level. I also very much enjoyed Jonathan's perspective on leadership and the importance of putting people first, whether that's working with founders, building a team, or developing the next generation of investment professionals. During our episode, he shares a favorite quote that really captures that philosophy. There's no limit to what a man can accomplish so long as he doesn't mind who gets the credit.

2:19It's a great reflection on Jonathan's approach to building Sheridan and the partnerships that have helped make the firm successful. Now we'll get this kicked off with Jonathan Lewis. Jonathan, welcome to Private Equity Fast Pitch. I'm excited to have you on today. Why don't you get us kicked off, introduce yourself, tell us a little bit about your firm. Thanks, Jeff. Jonathan Lewis. I'm originally from Atlanta, Georgia, and grew up in the South. I did investment banking there before moving to the Midwest, where I started my private equity career. And I've now spent over 25 years in private equity before founding Sheridan 15 years ago.

2:56So Sheridan is a healthcare-focused firm that really focuses on the lower middle market. So both outsource services, manufacturing and products, as well as technology and software. And then they also do some patient services as well, really across the healthcare continuum, primarily focused on founder-led businesses. So lower middle market, founder-led, where these companies are kind of at an inflection point of growth and development. And the founders are really looking for that healthcare-specific partner to help them scale, institutionalize, and in many cases do M &A to take advantage of the sector opportunity that they see.

3:38You mentioned lower middle market. Can you give us a definition of what that looks like from a size perspective? Sure. Yeah. So for us, that's really five to 25 million of EBITDA. And we're typically investing on average in that 10 plus million of EBITDA range. We've done some larger, some smaller, but looking to scale into that 50 plus million of EBITDA range. And so at that size range, I know in today's world, maybe everything has an investment banker, but it is a little bit more common for the founder owned firms to not have an investment banker. Can you talk about your business development efforts?

4:15Because I know that's a fairly robust area of your business that you've built up. Yeah. So, I mean, we really operate by the principle that we never know where opportunity is going to knock. We try to have not only all the bases covered, but in terms of the proverbial field, but also to be playing in multiple fields at any given time. So a lot of our businesses are introductions from former executives that are people that we meet at trade shows and conferences and many times organically within our networks. Obviously, we love to see a number of our investment banking partners who have great deal flow in this area of the market as well, but we really try to have all those bases covered.

4:54Jonathan, go a little deeper into how you develop business. We really have a focused business development arm. It does a lot of direct calling and sourcing in non-traditional intermediary channels, and that's been really productive for us. And they split their time between the portfolio, but also new platforms, but also the portfolio in terms of add-on acquisitions. That's been a big part of how we've grown. We've done for the 24 plus platforms that we've done, we've done over 200 add-on acquisitions now during that period of time. So it's really a nice way to create additional scale, but also find additional talent to really fuel the engine as we grow.

5:35Well, and what I also find interesting is that on the tip of the spear, if you will, you have a very robust business development structure, and then you have a fair number of folks on your team that are operations focused, which is really after somebody becomes part of the Sheridan family. Talk about what you do in that bucket. Yeah. So we've really built our acceleration team across our five core operating initiatives, And that's really growth, operations, self, finance and risk, human capital, and then technology. And those sort of generally align with the five C-suite leaders that we see at any scaled business.

6:13And so we've tried to develop resources over time that are a little push, but a lot of pull from our management teams to create this opportunity set and set of resources that they can pull on as needed. at different points of the growth cycle. Obviously, we try to manage so that we're not doing everything at once, but really prioritizing what's of the greatest need, but also then what creates the most value at the exit. When I would imagine in the lower middle market, as I've seen with other investors, the entrepreneurs are oftentimes stretched as they start going through these growth cycles and having somebody with that kind of operational bench is really, really valuable.

6:55What are some of the maybe top one, two, three things that a company coming into your infrastructure really needs early as you start that partnership? I think certainly number one on the list would be just financial resources, reporting capabilities, FP &A. Certainly for most of our companies, really an accounting software and a full-time CFO that has experience working with lenders and working in a more scaled institutional private equity setting. That's most of the companies we see to start are kind of on QuickBooks. They may be on cash-based accounting. And so part of what we have to figure out is really what does EBITDA look like today?

7:37But more importantly, how do we create more of a robust reporting package so that we have better insight into how we can direct strategy and growth across the enterprise? The second is kind of part and parcel to that, which is really technology. I think like a number of firms, we've recently invested into a director of digital transformation and AI. That's on everyone's list. But most of our businesses, we see a lot of opportunity in that sector. And then I think the final function is probably the human capital, right? Making sure that as the company is growing, that we continue to create that operational slack or running room to recruit great additional managers, maybe in areas that have been just under-resourced in the past.

8:23Most of the time, we try to keep the existing team in place and are able to do that, even if sometimes they occupy different chairs within the business. But ultimately, as we're looking to double, triple, quadruple the growth during our period of ownership, we have to really have an engine running in the background that can supply that incremental talent when and where it's needed. And sticking into this kind of theme of working with founders, sellers, I know founder partnerships are really important to you. And you mentioned earlier, not maybe trying to boil the ocean, my term, too early in the process.

8:57That relationship with the founders is so important and delicate at the same time. Talk to me about how you tiptoe into to make that work. Yeah, I think tiptoeing is one description. I think we also like to be transparent about what we expect, what a partnership looks like, the kinds of things that we're excited about, the kinds of things that we think need to be improved in the near, medium, and long term. But certainly, I think if we've had success and where we've had success, the most success in the past is really partnering with great founders. They built great businesses. They have a clear vision in their sectors.

9:33And many of them, if not all, are kind of market leaders within their niche or certainly aspiring to be. And so part of what we help to do is unlocking and giving them additional resources in areas that maybe the bandwidth hasn't been there in the past. Introducing maybe some new resources and new ideas, the things that they've aspired to do, but hadn't quite figured out how to do that. And then introducing a lot of things that we know, as we typically sell into another institutional investment firm, that those buyers will also value, right? That are on that roadmap for longer term growth that we try to do during our period of ownership.

10:13And are there any commonalities or qualities that your CEOs, founders show early that are a sign of how they're going to create extraordinary value as a partner with you going forward? Yeah, we've discussed that a lot and tried to look back at that track record. And what we've really seen is that it's not so much the pedigree of where someone went to school or necessarily which business they ran before. I think it's really other qualities that are a little bit more intrinsic to a leader, i.e. the one thing that we try to preach at Sheridan is servant leadership. Right. This this idea that we're not there to just direct the companies as much as we're there to help serve the vision and optimize that.

10:58And we find that managers who've had the greatest success in our portfolio have been oriented the same way. They are there really not in a sense of ego, but they're to serve their employees. They're there to serve their patients and they want to know the best way to do that. So I think it's a certain amount of humility and willingness to learn and consider new ideas. is. It's that flexibility to say, and we certainly try to do this as investors to say, okay, I don't know everything, but I do know a few things. And how do we learn together what we need to know to have the best outcome for the investment?

11:32Before I jump into another topic, I'm also curious from all the deals that you've done, what are the things that a seller could do better that you see consistently maybe shows up before you buy a company, or maybe even when you pass on a company that just kind of raises your eyebrow a little bit? Yeah, I think two things that we think are critical and we urge all of our future partners or founders to do, whether they're engaged with an intermediary or not, we frequently recommend that they retain an intermediary if they don't have one to at least guide them on the process, what it's going to look like, what is kind of market terms and so forth.

12:09But we really see that, I think, even more importantly, on the legal side, right? In terms of getting into a contract and understanding which positions are favorable and which are untenable, as well as on the quality of earnings side. It's no good to anyone when there's a bid ask or expectations that the seller has set, only to find that once you get into the actual numbers, that the valuation can't meet the expectations. And it helps to have a good advisor on both of those sides to inform the seller. Because we try to take very market-friendly and commercial positions when we're in the process.

12:46But you have to have someone on the other side who can explain and advocate. I know that you use the term clean demand a lot. And I think that's an intriguing couple of words. What does that mean to you? Yeah, I think that's more of kind of as we look at the markets in which our businesses operate, understanding the fundamental compelling value proposition that they're bringing to their markets. It's predictable, it's recurring. We try to avoid areas of regulatory scrutiny or risk to really make sure that our focus is not so much betting on policy as it is really helping build businesses in a way that's productive, thoughtful, but also mindful of our many constituents, right?

13:32We do try to be very much good stewards as we think about the markets and the patients, the communities that we're serving. And I think this would be a good time to maybe dive a little deeper into the areas that you invest. I know you gave a higher level listing of the buckets within healthcare, but are there any specific sub-verticals within that that are really compelling that you have a thesis about over the next 12 to 24 months? There are a handful of things that we continue to look at. We recently made a couple of investments that are in the ancillary life sciences ecosystem. system, we think longer term, there's still a lot of compelling outsourcing opportunities there.

14:11And those are multiple niches within the same kind of thesis. We try to get together as a team four times a year, at least, to really walk through on a very granular level, a lot of these different subsector theses. And those are being constantly really refreshed based on the headlines that we're seeing, the intel that we're getting from some of our advisors, what we're picking up directly as we're walking the floor at trade shows and talking to industry executives. Jonathan, AI obviously has been around a long time, but it's really rapidly being rolled out in the corporate world. Tell me about your thoughts on AI.

14:48Yeah, I think what I would say broadly about AI, AI is part of a continuum of technology. And so that's what we try to focus on. I think a lot of people in the market are still trying to figure out what AI means and whether it's a threat or it's an opportunity. With most of our companies, we see it as an opportunity and we've woven it in. We don't treat it as a separate entity unto itself. We think it's really important to be intertwined with the strategy and the rest of the technology roadmap as we're building that out for our businesses. It sounds sexy and exciting to have an AI strategy, but when you get down to the nuts and bolts, it's like we recently had an executive summit with all of our CEOs in Chicago, and AI means something very different to each of those companies.

15:37For some, it's a critical component. It's at the core of what they're doing, the tech enablement. For others, it's streamlining what is typically a labor-intensive process or a less efficient process. And so it means very different things to different companies within the portfolio. And part of our efforts and goal there is to try to figure out where each company is on the overall strategy and technology journey, and then figure out where AI fits into that landscape. So Jonathan, I'd love to toggle back in time and let's talk about your origin story of the firm. And you're a unique individual in the private equity world because you spent a fair amount of time in the investment banking side, then private equity, and then started your own firm.

16:20Not that there aren't others that haven't done that, but there's not a lot. And then when you dovetail that in with a healthcare focus, that is unique. So why don't you give us a little bit of a background on your journey and then how you ended up starting Sheridan? Yeah. So to your point, Jeff, earlier in my career, I started out on the consumer side of things and banking and moved into industrial, which included some healthcare manufacturing. And then post-business school, I was at generalist firms along the way, but healthcare became an increasing focus and certainly deals that I tended to gravitate towards and enjoy and that were actually successful.

16:58For me, there was a natural affinity there of seeing the market opportunity and certainly the long-term demographics, all the reasons that investors like healthcare. It was interesting to me. It was also interesting from the sense of watching an impact of being able to invest in a sector where there were some positive externalities about the work that we were doing, the companies we were building. In terms of Sheridan itself, our original backers at Sheridan were a large family office that had themselves created wealth in the healthcare sector. So it was natural for them, natural for us to really double down on healthcare.

17:36It was something that there were some nice introductions early on, some operational resources that we could leverage in the early days when the team itself was still in the mid to low single digits of the investment firm. As we grew as a firm, we were able to add more and more healthcare focus and expertise. And if you look at our team today, what you'd see is that many people have family members, parents, siblings, spouses who also work in the healthcare field. We've become eat, live and breathe healthcare every day. It certainly wasn't that way from the beginning. As we drew it up, we thought this is a fascinating part of the market.

18:17And we can really, even early on when we didn't have a past track record to rely on, lean into the sector with a good amount of expertise. I love that story. And I think that what's interesting about it is how long you've been in the space and you've gone through a lot of different economic ups and downs, as well as the government does have, even though you don't invest in maybe government direct impacted areas of health care, it still does have an impact in the health care vertical. Talk about how you maintain your discipline within the variances in the economy. One of the things that you hit on there is really the increasing complexity in healthcare.

18:55And that has certainly been something that we've noted and followed over the last 15 years. We think that sets up well for sector specialists relative to some of the generalist funds that, especially in the lower middle market, right? Bigger firms have dedicated healthcare teams and they operate almost as sector specialists within a larger firm. But with the area of the market that we're typically investing in, there are generalist funds and then there are other healthcare specialists. And over time, we've seen outperformance there, maybe relative to some others. And I think a lot of that is because there's a lot to know about healthcare.

19:30And you can even see from the last few administrations, there are different views politically and from a policymaking standpoint on which direction different parts of the healthcare landscape should go. From our perspective, we try to understand that landscape as well as we can, not so that we can take the risk, but so that we can avoid the risk. We don't want to be guessing on which way Congress is going to lean or which way the president may lean. We prefer to be operating in businesses that both parties view are critical to the long-term health of the population in general writ large. And then find those interesting areas that are lowering costs, increasing access to care, advancing science.

20:14Those are the things that we look for within our businesses because we think those advantages are scalable and sustainable. And I know you talked about AI, but a new question jumped into my head when you say advancing sciences, because AI is having some impact in that area. How are you thinking about that? Again, we've not been investors historically in developing drugs or building molecules or a medical device. We prefer to look at a derivative strategy to some of those trends, avoiding that binary risk that certainly can be inherent in different parts of the healthcare landscape. There are some groups that want to lean into those things and they may be making 50X returns, but there's some zeros along the way.

20:58And so we try to have those doubles and triples a little bit more consistently. That's what our investors expect. You mentioned that a lot of your newer associates are folks with maybe families that were in the healthcare space. And I always find that when you have people that grew up with the thing around the kitchen table being spoken every evening, it becomes part of your DNA and obviously become much better at it if you end up going into that industry. But I'm sure you have a lot of kids asking you, what would you do if you were in my shoes? If I want to go into private equity investment banking, what types of things are you telling them now?

21:30Yeah, I think one of the things that I do frequently have calls with or meet with people from business school or undergraduate or trying to figure out the landscape. And it has changed a lot over the last 25 plus years in terms of what that path looks like. But, and this is true, and I'm back to our business development topic, talk about this with our team frequently, is that you never know where you may find opportunity. And from a deal perspective, that means being willing to have the extra meeting to take a long shot with something that may not immediately seem germane or relevant or something that's attractive.

22:09But those conversations frequently do lead then to the proverbial pulling of a thread to something at the end of that thread that becomes very interesting and compelling. And I think that's true from a career standpoint as well. Be focused, be curious, be focused on where you can learn. I feel very fortunate to have been apprenticed, if you will, at firms with some really talented investors, not only in terms of the deals they chose, but how they managed a firm, how they built and grew their own enterprises. And so I've tried to internalize some of those lessons. I think that's true. It's easy to chase the big brand and take the highest paying offer or the biggest brand on the street.

22:51I think frequently though, there's a lot of opportunity in going to the place that's going to invest in you as a professional, your development, your understanding where you can take on more responsibility. And that's what we've tried to offer our, the younger people in our firm. That's really good advice. And I'm going to dovetail my other question. Do you have any favorite quotes or mottos that you share with your team or your family? I try to read a lot. And I think sometimes the best ideas are certainly in the history books and sayings of people wiser than myself. But one that I particularly like, I think it was attributed to Robert W.

23:27Woodruff. He was the CEO of Coca-Cola and as an Atlanta guy, growing up, Coca-Cola was a pretty important influence day to day. And he also was an alumnus of my high school. So every day walking into campus, there was a big statue of Robert W. Woodruff in the quote that there's no limit to what a man can accomplish so long as he doesn't mind who gets the credit. I think that was attributed to Lyndon Johnson at one point, maybe Ronald Reagan was in the same. So I think multiple people have latched onto that. But for me, I think it's important. It reflects the spirit of what we try to be. We're not focused on necessarily individual track records.

24:06We're not focused on who did what to be successful. We're focused on the successful part. And sometimes that means taking the lead. I think sometimes that means taking a backseat and allowing the leadership of others to shine through and knowing when to do each of those. This still just blows me away. I keep saying this, I think every podcast, but I still, after having close to 200 guests, have not had anybody repeat the same quote, which is just phenomenal. And I have occasionally somebody say, you know, oh, my favorite quote's Teddy Roosevelt and I'm ready for them to go into the man in the arena.

24:42And they throw off a Teddy Roosevelt quote that I've never heard before. And this one is really, that's a fantastic quote. I really love that a lot. Jonathan, this has been a really great podcast. I know our audience is gonna enjoy very much getting to know you and the firm and your story. My last question that I'll ask is if I'm a seller and I've whittled down my decision between Sheridan and another firm, what are the things you want me to remember tonight as I make that final decision that will tip me over to becoming a partner with you? I'd say one is if we're looking seriously at a business, it's because we think we can drive disproportionate value in that sector of healthcare based on either prior deal experience or the knowledge that we have.

25:23Two is that we think we can be a great partner, both in terms of the resources and capabilities that we bring that are deep and also broad to help the company scale, institutionalize, to help the founders realize their vision. And I think the last is a relationship. We encourage all of our executives to reach out to former executives. We're proud of those relationships that we built, the successes that we've had. And for most of our founders, this is a once in a lifetime thing. We transact on multiple times, multiple deals, multiple funds, but the who matters, right? And it matters to us. We care about the people we're working with day in and day out, and we want them to truly enjoy the experience of working with our team as well.

26:06That's fantastic. And again, really appreciate you joining the show today. Thanks very much, Jeff. Appreciate it.

26:14Jonathan Lewis: Thank you for joining us for Northstar's Private Equity Fast Pitch. For more information about Fast Pitch or our boutique private equity heavy hitter events, you can visit us at enorthstar.com.