The Stephens Group is a family office backed by the Stephens family, which has been investing in a variety of industries for the past 90 years. The Little Rock, Arkansas-based firm has invested more than $1.5 billion since 2006 and invests in industries across the U.S. including industrial and commercial products and services, specialty distribution, B2B food and consumer products and technology infrastructure and tech-enabled services. The firm will write a check from $25 million to $125 million at first pass and make necessary follow-on investments, often in amounts that far exceed their initial investment. Mergers & Acquisitions recently spoke with managing directors Aaron Clark and Clay Hunter to explore the firm’s strategy.

How was Stephens Group created?
Clark: Witt Stephens was a great businessman and entrepreneur who took his early personal success and reinvested it in other people and businesses. He seeded what became a classic merchant bank and continued actively making private investments. The Stephens family was making significant private investments at a time when not many others were pursuing that model. Stephens Group was formed in 2006, when Witt Stephens Jr., and his sister Elizabeth Campbell decided to divest their interest in the financial services side of the merchant bank and, going forward, focus solely on private investments. The goal was to retain the family’s rich history and strong financial acumen while adding many of the best practices they saw being developed by the private equity industry and that’s what we’ve done.

What industry verticals do you invest in?
Clark: We are active in commercial industrial products, with a particular interest in specialty distribution and engineered industrial products, and we have a robust practice in technology infrastructure and tech-enabled services, with a focus on businesses with a vertical-specific, software-as-a-service model. We also have a burgeoning effort around business-to-business food, and we can also be opportunistic if the right opportunity arises.

How did you decide that these verticals will be your focus?
Hunter: We went through a pretty extensive strategic planning process a number of years ago in both a top down and bottom-up manner to identify or reconfirm where we were focused at the time was where we wanted to focus for the next decade or more. Witt Stephens, our CEO, challenged us to think bigger and deeper than we had been about the best spots to deploy capital – for us. We all have backgrounds in certain areas, and we tended to invest in those sectors. This process was useful and allowed us to step back and really ensure what we were doing made sense.

How does your deal pipeline look?
Hunter: We are busy. In the first few months of this year, we exited a couple of investments and made a significant investment in an existing portfolio company. In March, we bought a new platform company called Sound Seal, which is a manufacturer of noise control products. Then in June, we bought Noise Barriers as an add-on acquisition to Sound Seal. Noise Barriers will operate as a stand-alone division of Sound Seal. We of course always have a number of platform and add-on acquisitions in various stages of assessment, and we also have a couple of businesses that are likely to be sold in the near term. We are busy, but it feels the same as last year—not busier.

Do you think the fact that you can offer permanent capital to companies gives you an advantage in the purchasing process?
Clark: My favorite conversation to have with a management team or a group is to explain how we can be part of their story going forward. If they are pursuing a transaction where they are going to stay involved, they will care about their partner. The flexibility that we offer matters. We don’t have a fixed timeframe for a sale. We just pursue a strategy that can add value and help businesses mature.

Hunter: I will tell an owner we are no smarter than anyone else, but we have a different set of criteria by which we make decisions that we think makes us a great partner. Private equity firms often need to make decisions that keep them in business. We have the luxury of not having to think about remaining in business ourselves. We can make decisions that are only focused on the particular portfolio company’s best interest. Every decision we make is in alignment with the company. We offer all the good that comes with the sponsorship investing model, and there’s certainly a lot of good. We’re essentially a private equity model without the constraints of that principal investing model.

How do you source deals?
Clark: We are open to all traditional deal sources, and we spend a lot of time with the appropriate intermediary ecosystem. Our network also allows us to find proprietary deals; we want to see all the relevant deals we can and then apply the filter. We look at a large number of deals, and then really go after the ones where we can offer something different. If we find something we like, we will do what’s necessary to prevail. With 90 years of history, I do think we get more inbound calls than most traditional funds. A lot of independent sponsors and other family offices also know us, which can lead to deal flow.

What can we expect to see in the industry over the next six months?
Hunter: We’ve all seen rising valuations over the last few years, but we’re also seeing a shift in [contract] risk allocation in favor of sellers – I expect that will continue and certain seller-friendly terms will likely creep further down market. Savvy buyers will increasingly be trying to figure out how to front-load the critical risk elements of diligence in order to be competitive on this dynamic. Importantly, we also expect to continue to see the increasing professionalism and investment tempos of family offices and other sources of permanent capital. This is a flavor of principal investing that’s come into its own as an attractive alternative to the traditional sponsor model.

Clark: We would welcome some volatility, but I expect more of the same in the M&A market – significant availability of debt and equity capital and a lot of investment firms stretching to differentiate. Many firms are responding to higher prices and tighter processes by looking to control more of the value creation process. They develop play books and buy companies with the idea of taking over and running their plays. It feels like a newer version of the old industry “strategic” buyer. Some management teams recoil at that model. We think proven management teams will be at an even higher premium and will have greater influence in a variety of ways.