While the Private markets provide strong returns for investors, they also offer an opportunity for social change.

PitchBook spoke with Shundrawn Thomas, founder and managing partner at The Copia Group and former president of Northern Trust Asset Management, about his firm, which he launched in September alongside partner Anthony Hoye. At Copia, Thomas pairs his expertise in investment management with a philosophical imperative to help female and diverse entrepreneurs and founders maintain majority equity ownerships in their businesses.

Copia operates under the general principles of "nondilutive" strategies—typically in some form of a secured credit facility, debt or a hybrid debt-equity model—that allow founders to maintain control of their companies while simultaneously helping them expand their client bases and overall value.

Before starting Copia, Thomas spent 18 years at Northern Trust, where he worked in various roles across the organization. From 2017 to early 2022, Thomas was the president of the asset management arm of the insurer.

This interview has been edited for clarity and brevity.

PitchBook: Can you give an overview of your transition from Northern Trust and talk about why you decided to go out on your own at this point in your career?

Thomas: In the time that I got to spend at Northern Trust, there were several things that were really important to me. One was just building great businesses. I love the business of investment management.

[Another was] my commitment to sustainable investing. Many people probably under-appreciate that Northern Trust Asset Management is a global leader in that space, and in the five years that I led as president and chief executive, it was one of our strategic priorities. So there is a fundamental business and philosophical belief that I have around sustainable and socially responsible investing and the opportunity private businesses have to be great forces for good.

[I am also committed] to diversity, equity and inclusion. When I joined the asset management executive team at Northern Trust back in 2008, … I happened to be the only person of color on the team. We had no women.

But we evolved to the point, at the end of my tenure as president, where two-thirds of our team was either women or ethnically diverse.

Can you talk a little more about that lower-middle-market gap that you identified? Why are the businesses that fit this bill having trouble getting capital?

If you look at lower-middle market companies—companies with roughly $10 million to $100 million in revenue, established business—they're having a harder and harder time getting access to capital because banks—the large providers historically to the middle markets—have pulled away for a variety of reasons, including regulatory reasons. And many large players in the private market space, the private equity and private credit firms, have great businesses, but they're focused on that higher-end. So there is significant untapped opportunity that continues to grow.

Demographics in our society are changing [with] the formation of businesses among women and ethnically diverse entrepreneurs. But if you think about how poor capital markets have been at providing access to capital for these businesses, therein lies another, some would say, problem, but I would say, opportunity.

Why are big banks and private market players pulling away from this segment of the market?

From a strategic standpoint, for some institutions on the banking side, some of the focus has shifted to "fee-based" businesses as opposed to "transactional-oriented" businesses to give more stability in their earnings stream.

Can you talk about the typical financing structure of Copia's deals?

One of our focuses in terms of financing is that we want to provide debt and equity capital solutions for lower-middle-market companies. We have a preference to provide solutions that are either less dilutive or not dilutive. We're talking about dilution relative to the existing equity owners. Those equity owners could be the actual entrepreneurs or founders who own the company or the private equity firms or sponsors who also have an ownership interest in the potential portfolio company.

Naturally, the most non-dilutive structure that you could offer is some sort of credit solution. Credit solutions can range. They can come in the form of a senior secured credit facility, a second lean, subordinated or mezzanine debt, or a hybrid solution. This hybrid solution could be what we would refer to as "unitranche," so part of it could be senior and part could be subordinated.

Another thing: There are a number of established private investing firms that do control ownership interest. So we would have a bias toward finding opportunities where we can provide partnership capital, so looking at making minority equity interest in companies.

Why did you decide to pursue this strategy?

We have a "four-C" framework, which means that we're going to be more than just a provider of financial capital. The first C is capital, both financial and social capital. How do we help companies that we're investing in get access to the right kind of capital and a tailored capital solution that fits their capital structure? How do we increase their relationship capital through our executive network and relationships?

The second [C] is counsel. Many companies on the lower end of the middle market are under-advised.

The third thing is colleagues. Sometimes we're advising businesses, and they have a great strategy, a great core leadership team, but they may be one or two functional leaders away from being able to scale their business.

The fourth is clients. How do you start with a business's client base and help them expand that to grow and scale the business?

We don't necessarily have to be in a control equity position to be able to do that. We want to be able to partner with businesses that are truly scalable but also are mission-oriented. So it's a philosophical thing.

The other thing I would point out is that when you look at women- and diverse-owned businesses, the owners tend to have materially less ownership equity interests in their businesses than their white male counterparts.

I want you to think about that. Here you have great people who decided to go out and take entrepreneurial risk, but they're not reaping the maximum benefits because they have a lot less interest in that business.

Our preference for nondilutive strategies also allows us to help create more wealth generation among women and communities of color.

On that thread, can you talk about how you're incorporating impact investing into your investment thesis?

Absolutely. Increasingly, there are more and more investors that are saying "yes, we want an attractive return on our investment. But we actually care beyond just the investment return."

We've partnered with Morningstar Sustinanalytics to develop a proprietary framework around social impact themes: diversity and inclusion, healthcare and wellness, workforce development, equal opportunity, and quality education. (Editor's note: PitchBook is a Morningstar company.)

As we're looking and sourcing investment opportunities, we're also trying to determine if the prospective companies have the opportunity to materially drive impact in one or more of these areas. For instance, there's a company in our pipeline right now that has a unique opportunity to drive impact in the area that we refer to as workforce development. By virtue of not only their business plan or strategy, but also their mission, they're creating attractive-paying jobs in areas where there's a high propensity to employ ethnically diverse individuals. They're increasing representation in terms of the diversity of the workforce in an attractive industry and providing attractive earnings. They're providing job security and stability.

All of those things I mentioned can be codified and measured as [key performance indicators]. If we were to invest in that company, over the life of the investment, we could say "here’s how the company over time has created and driven impact along that theme of workforce development."

Broadening our conversation a bit, can you talk about your outlook for the private markets in 2023? What are your expectations for investor interest in private equity and allocations to the space next year?

Let me start with my longer-term outlook and then give you some commentary on the shorter-term.

The private markets have garnered a share from the public markets in terms of allocation of investment dollars, both by institutional investors and, to a lesser degree, by high-net-worth [individuals]. If we look over the next five years, I expect that trend to continue.

I think there's going to be particularly strong flows into areas that include private credit and real assets. And the emerging parts of the private investing market—areas like digital assets—will be positive beneficiaries from the secular trend that is favoring the private market.

In the near term, the fundraising environment was so robust that we've felt a bit of cooling in that. Part of it has to do with the fact that we've seen a significant trade-off in equity markets, particularly in the growth-oriented parts of the equity markets. If you look historically, that has usually been a leading indicator of people looking to shift or mark down valuations in the private markets. In anticipation of that, people are going to draw back a bit.

There is also a question mark as to where we are in the economic cycle. The lack of a sense of comfort or clarity around that, particularly as you think about exposing yourself to potential things that have credit risk, you have some pulling back or some hesitancy, especially because there are many institutional investors that have already made commitments to private capital—private equity—that they have to honor. They're already allocated, so if they shift their allocations, they wind up on the margins, a little over-allocated.

I think that's natural. It doesn't put me off in any way. As you move through any economic cycle, you would expect some of that reaction or adjustment in the market.