Succeeding with private equity spin outs: A conversation with Eric Zoller, Co-founder and CEO of Taproot Capital

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Jonathan Goldstein: I'm Jonathan Goldstein, a partner in Heidrick & Struggles' New York office, and I'm the regional managing partner of the Private Capital Practice in the Americas. In today's podcast episode, I'm speaking with Eric Zoller, chief executive officer and co-founder of Taproot Capital, an alternative asset management firm that focuses on seeding first-time funds and partnering with emerging and growing private equity firms to help and launch, them, institutionalize, and scale their platforms.

Eric, who has been a friend and a client for many years, co-founded Taproot in January 2025. Prior to that, he founded SixPoint Partners, a global placement agency, which he sold to PNC Bank in 2019. PNC later merged it with Harris Williams, after which Eric joined the combined firm's leadership team as their head of private advisory.

Early in his career, Eric was an investment banker at Merrill Lynch, and before that, he was an attorney at White & Case, focusing on sponsor-backed M&A. Welcome. 

Eric Zoller: Thanks for having me. 

Jonathan Goldstein: Our pleasure. So could you talk a little bit about the growth of the emerging manager sector? What does that imply about leadership trends in private equity overall?

Eric Zoller: So I think that when we talk about private equity today and the impact and constraints that it creates around talent, but also the motivations that it creates for first-time fund managers to go and spin out, you really have to think about, you know, where was the broader private equity market ten years ago and where is it today.

So if you think about ten years ago, private equity funds were launching first-time funds, growing kind of more [of[ a monoline strategy. They could have a particular sector focus or even a generalist focus, and they're growing from fund one to two to three and so on, with generally linear growth, in some cases non-linear growth over time.

Over the last five or ten years, what we've seen also with the onset of the GP stake market is that a lot of these funds have converted from what was thought of as a fund business to really building enterprises, platforms, businesses that really have terminal value in them. And as GPs recognize that they have the ability to generate terminal value, they really start to think about how they grow their businesses beyond just a monoline product.

A lot of firms have launched credit strategies, all different kinds of adjacencies, in some cases, a small market version of what they're already doing as these monoline strategies have grown in size and perhaps abandoned where they came from. And with that means there were changes in the complexion of the firm, because if you're gonna start managing multiple billions of dollars across a variety of different kinds of products, you really have to have a different set of controls in place, a different kind of investment process in place. There could be professionals that are sitting on multiple investment committees. And so with that, what you saw is the introduction of greater bureaucracy, greater competition for the deployment of dollars and attention at the investment committee level.

And so now if I bring it back to your question of how has this impacted leadership and talent within the emerging manager landscape, really what we've seen is the growth of these private equity firms, in some cases for great reasons.

So on the one hand, you're seeing entrepreneurs, partners at these firms who are motivated out of respect and admiration for the firms they were a part of and feel as though it is now their opportunity to go and replicate, in many ways, what they saw at the firm that they were working at and what was best implemented. On the other hand, that bureaucracy that I just talked about and the difficulty of getting attention, whether it's in deployment or otherwise, also created a second motivation for a lot of these partners, which was a motivation to spin out because of what they viewed as a burden or blocking their ability to advance their careers in the way that they want

Jonathan Goldstein: I'd like to talk a little bit about how the process works with Taproot Capital, and what do you bring to the table besides just capital? 

Eric Zoller: So, this really sits at the heart of why we formed our business. When my partners and I decided to spin out of Harris Williams, we took a look at the market and recognized that there really is a gap in the market with respect to emerging managers, spin outs, first-time funds from two perspectives.

The two problems that we recognized is when you are spinning out, there is the challenge of certainty. Can you actually hit your target? Are you gonna be able to raise the capital you need? Because if not, if you're out there targeting a seven hundred and fifty million dollar fund or a billion dollar fund, and you end up sizing your team to that level of scale, and you only hit half of your goal, whatever that goal might be, you're gonna have an issue with retaining talent, let alone attracting that talent.

So one problem we are looking to solve is the certainty of capital, and then the second one is the timing of it. Timing is also a very important component because a lot of GPs don't wanna leave a very comfortable environment in which they're in and move into an environment that not only is uncertain about their goal, but could take them two, in some cases, three years from spinning out to actually having a final close.

Firms that are able to close more capital more quickly, I'm talking about spin-out first-time funds, develop a halo which then has a knock-on effect for when they raise their second fund and their third fund because they're thought of as that group that was able to get through the market quickly. So those are the two problems we sought to solve.

The other part of your question was, well, how do we solve it? And for us specifically, and I'll try to go through this, you know, without too much detail within each vertical, but we have five verticals that are mapped to what we see are the two problems that I identified. First is capital. Now, any sponsor is gonna tell you capital by itself isn't differentiating necessarily, or at least it's not thought of.

But the ability to bring capital at scale in a foundational close, what we define as a pre-first close, is materially impactful.

So that's one. Two, also within the capital rubric, we're able to provide working capital, and that also we believe is very, very important for the manager because when we sit in front of a manager and we start talking about their capital needs, we try to remind them that your capital needs are not just the needs you need for hiring your team, it's also the needs of capital you have for your GP commit, having some incremental working capital at the outset to help you identify and really bring on and secure the right team is important.

So capital's the first vertical. The second vertical is what we call the corporate solution, and this is hugely important. 

And one of the important things within the corporate solution is, at least for Taproot, when you compare us to our peers, I think almost all of our peers will go out and say, "You know, we'll introduce you to the best fund administrator, lawyer, accounting firm, all the different vendors."

What we believe differentiates what we do and also we think is important to simply do in the market is we take over that function for the GP. So we don't own it long-term, but we build it, turnkey it, really allow the GP to focus on building his or her team and raising their fund, doing deals without worrying about the ability to stand up the firm, and our goal is to be able to take an individual and stand up their firm within 60 days.

Within that, we also have what we call our talent tree, which is our group of operators, and so we can try to bring some real-world, real-life examples and support to these GPs as they're looking to do what it is that is required of a first-time fund. So we bring in professional LPs, GPs, individuals whose sole job it is to focus on operational due diligence so that these GPs can understand what that process is like when they go out and raise the balance of the capital for their fund.

So I mentioned five verticals. Capital and operations are two, and then the others are fundraising, and really kind of having this integrated approach where we can combine capital with capital raising. 

And then lastly, we also provide post-close all of the dedicated investor relation services. So again, there's a lot in there, but that's really the story when we're sitting in front of a GP who says, "Well, it all sounds attractive. What do I have to give up for it? What's the cost?" The more services we can provide, the more value-added we are, we believe any seeder is, the more that justifies the cost, as they call it, or the partnership share.

Jonathan Goldstein: Could you talk a little bit about what are the important roles to fill right away, and why are those the important roles? 

Eric Zoller: When a GP is just spinning out and starting anew, there's a thousand things coming at them.

The most important hire in our view is really the chief financial officer. And when you think about the role of the CFO over the last decade, it has evolved with many firms to being somebody that's completing functions well beyond just financial planning and analysis.

Today, the CFO is head of HR. That individual tends to be head of technology, compliance, cyber, onboarding professionals, which again is HR. And if you really do it right, over time with many firms, that CFO becomes a force multiplier really on the investment side, being able to provide additional support and diligence either at the front end or at the back end when you're exiting a business.

So I think that's the most important hire. You know, I didn't mention when you're a founding partner that of course you have to identify who your next partner's gonna be and what the next partner is going to be–

Jonathan Goldstein: Their next investment partner. 

Eric Zoller: Next investment partner, or the rest of the investment team. 

Jonathan Goldstein: Right. 

Eric Zoller: But I view that in many ways as table stakes. If you don't have the right team and overlap, the DNA, you don't get to the next step. So once you have that, you need the CFO, and then, you know, when you talk about roles that could potentially be deferred until later, I talked about IR, it's a crucial role. But for a new fund, it's not a role that they necessarily need upfront, you know, in particular with–

Jonathan Goldstein: With your help, with Taproot's help.

Eric Zoller: In particular with Taproot, you don't need it. But even without that, it's not something that we typically see a first time fund GP have at all, and it's typically a role that gets filled during fund three or fund four. 

Jonathan Goldstein: Right. Right. What's the most effective way for an emerging manager to build their leadership team? 

Eric Zoller: So I think when an emerging manager is growing, there are a couple different things that a manager's gonna wanna take into account.

First of all, we have this mantra of identify, train, and retain. And so the most important thing is, first of all, how do you go about identifying what your needs are? I'll talk about that more a little bit later, but one of the ways we try to work with the GP is to have them build their organizational chart for fund three today, right?

Again, the question is: How do they go about building the right leadership team? Well, you can't deviate from a plan unless you have one, so it's really about building a plan first and having this conversation with the GP that if you can wave your magic wand, if you were not resource-constrained, if you're now raising fund three that perhaps is a multi-billion-dollar fund, what would the team look like?

And then working backwards, how much of that fund three composition could you pull forward into fund one? What's really needed and not? There's certain roles that you'd love to have, but in theory you can't afford, and there's certain roles where you say, "I just don't need them today, but I will need them when I have fund three."

And so partnering up with a seeder, one of the things we try to do is change the complexion of the firms we partner with to look like a fund one-and-a-half or a fund two out of the gate by pulling forward some of the resources from that organizational chart that we work with them on. So that's a big part of it.

And then from a training and retaining perspective, it's all about creating alignment. Oftentimes, these GPs have left other firms because of the misalignment that might exist. I talked about some of the motivations, but another motivation is just an inability to participate in what they believe is the true upside of the firm and the contributions they've made to that firm.

Jonathan Goldstein: Right. One of the things that we've spoken about is fundraising, and fundraising right now is particularly challenging because of all the headwinds we're seeing in the market. What does Taproot do to meet those challenges? 

Eric Zoller: So if we look back over the last six years, you and I have both been in the market for a long time, twenty-five years on my part, maybe a couple years more on yours.

And I think we could agree we've seen more change in the market in the last five years than we've seen in the last twenty-five years. Product evolution, LP evolution, all of those different things. And likewise, we've had three different market environments in this short period of time, just the last five or six years.

Really, the environment we're seeing now that is driving the feeling of a better environment is really money being moved from one pocket into the other. So those GPs that are underperforming for any number of reasons, LPs are re-under-writing every manager, even existing relationships, just as hard as a new one, and then they are borrowing from those existing relationships that they are either not re-upping into or re-upping into less and using that to drive allocations for new managers.

So that, as a background, means that we are still living in a somewhat constrained environment, even though it's somewhat improved. From a seeders perspective, it's a Goldilocks environment. It's still difficult enough that our phone will ring off the hook for managers that wanna spin out, but it's not so difficult that if we put the money out, the funds that we get back can't get raised.

And the role that we play, we put it into two different components. There's the soft power, hard power components to it. From a soft power perspective, in these tougher environments where LPs have lots of choices, funds don't move as quickly, so they could take their time to do the work. We serve as that first LP reference for the GP, which means we validated their track record, oftentimes where there is no formal attribution, and so we help them with that attribution.

And then from the hard power perspective, I talked about the large check that we could write. But in addition to that, we are able to step in and provide co-invest capital and bridge capital, bridge financing early on, so it could really allow these GPs to close on more capital, do more deals earlier.

And as we both know, every fund closes, every new deal begets the next close, begets the next deal. 

Jonathan Goldstein: Yeah. Becomes a virtuous circle. So what are the challenges now to spinning out, given all of this, given everything that we've discussed, and what do leaders need to have in order to meet these challenges?

Eric Zoller: So we think about things in terms of the challenges as there's the challenge of exit, there's the challenge around the restrictive covenants, right? And those are two different things. And then there's also the challenge of building a team from scratch with an idea on paper. So on the exit front, one of the most important things we try to focus our GPs on when they're walking into the room to announce, A, be ready to have that conversation.

Be clear that you are resigning. So you really need to have the conviction, and when you go in, you've gotta have a proper plan, and this is one of the things we try to assess.

Are these individuals really ready to do it, or are they viewing this as just an alternative to their job? Are they looking to get bids back? Right. So the exit timing, exit messaging is important. Now, when you get deeper into the message, you wanna leave on the best of terms, and so you really wanna make sure that you're walking into that GP and you're saying to your managing partner, "I've been a part of the firm for a long time. I've helped contribute to the growth of the firm. I've loved what you've built, what we've built together, but I feel it's my time, and I wanna do this, and I wanna do it with your support, and I wanna do it on your timeline, and I wanna do it with your input on the messaging, and I wanna do it with your blessing."

Now, most of the time, having that sort of adult conversation will work even through any restrictive covenants. But you've got to be prepared that the conversation could go in any direction. You’ve got to be prepared that you might be asked to walk out the door that day. But that's how we try to coach our GPs on messaging, on exit, on restrictive covenants.

But really understanding what your non-compete and non-solicit is. That non-solicit could impact how you build the team, and that non-solicit could also impact how many LPs you talk to.

And then again, finally is, is the team dynamic itself. And this is really about leadership. You know, when I started my first company, Six Point Partners, which I later sold to PNC, I was 30 years old when I started. My wife was pregnant, I just bought a house, I quit my job. There was no alternative. I was going to do this, and I had to convince people that were smarter and more experienced than I was. I was 30 years old in an industry that I had no prior experience in to come work with me and for me in order to build the business that eventually I built together with my partners. And so when I talk about leadership, we meet a lot of guys, both you and I, that'll tell us from now until the end of times that they could build their own firm and accomplish all the things they say they can accomplish, if only everything was laid out perfectly for them.

Jonathan Goldstein: Right.

Eric Zoller: And the reality is that's not how it works.

Jonathan Goldstein: So how do you assess for that? That's the question, because everybody you meet with has a good track record is smart, graduated from the right schools, has great references. But how do you test for that leadership ability or that entrepreneurial gene?

Eric Zoller: It's really through these cadence calls that we have with the GP, where we are asking questions like, as an example, in order to get a feel for what they are able to do in building a business, we'll ask them, "You know what? Go back, build that org chart that we talked about."

We don't build it for them. We say, "Go out and build an org chart. Show me what the firm looks like." We'll also ask them to go out and build a budget, and why are we asking them to build a budget? We wanna see how they think about comp. We also ask them, "Show us how you're gonna allocate carry," for the reasons you might expect.

We wanna see how they think about alignment. "Show us how you're gonna allocate management company stake." Again, another component around alignment. So as a threshold matter, as a leader, do you have a vision for distributed leadership where there's multiple people on the team, everyone's doing what they need to do, and you don't necessarily have to be the founder that tells them every single day what they're doing?

Or are you one of these very, like, tightly wound prospective founders and leaders where everything's got torun through you? Not to say that there aren't firms who haven't succeeded doing it, just not the kind of leadership model we're looking for.

Jonathan Goldstein: Right.

Eric Zoller: So when they go around and build that org chart and that budget, we can assess how they think about distributed leadership, functional roles, and we can also take a look at how they think about alignment.

Jonathan Goldstein: Right. Are there red flags? When you're interviewing and assessing these people and having multiple meetings because this is a partnership and you want to develop that partnership, are there things that you have heard or seen along the way that you know is immediately a no? Setting aside track records, setting aside bad references, something inherent about the person where you think this person's not gonna be a good leader.

Eric Zoller: So, look, the alignment piece is always kind of the easiest red flag in terms of just how they think about the sharing of economics.

Jonathan Goldstein: Yeah.

Eric Zoller: I would say likewise, when we think about their ability to actually attract talent.

It almost answers the question for itself. It's not necessarily a red flag. It's just they never get out of the starting gate. There are professionals that we've come across, and when we talk to them about what a team looks like, they're like a deer in headlights. They can't get through that next step of, how do I recruit somebody against that vision I talked about, which is off of a piece of paper?

They just can't convince people to leave their jobs to join them. So again, maybe not a direct red flag, but something that is clearly a test when we talk to them about, you know, going out and actually recruiting somebody. And then also just, you know, seeing how they operate. I mean, some of it is, you're right, it's not the track record per se in terms of just the net result.

But it is, like, what was the role you played within those deals? You know, how much of this was a momentum investment? How much of it was actually replicable versus deals that, you know, this one I bought right, and this one we caught the tailwind right. How much of what you do is really spotting the thesis, identifying the company, which is great.

Those are two important things. Winning the deal, sourcing it—a very important thing—but then how much of that is actually then being handed off to the operating team to execute? For us, a partner who sources deals but then hands it off, even if they're handing off fifty, sixty, seventy percent to the operator, makes it difficult for us to assess.

For us, that becomes a red flag in terms of who owns the value creation.

Jonathan Goldstein: Yeah. Where does the market go in the next five years, and how is Taproot going to grow, evolve to meet the changes in the market?

Eric Zoller: Because you don't have multiple arbitrage anymore.

Jonathan Goldstein: Right.

Eric Zoller: And so what does that mean? That means growing the top line. It also means improving margins. And when you think about those two things, top line and margin expansion are related. I think from go-to-market strategy to pricing strategies, to lean manufacturing, to all different types of operational improvements that you can have. So the short answer is, I think there's just this huge drive towards insourcing and expanding operational capabilities. You see a lot of firms that have been leaders in that over time. From an emerging manager perspective, it's actually a challenge because how do you compete from a resource perspective to really build and grow all these capabilities in-house when your larger peers have it already?

So I really think it's about partnering with a seeder who can help you, again, pull forward some of those capabilities. To do that, I'll give you just one other example. I was on the phone with a manager, and I was assessing that when you talk about red flags and green flags. How do you think about building out your operating bench? And he said, "One of the things that I'm now very focused on is making sure I have an AI systems integrator." We could both agree three years ago, nobody was talking about an AI systems integrator within their operating team. So staying ahead of the curve, looking around the corner for what's that next capability is key.

Jonathan Goldstein: Eric, this has been a great conversation. We hope to have you back many times. I think this is the start of something beautiful.

Eric Zoller: And Jonathan Goldstein, thank you for having me here for a great conversation, and [I]look forward to many more discussions and our continued work together.

Jonathan Goldstein: Likewise. Our pleasure.

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About the interviewer

Jonathan Goldstein (jgoldstein@heidrick.com) is the regional managing partner of the Private Equity Practice in the Americas; he is based in the New York office.