Debt Financing with a ThinEquity Capital Structure
June 20, 2014Presented by Opus Connect
Moderator:Britt Terrell, Backbone Capital Advisors
Panelists:David Ellis, GemCap Solutions
Stewart Kim, PGP CapitalJR Matthews, Tregaron CapitalJohn Stuart, Full Circle Capital
Sponsored by:
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• Founded by Lou Sokolovskiy
– Managing Partner of Genero Capital Partners
• Chapters: LA, New York, San Francisco, Chicago, Orange County
– Monthly seminars
– Specialty: webinars, Deal Connect “speed-networking”
• Membership by invitation only
– Only accomplished senior executives, vetted by selection committee
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Britt TerrellFounder & Managing Director
Backbone Capital was established in 2011 byBritt Terrell, a 25-year veteran in the middlemarket corporate finance industry. Britt hasbeen underwriting, structuring, closing andmanaging credit portfolios since the mid-80s,with a focus on middle market acquisitions andcorporate debt restructuring over the lastdecade. He has worked on both the borrowerand lender sides, working mainly in the middlemarket debt financing arena with transactionsranging from $10 million to $ 50 million.
In 2001, Britt joined the Wells Fargo FoothillLos Angeles headquarters to manage itsUnderwriting Department, representingapproximately $1 billion in commitments. In2002, Britt joined the Gores Group in LosAngeles to arrange and manage all acquisitiondebt financings and recapitalizations for itsPrivate Equity Fund. During his 9 year tenure atGores, Britt led and closed approximately $2billion in debt financing.
Britt is a member of the Association forCorporate Growth (ACG), TurnaroundManagement Association, Opus Connect and AllCities Group, and has participated in multiplediscussion panels at the Commercial FinanceAssociation (CFA) conferences. He holds a BADegree in Business Economics from Universityof California, Santa Barbara, with an emphasisin Accounting.
(818) 508-8462 www.backbonecap.com
Backbone Capital Advisors is a full-service professional financing arranger, providing traditional and non-traditional capital sourcing, with complete execution, for middle market businesses that require debt financing and other capital solutions.
Maximum Financing at Optimum Terms — We work closely with each borrower and sponsor to procure maximum financing at optimum terms, while assisting, advising and driving each step of the process from inception to funding.
Corporate Financings — We accommodate transactions for leveraged acquisitions, leveraged recapitalizations, financing for growth and shareholder liquidity and refinancing existing debt.
Transaction Types — We have expertise in all types of debt, including asset-based, senior cash flow, 2nd lien, mezzanine, unitranche, and other solutions across the capital structure of the borrower.
Who We Work With — We support private equity firms, independent sponsors, professionals and direct operating companies to achieve all outsourced financing solutions.
Established Relationships — We have strong relationships with more than 200 banks, finance companies, and debt and private equity funds in all areas of financing, including special situations for more challenging capital sourcing.
Local to Global — We have access to both domestic and international lenders for large and small deals, with average deals ranging from $5 million to $50 million. And, we can easily accommodate deals outside this range.
Professional Execution — We combine service, flexibility and extensive knowledge of the marketplace to ensure that our clients’ needs are met with the highest level of expertise.
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Target Market
GemCap: Asset Based Lender specializing in underserved niche market
• GemCap was launched June 2008 to fill the underservedniche within the asset-based lending community for seniorcommercial loans ranging between $0.5 million and $ 10million.
• Target clients are lower middle market companies whoseworking capital needs are no longer being met by their localbanks.
• 12 - 24 month typical loan duration.
• Collateral typically includes receivables, equipment andinventory; occasionally includes intellectual property and realestate.
• Inventory & equipment loans based on percentage of assetliquidation value; receivables competitive with market.
• Personal and validity guarantees are common.
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Typical Clients include:
Import / Export
Small Business Owners
Rapid Growth Companies
Start-Ups
Inventory Greater Than Receivables
Bridge Loans
Low Cashflow; No Cashflow
Niche Market
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• David Ellis is Co-President and a co-founder of GemCap. As a leadingexpert in the liquidation and asset appraisal industries, Mr. Ellis applieshis experience and connections throughout all facets of GemCap.
• Through 2006, David Ellis served as President of Buxbaum Group andcompiled 20 years of experience in the liquidation business. Hecompleted 13 years of experience with Buxbaum Group, having joinedthe company in 1988, and following a three-year hiatus in 1991,rejoined the company during 1994. Under Mr. Ellis’s direction,Buxbaum Group grew from a five person liquidation firm to a diverseinternational company with over 1,000 employees. Areas of focus wereasset disposition, asset appraisal, asset-based lending, turnaroundmanagement, and distressed equity.
• During his 1991-1994 hiatus from Buxbaum Group, Mr. Ellis served asa member of H.J. Heinz Corporation's consulting team. At Heinz, Mr.Ellis implemented the structure and operational procedures for a globalfood segment's acquisition program and their marketing, production,and distribution functions.
• David Ellis has served on the board of directors for Talon International(TALN) since 2010.
• David is active with the Young President’s Organization (YPO),Turnaround Management Association, and Commercial FinanceAssociation. Mr. Ellis received a 1984 Bachelor of Arts degree fromTexas A&M University.
David Ellis
24955 Pacific Coast Highway, Suite A202
Malibu, California 90265
T: 310.593.9074
David Ellis – Co-President
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Executive Summary
Snapshot of Firm
Headquarters: Los Angeles
Established: 2003
Products: M&A Advisory
Private Placements
Fairness Opinions
Target Niches: Ethnic-owned Businesses
Cross-border Asia
Key Industries: Media
Technology
Financial Services
Consumer
Strategic Investors: East West BankCashCall, Inc.
Latest Transaction: Placement agent for Creative
Artists Agency Ventures LP $20m fund closing (March 2014)
Company Website:http://www.pgpcapital.com
Founder / Managing Partner Bio
Stewart Kim:
Over 25 years of experience in the financial services industry with the last 15 years spent as CEO of PGP(investment banking) and Pacific Gemini Partners (asset management); former M&A banker at Merrill Lynch & Co. from 1988 - 1995
Current Mandates
M&A advisory for major Asia-based smartphone game developer. Potential JV in U.S. with leading media company
Sale of privately-held business services company
Equity private placement for leading distributed database software provider
Debt private placement to finance acquisition by publicly-traded mobile solutions provider. Fairness opinion requested as well
Equity private placement for leading audio on-demand platform provider looking to raise equity
Equity private placement for leading global producer of all-natural, zero-calorie sweetener alternative to stevia
PGP Summary
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have formed a
$440,000,000
Joint Venture
We acted as advisor to EarthLink, Inc.
in negotiating this joint venture
&
have entered into a strategic
relationship and formed
Nicklaus Companies, LLC
We acted as exclusive financial advisor
to Golden Bear International, Inc.
&
Golden Bear International, Inc.
Executive Summary
has acquired
We acted as financial advisor to
MultiCultural Radio Broadcasting, Inc.
in both negotiating the acquisition and
obtaining financing for the transaction
Has merged with
We acted as exclusive M&A advisor
to Nimble Commerce Inc., a portfolio
company of SK Telecom, the largest
wireless network operator in Korea, in
originating and negotiating this
transaction
Recapitalization
We acted as exclusive financial
advisor to Broadway Financial
Corporation and assisted with
arranging the private placement as
well as negotiating terms of the
recapitalization with the U.S Treasury
and other security holders
$12,025,000
Common Stock
We acted as financial advisor
to Saehan Bancorp and assisted with
arranging the placement
Has merged with
We acted as M&A advisor to
Salient Stills, Inc. in
consummating this transaction
$40,000,000
Debt Facility
We acted as financial advisor
to CashCall, Inc.
and arranged this facility
Selected Transactions
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About TregaronInvesting out of a $65 million fund closed in 2011, Tregaron Capital is a Palo Alto-based private equity firm that specializes in investing in small to mid-sized companies with annual EBITDA of $1 to $5 million. We focus on providing capital for growth and owner liquidity, as well as strategic support to achieve the next level of success.
Tregaron is designed to provide senior attention to each opportunity and portfolio company. Our senior partners bring substantial skills, experience, and energy to each situation, enabling fast and confident decision making and meaningful support in building the business.
Industries of Interest• Technology-Enabled Business Services
• Nutraceuticals
• Information Services
• Commercial Landscape Maintenance
• For-Profit-Education
• Environmental Services
Transaction Types
• Control Equity
• Mezzanine Debt
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JR Matthews
JR has been performing successful buyouts for nearly 20 years, as both an executive and an investor. While still in his twenties, he led the buy-out and served as CEO of his family’s wholesale, retail and real estate companies. Over 10 years, he grew the companies to over $80 million in revenue and 300 employees and successfully exited through a strategic sale.
As an investor, JR has focused on special situation and growth opportunities. Before founding Tregaron, he invested actively as both a venture capital and private equity investor focusing on growth and special situation opportunities.
Matthews received a BSE in Electrical Engineering from Duke University with Phi Beta Kappa, summa cum laude honors and Distinction and an MBA from Harvard Business School. He is on the Board of Visitors of The Pratt School of Engineering at Duke University and is a past Board Member of Leadership Public Schools a charter school network serving diverse students in Richmond, Oakland, Hayward, and San Jose.
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Full Circle Capital Corporation
Profile
• Publicly traded business development company; ticker: NASDAQ GM – “FULL”
• Closing price on June 18, 2014: $7.96 per share
• Shares Outstanding: 11.4 million; $88.1 million equity market capitalization
• Annualized Distribution Yield: 10.4% (based on monthly distribution rate of $0.067 cents per share)
Investment Strategy
• Primarily provide first lien senior secured loans and stretch senior secured loan solutions to lower middle market companies in a diverse range of industries
• Lend to companies with both cash flow for debt service and underlying assets as collateral
• Source investments through direct origination platform focused on lower middle market and through purchases in secondary market
Investment / Loan Profile
• Loan sizes: $3 million to $10 million or more
• Focus on companies with $2 million to $10 million of EBITDA
• Term and Revolving Line of Credit facilities
• Use of funds: growth capital, acquisitions, refinancings, recapitalizations
Since Inception in 2005
• Executed over $350 million in senior secured loans to 67 smaller and lower middle market companies
Full Circle Capital Overview
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John E. StuartCo-Chief Executive Officer, Chairman
Gregg J. FeltonCo-Chief Executive Officer, President
Full Circle Advisors, LLC: Managing Member
Full Circle Funding, LP: Managing Partner
Prudential Securities: Managing Director (Investment Banking)
Oppenheimer & Co. Inc.: Vice President (Investment Banking)
Titan Outdoor Holdings, Inc.: Co-Founder, President
25+ years of experience
Full Circle Advisors, LLC: Managing Member and Chief Investment Officer
Goldman Sachs: Partner, Managing Director, Head of Global Credit - GSAM
Goldman Sachs Liberty Harbor: Founder, Chief Investment Officer
Amaranth Advisors: Senior Portfolio Manager, Head of Global Corporate Credit
20+ years of experience
914-220-6250 ● [email protected] 914-220-6280 ● [email protected]
Patrick Stone
Associate
Origination Officer
914-220-6282
Michael Gervais
Managing Director
Healthcare Strategies
914-220-6285
Brian Neilinger
Managing Director
Real Estate Strategies
914-220-6292
Full Circle Capital Team
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Provides borrowers with a more efficient and desirable solution than a senior bank linecombined with a separate second lien or mezzanine loan obtained from another source
• Stretch senior loans advance more againstborrower’s assets and cash flow and staywithin Full Circle’s preferred 2:1 (40% to60% LTV) collateral coverage parameters
Benefits to Borrower
• One-stop financing solution
• Speed and certainty to close
• Flexible terms and structures
Traditional Loan Structure Stretch Senior Loan Structure
35%
15%
20%
30%
40% to 60%
10% - 20%
30%
LTV LTV
Benefits• Higher Advance on Assets
and Cash Flow• Single Set of Documents
(No Intercreditor Agreement Necessary)
• Ability to Close in Compressed Timeframe
The above illustrations are based upon management’s experience and current market conditions. Be advised that these illustrations do not represent the capitalstructure of any particular borrower, and figures included therein could change significantly as a result of future market conditions.
Senior and Stretch Senior Secured Lending
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Overview
• This panel is focused on higher yielding debt/equity investments in the lower middle market
• These companies tend to have more “storied profiles and/or thinner equity capital structures
• In the more “operationally challenged and undercapitalized” companies, Asset Based Lending is the main financing source, or dilutive equity structures
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Acquisition Financing – Independent Sponsor:
• Supporting the Independent, Pledge Fund (backed by HNW) sponsor.
• This usually translates into:
i. Seller structure (seller note, contingent earnout, rollover equity, etc…)
ii. lower cash equity invested by buyer
• Is this a Capital Structure that lenders can get comfortable with, and how?
• Minimum Equity cash investment (%) required ?
• In exchange for less cash invested by buyer, what does your fund look for in terms of structure, collateral, yield, etc …
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Acquisition Financing – Opco buyer
• With operating company (no sponsor) as the buyer acquiring target, using implied rollover equity of buyer with less new cash equity.
• Is this a Capital Structure a lender/investor can get comfortable with?
• Minimum Equity cash investment (%) required ?
• In exchange for less cash invested by buyer, what does your fund look for in terms of structure, yield…
• Equity Warrants or co-invest, when does your firm get them & approximately what %?
• When does bigger minority equity (Preferred) structure begin, and into control equity?
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Investment Banking in lower Middle Market
Raising Equity
• Buy-Out vs. Growth Capital
• Management/Ownership – Stay or Go?
• Size – Minimums Shift Ever Downward
• Investors- Private Equity Fund- Family Office / Multi-Family Office- Entrepreneur / Seasoned Executive- Competitor
• Sourcing- Traditional Bankers- Alternatives
How does your firm compete in a competitive financing process?
What are the key elements of a deal structure you are looking for?
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What are some of the nuances in the “inefficient” lower end
(EBITDA <$4M)?
• Seemingly less competitive?
• Quality of information, Diligence requirements
• Management, internal controls
• Etc…
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As an investment banker in a sell-side scenario, when you get bids from more
thinly capitalized prospect buyers:
• What are you looking for?
• What are your concerns?
• How do you get comfortable when down-selecting bidders?
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Summary
• Financings are able to get “done” under lower middle market and challenging circumstances, but it’s not cheap and there are controls, restrictions and lender remedies
• Structures can be demanding and can be equity-oriented, but appropriate balance of risk/reward, especially in lower middle market finance with thinner capital structures
Thank you!
• You will receive:– Survey about today’s webinar
– Contact information for our panel
– Link to a recording of today’s webinar
• Questions? Contact Nick Zobel ([email protected])– Qualified potential members are invited to attend TWO Opus
Connect chapter meetings free of charge.
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