SBIA Update 1st Issue
SBIA is pleased to announce SBIA Update, a new way to stay up-to-date on the latest industry news, SBIA member information, and policies that impact the lower middle market. Below are a few articles featured in this edition of SBIA Update. For the full news update, please refer to the SBIA Update email in your inbox. If you want to receive the SBIA Update, please sign up.
Legislative & Regulatory Update
SBIC FUNDING PROCESS: New Trustee Fee on Regular Debentures and Additional Process Changes
Pursuant to its statutory authority, the SBA will levy a new fee on leverage draws made by SBICs on and after October 1, 2019. The new fee (“Trustee Fee”) is a one-time charge of 10 basis points (0.01%) withheld from the proceeds of leverage draws. Early Stage, LMI, and Energy Savings Debentures are exempt from the Trustee Fee.
The SBA also announced that it has replaced fax numbers with email addresses in its Approval Notices under the leverage draw process effective August 14, 2019. SBICs will now email executed Approval Notices to SBA’s Trustee, Bank of New York Mellon (BNYM). BNYM will also now send disbursement documentation to SBICs by email.
Finally, SBA’s Leverage Commitment Application and Leverage Draw Application instructions have been updated to reflect these changes. Please visit the SBA website (www.sba.gov/sbic) to download the revised application and instructions.
SEC Small Business Forum Report-AFFE Exemption Recommendation Included
The SEC hosted its annual Forum on Small Business Capital Formation in Dec 2018. Working through the Office of Small Business Policy, the attached final report of 2018 Forum recommendations was published in June 2019.
The Forum has assembled annually since 1982, as mandated by the Small Business Investment Incentive Act of 1980. A major purpose of the Forum is to provide a platform to highlight perceived unnecessary impediments to small business capital formation and address whether they can be eliminated or reduced. Each forum seeks to develop recommendations for government and private action to improve the environment for small business capital formation, consistent with other public policy goals, including investor protection.
With SBIA’s in person advocacy at the event, a formal recommendation to exempt BDCs from the Acquired Fund Fees and Expense rule (AFFE) was included. With 100 or so industry representatives in attendance, just 10 recommendations were accepted for inclusion. We were successful in ensuring one of these 10 recommendations is to “exempt BDCs from the AFFE rule and remedy the ‘double counting’ disclosure issue.”
Why Does This Matter?
While the AFFE rule, as it pertains to BDCs, is under review at the SEC, a sustained push from Congressional champions and external stakeholders, is key to maintaining pressure on federal regulators. As always, please feel free to reach out with any questions.
In Case You Missed It: The shadow banks are back with another big bad credit bubble
There have been extensive internal discussions amongst bank regulators on leveraged lending and “shadow banks” for quite some time now. Additionally, a handful of policymakers have recently publicly expressed their own concerns. While SBIA has been monitoring this, and will continue to do so, we think you should be aware of the issue and prepared to tell your story – especially in the case of an economic downturn.
1. SBIA engages with policymakers daily to educate Members on the value BDCs provide directly to their constituents and to ensure Congress remains supportive of the industry. We encourage you to join us for Hill meetings on your next trip to DC.
2. This is a great time to send your updated BDC portfolio company success stories for the SBIA government relations team to share directly with policymakers.
Volcker Rule Revisions Adopted by Two of Five Federal Regulators
On August 20, The Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency approved modifications to the 2013 Volcker Rule that restricts proprietary trading by financial institutions. The new rule, which must still be approved by the Federal Reserve, SEC and CFTC, takes effect on January 1, 2020. Banks would then have one year to comply with the rule but may opt in earlier.
Upcoming House and Senate Hearings on SBIC Program
As a follow-up to the June 26th hearing, the Senate Small Business Committee plans to hold an oversight hearing in September with Associate Administrator Joe Shepard testifying alone. The Committee wants to drill down on some of the issues that were raised during the earlier hearing (examinations, IT, etc.) and assess whether Shepard has made any progress toward getting the SBIC program back on track.
In addition to the Senate hearing, the House Committee on Small Business will hold a hearing (tentatively scheduled for September 26th) on the SBIC program. The House plans to have two panels testifying: one with Joe Shepard and a separate industry panel. The House is currently drafting its own version of an SBIC oversight bill and plans to discuss these legislative ideas in addition to holding Shepard accountable for the poor performance of the program during his tenure.
Upcoming Nomination Hearing on Jovita Carranza
The Senate Small Business Committee will also be holding a hearing to consider the nomination of U.S. Treasurer Jovita Carranza to be Administrator of the U.S. Small Business Administration. No hearing date has been set, but I will likely be in October, as the Committee must review all of Carranza’s required disclosures and allow every Senator the opportunity for a face-to-face meeting with the nominee. SBA is working hard to make sure Senators are informed on the impact SBICs have on the U.S. economy and are asking Senators to demand that Carranza makes strengthening the program and ensuring it has competent leadership a high priority.
North Atlantic Capital welcomed Jay Tansey to the North Atlantic team in September. A graduate of Bowdoin College and the Yale School of Management, he previously served as a policy advisor at the U.S. Small Business Administration (SBA) and worked in digital strategy at Pepsi. Jay is thrilled to be back in Maine with his family and is off to a strong start sourcing investments and supporting the North Atlantic portfolio.
North Atlantic Capital is also pleased to announce the launch of their new website. The updated site retains North Atlantic’s classic coastal Maine aesthetic while featuring a modern design, reflective of our creative investment strategy and innovative portfolio companies.
LFE Capital operating partner Diana LaTour was interviewed by an Orlando business magazine. Click the following link to hear her thoughts on the thriving entrepreneurial scene in Central Florida: Up Close with Diana LaTour
Star Mountain Capital, LLC, a specialized alternative asset manager focused exclusively on the U.S. lower middle-market, is pleased to announce that Mark Weisdorf has joined as a Strategic Investor and Senior Advisor. Mr. Weisdorf has a distinguished thirty-five-year history of alternative asset management and finance experience, most notably as the former Head of Private Markets at the ~$250 billion Canada Pension Plan Investment Board (CPPIB) and as Global CIO & CEO of JPMorgan Asset Management’s ~$10 billion Infrastructure Investments Group. During his time at CPPIB, Mr. Weisdorf was a co-founding member of the Institutional Limited Partners Association (ILPA), an association dedicated to advancing the interests of private equity limited partners through industry-leading education programs, independent research, best practices, networking opportunities and global collaborations. Mr. Weisdorf is currently the managing partner of Mark Weisdorf Associates, a strategic consulting and advisory firm servicing institutional investors and investment management firms with the objective of establishing, turning around or improving investment performance and accelerating the growth of private equity investment platforms. Mr. Weisdorf has a Bachelor of Commerce from the University of Toronto and holds both CFA and CPA designations.
Spell Capital Equity Partners is pleased to announce the closing of Spell Capital Partners Fund V, LP, a $68.0 million private equity fund focused on the buyout of industrial manufacturing businesses. Fund V has acquired its first three platform investments and is actively seeking additional investment opportunities.
Spell Capital is celebrating their 29th anniversary as a firm, and our current equity buyout Fund V will allow us, and our partners, to capitalize on our niche in the lower middle market which continues to bring us unique investment opportunities. In addition, our first mezzanine vehicle, Spell Capital Mezzanine Partners SBIC LP, closed on its 25th investment during 2016.
Caltius Capital is excited to announce that Pensions & Investments named Caltius Capital Management a “Best Place to Work in Money Management” for 2016. Caltius was one of only 50 companies in the nation to be named as a “Best Place to Work in Money Management” in 2016. In determining the winners, Pensions & Investments partnered with Best Companies Group, an independent research firm specializing in identifying great places to work, to survey employers (25% of the score) and their employees (75%). Employers were evaluated on workplace policies, practices, philosophy, systems and demographics. Employees were surveyed to measure the employee experience.
Many characteristics exemplify the exceptional corporate culture at Caltius, particularly the long tenure of their team, averaging 15 years. The five co-founders all remain as managing directors and some employees who departed ended up returning. A healthy work/life balance is promoted and appreciated by all. Most importantly, the firm’s culture is based on inclusion and mutual respect, regardless of titles.
Endeavour SEAM is now True West Capital Partners. They created True West to provide flexible growth capital to middle-market companies in the Western United States. The firm is dedicated to building and maintaining long-term relationships, and they always treat their partners with the utmost respect. True West delivers creative, debt-oriented financing to a broad range of industries. They are seasoned investors, with over 100 years of experience among them.
Main Street Capital Corporation is pleased to announce that it recently led a new portfolio investment to facilitate the leveraged buyout of Clad-Rex Steel, LLC, a leading specialty manufacturer of vinyl-clad metal used in a variety of industrial, commercial and consumer applications as an alternative to conventional pre-painted and powder-coated metals. Main Street, along with a co-investor, partnered with the Company’s management team to facilitate the transaction, which resulted in the buy-out of the Company’s non-management equity owners, with Main Street funding $22.8 million in a combination of first-lien, senior secured term debt and direct equity investment. Headquartered in Franklin Park, Illinois, and founded in 1961, Clad-Rex is one of the preeminent manufacturers of vinyl-clad metal, which offers enhanced aesthetic appearance, greater design flexibility and durability, noise and vibration abatement, condensation and temperature insulation, and broader fabrication abilities. The Company serves customers across a wide variety of industries throughout the United States, with many of these customer relationships spanning several decades.
Main Street is a principal investment firm that provides long-term debt and equity capital to lower middle market companies and debt capital to middle market companies. Main Street’s portfolio investments are typically made to support management buyouts, recapitalizations, growth financings, refinancings and acquisitions of companies that operate in diverse industry sectors throughout the United States. Main Street seeks to partner with entrepreneurs, business owners and management teams and generally provides “one stop” financing alternatives within its lower middle market portfolio. Main Street’s lower middle market companies generally have annual revenues between $10 million and $150 million. Main Street’s middle market debt investments are made in businesses that are generally larger in size than its lower middle market portfolio companies.
This past summer, North Atlantic Capital invested in Kiip (pronounced “keep”), a rewards-based mobile advertising company headquartered in San Francisco, CA. As featured on TechCrunch, North Atlantic led the $12 million Series C round. Co-investors include US Cellular, HWVP, Relay Ventures, Verizon Ventures and True Ventures.
Since its founding in 1986, North Atlantic Capital has evolved from a regional investment focus to national visibility. Their team has invested in over 80 companies in a variety of structures and transaction types, generating lasting value for portfolio companies and limited partners. For 25 years, North Atlantic has been licensed by the U.S. Small Business Administration. In 2015, North Atlantic closed their fifth venture fund, North Atlantic Venture Fund V, L.P., with over $123 million of committed capital. Today, they leverage their professional network and research-based deal sourcing program to invest nationally in rapidly growing technology companies.
Spell Capital Partners, a leading lower middle market private equity firm, announces the sale of its portfolio company, Production Services Associates (PSA), to Plasticard-Locktech International, a hotel keycard, gift and loyalty card manufacturer. PSA is a leading manufacturer of printed gift and loyalty cards for global retailers and merchant payment processors and was the second investment of Spell Capital Partners Fund IV. Spell Capital established the PSA platform in 2012 and partnered with a strong management team to grow revenues organically and through two strategic add-on acquisitions. The transaction closed on November 2, 2016. Financial terms were not disclosed.
Spell Capital Partners also announces its investment in Deacro Industries Ltd. as Spell’s second platform investment in Spell Capital Partners Fund V. The acquired business manufacturers slitting machines, roll slitters, rewinders and material handling equipment for the converting industry. As the industry leader in its field, Deacro is a good fit for Spell Capital, which has extensive experience in the capital equipment sector. Terms of the deal, which closed October 31, were not disclosed except that Spell will continue to operate Deacro out of its current manufacturing facility in Toronto, Ontario.
Spell Capital Private Equity is engaged in the acquisition of controlling interests in well-managed, historically profitable industrial manufacturing businesses. The firm uses their deep expertise in acquisitions and financing to collaborate with management and grow the businesses in which they invest – both internally and through add-on acquisitions. Spell Capital Mezzanine provides subordinated debt and non-control equity to businesses in a variety of industries across the United States. They finance leveraged acquisitions backed by lower middle-market private equity sponsors, management and family driven ownership transitions, add-on acquisitions, recapitalizations and growth initiatives.
Spanos Barber Jesse & Co., a private investment firm with offices in the San Francisco Bay Area and Dallas, announced that it has completed an investment in Troy Lee Designs, a leading provider of off-road motorcycling and mountain biking gear and apparel based in Corona, California. For over 30 years, Troy Lee has been customizing helmets “For The World’s Fastest Racers”. TLD’s relentless commitment to creating products that exceed the cutting edge of style, design and quality, has earned them the reputation as an innovator in many different fields of racing. Troy Lee Designs offers a complete line of helmets, apparel and premium protection for off-road motorcycling and bicycling, sportswear and accessories, and operates the TLD supercross and motocross teams.
Spanos Barber Jesse & Co. manages a private investment fund with over $200 million of committed capital from offices in the San Francisco Bay Area and Dallas. SBJ invests in lower middle-market consumer, business services and healthcare services companies. SBJ has the flexibility to invest equity or debt in control or non-control situations to finance buyouts, recapitalizations, acquisitions and growth. Founded by a team of professionals with over 75 years of experience growing companies as investors, executives and advisors, SBJ draws on extensive operating experience and domain expertise to support the strategic goals of its partner companies.
Tecum Capital Partners, LLC has partnered with O2 Investment Partners, LLC and Oakland Standard Co., LLC in the acquisition of Top Master as an add-on to their countertop supply and fabrication platform Clio Holdings, LLC. Tecum Capital provided mezzanine debt and equity to support the transaction. Based out of Kansas City, KS, Top Master is the largest fabricator of countertops in the Midwest with six locations, primarily serving the Iowa, Kansas, Missouri and Nebraska markets. Following the acquisition, Clio has an eight state footprint serving a full spectrum within the countertop industry, from new home builders and commercial contractors to kitchen/bath dealers and home improvement centers.
Tecum Capital Partners is a pooled fund of committed capital licensed by the Small Business Administration (“SBA”) as an SBIC. Originally called F.N.B. Capital Partners, Tecum is headquartered in Pittsburgh, Pennsylvania and invests $3 million to $15 million per transaction. Tecum specializes in providing mezzanine debt, subordinated notes, private equity and other types of financial capital to small and medium size commercial enterprises for the purposes of recapitalizations, buyouts, generational transitions, mergers and acquisitions and other growth capital.
Ytel, a leading provider of contact center software and embedded real-time communications solutions, announced today it received a significant investment from Argentum and Marwit Capital. The investment will be used to expand sales, marketing, and engineering efforts to support Ytel’s rapid growth and continuing solution innovation. Founded in 2012, Ytel is a Registered Telephone Carrier and powers Contact Center Software (Cloud Contact Center), a Tier 2 SIP network (sipPro), and an API (message360) for web-developers to programmatically enable voice, text, email, and direct mail within any web application. Servicing midsize and Enterprise businesses worldwide, its solutions support billions of business-critical communications each year.
Argentum is a New York-based growth equity firm that supports entrepreneurial owners in building industry leading companies. The firm partners with management teams of companies with revenues of $5 to $25 million to provide capital to accelerate growth, fund acquisitions or generate shareholder liquidity. Since raising its first fund in 1990, Argentum has invested in over 80 companies and supported nearly 200 add-on acquisitions in technology, healthcare and other high growth service sectors.
Brookside Mezzanine Partners is pleased to announce its investment in The Infosoft Group, LLC. Founded in 1996 and headquartered in Milwaukee, WI, Infosoft is a leading provider of regulatory compliance and recruitment solutions. The company provides federal contractors with a fully outsourced solution to comply with several regulations of the Office of Federal Contract Compliance Programs and it also maintains a network of over 6,000 locally-focused online employment websites. Brookside Mezzanine Partners provided subordinated debt and equity co-investment to facilitate the recapitalization of Infosoft by Gauge Capital. Based in Southlake, TX, Gauge is a leading private equity firm that partners with owners, managers and equity stakeholders of successful middle market companies with a focus on investing in technology-enabled companies in the business and consumer, healthcare and food sectors.
Founded in 2001, Brookside Mezzanine Partners manages in excess of $500 million across three mezzanine funds. The Firm is a leading provider of subordinated debt and minority equity capital to small and mid-sized companies throughout the United States. Brookside invests in both sponsored and non-sponsored transactions and provide junior capital and unitranche financing to support buyouts, leveraged recapitalizations, strategic acquisitions, dividends and growth capital.
Capitala Group, a provider of capital to lower and traditional middle market companies, announced that it recently invested in BigMouth Inc. BigMouth is a leading boutique designer of unique and innovative lifestyle products. Capitala Finance Corp., a business development company managed by Capitala, invested first lien debt and equity alongside Capitala Group affiliated funds. The investment was made in support of CID Capital’s recapitalization of the Company. Based out of Glastonbury, CT, BigMouth designs an exclusive line of high-quality oversized lifestyle products and creative gifts. The Company sells its products through a variety of leading blue-chip retailers, websites and specialty retailers to a diverse group of customers in more than 50 countries.
Capitala Group also announced that it recently invested $23.0 million in Xirgo Technologies, Inc. Xirgo is a leading provider of wireless telematics modules for tracking, monitoring, protecting and controlling remote assets and workers supporting the Internet of Things growth sector. Capitala Finance Corp. invested approximately $16.2 million of second lien debt and equity, with the remaining $6.9 million invested by Capitala Group affiliated funds. The investment was made in support of Hammond, Kennedy, Whitney & Company, Inc.’s acquisition of Xirgo.
Based out Camarillo, CA, Xirgo provides innovative, high-value M2M communications platforms with exceptional quality and scale. The Company supplies products to numerous market verticals including automotive, mobile monitoring & control, fleet management and container & trailer tracking.
Capitala Group is a leading provider of capital to lower and traditional middle market companies, through its family of credit focused funds. Since 1998, Capitala Group’s managed funds have participated in over 133 transactions, representing over $1.2 billion of investments in a variety of industries throughout North America. Capitala Group manages both public capital (Capitala Finance Corp.) and private capital (Capitala Private Credit Fund V, L.P. and CapitalSouth SBIC Fund IV, L.P.) for institutional and individual investors, and seeks to partner with strong management teams to create value and serve as long term partners.
SBIA is the voice and advocate for the lower middle market. Go to www.SBIA.org/about to learn more about the Small Busines Investor Alliance.