Put Me In, Coach! Capital Is Sitting on the Sidelines: An Interview with Donny Harrison

Mr. Harrison is a partner in the Business Development & Capital Markets group with Ridgemont Equity Partners. Based in Charlotte, NC, Ridgemont is the largest private equity firm headquartered in the Southeast. 

Key Takeaways:

  • Capital is available for companies with a solid business plan and a good opportunity for growth, especially for larger companies with EBITDA over $10 million.
  • Debt financing is especially available and from sources in the South and other regions of the U.S. Equity capital is available in the South, but higher levels are resident in money centers outside the region.
  • There is capital sitting on the sidelines because there is more money available than quality businesses to invest in, and investors are focused on not overpaying for companies.
  • State governments are assisting capital formation by attracting headquarters of major companies, and those companies can help by being great places to work. The talent and capital typically follow.

Q: What is your sense of availability of capital to middle-market companies in the South? What about different areas throughout the South? How do differences in “availability” manifest itself?

A: There is capital available at a flush, highly liquid level for many companies, particularly larger companies with EBITDA above $10 million. They generally have an easier time attracting capital due to their more substantive size and higher level of confidence in management. Overall, capital has become more available in the last year and it’s not really a challenge for companies right now to raise money.

I don’t see a major difference between states throughout the South. There are some subtle differences for companies that are closer to the centers of finance like Atlanta, Charlotte and Nashville, as opposed to some of the secondary markets. There are fewer bankers out calling in secondary markets and less awareness. But, if there is a good company headquartered in East Tennessee, that doesn’t mean it won’t get the same level of interest from a capital standpoint; it just means there won’t be as many bankers going out there on a regular basis.

The lower tier companies are clearly going to find tighter terms and higher cost of capital because they are less mature businesses. There is not a bright line between tiers of company sizes. We have to consider aspects of the industry, things like end-market demand drivers and growth prospects. But, in general, there is more attractive pricing and terms for larger companies, which is certainly not unusual or new.

Q: What kind of private capital is most available? For example, is it growth equity, like seed funding, angel funding, A round or B round? Or it is financing for established companies, such as preferred or common stock or debt?

A: Debt capital is available pretty readily at all levels. Bank debt and senior secured type financing is available for companies of a certain size. There is a lot of capital from non-bank finance companies, like GE, as well as specialty finance companies like Business Development Corporations. These are public vehicles that have been funded by public investors or private vehicles funded by insurance companies. This capital is typically not regulated like a bank. This provides a lot of capital chasing after companies. Owners can go out and raise growth capital within reason on their balance sheets.

Although I’m not as familiar with the venture capital side, this has been an area of interest for many in the investment community. There is plenty of capital out there to finance early rounds of venture. Look at Raleigh/Durham and Research Triangle type businesses. For the right business plan and the right situation, that capital is available.

If people are having a hard time getting capital, the problem is likely the depth of the business. If you have a solid business plan and have a good opportunity, especially in technology, infrastructure or telecom, you will be able to find financing. There are many business plans that just aren’t that well put together. Investors are not going to fund something that isn’t backable. My generalization is that these businesses don’t have enough depth in their business plans. Entrepreneurs also might not know where to go for the capital, and so they are mismatching their pitch with a potential investor. A solid business plan and solid company is able to attract capital today.

Q: Do you see capital sitting on the sidelines?

A: We see tons of capital on the sidelines. There are people like us, private equity firms, which have an overhang of $300 – 400 million of buyout capital residing in our funds. We want to put that money to work, but we’re looking for very specific situations and sectors. There is a decent supply of opportunities out there, but there is more capital than there is a good supply of places to put it. It is very much a seller’s market. This can be said for banks, insurance companies and funds that want to invest money, but aren’t forgetting the last downturn and want to be wise with investments.

Q: What types of companies are seeing traction right now? What can middle market businesses do to make themselves more attractive to private equity groups?

A: We focus on making investments from $25 – 100 million in health care services, oil and gas, telecom, technology and basic industries like distribution and industrial services. We stick to these sectors, and have had a bit of a dry spell in the last 12-15 months. We have pursued a lot, but prices have escalated and we have a harder time putting money to work than in the past. A lot of people are overpaying for businesses right now, and we are very careful not to do that.

Private equity groups specifically want to see a solid business plan for the future and a nice business that has proven itself over the last five to seven years – at the least. We really like recurring revenue businesses. We are not interested in anything highly dependent on projects or the expectation of a new growth opportunity that may or may not happen.

We like reliability and growth. It doesn’t have to by hyper or double-digit growth, but we want to see growth opportunities. Those businesses are typically able to produce higher returns. We like companies that have a lot of operating leverage. As the company grows they can incrementally expand margins and grow the business that way.

Additionally, we like strong cash flow businesses more than capital intensive businesses. We don’t do much in the manufacturing space, and focus more on companies like distribution businesses. They can be lower margin, but typically have lower capital intensity. Something like a $20 million cash flow company that only spends $1 million on capital expenditures. We are attracted to companies like telecom, fiber, data centers – they have longer-term contracts and are pretty predictable.

Those all translate into businesses where we can put debt upfront and delever fairly quickly to protect our downside. But, we will re-lever if we identify an opportunity to go out and expand the business. It’s a combination of our capital, as we’re equity only, with debt capital to continue to grow the operation. Financial reporting and financial standards are very important. We don’t look at businesses that don’t have impressive financial controls.

Management is also critical, particularly in businesses of this size. They need to have strong leadership at the top and more than one key person running the business. We are looking at all of the C-suite, including CEO, CFO and operations. If it’s an intense sales operation, we will have active dialogue around the sales function, and have switched out sales leadership in the past.

Q: How much capital comes from outside the region? Where is it coming from? What can the region do to attract more outside capital? What can be done to get more local investors in the game?

A: To address this we have to segment what type of capital. The majority of debt capital from banks and other financing companies in the South comes from the South. We have capital contacts in Chicago, and they may come down and invest in a South Carolina company. Largely in the debt finance world, equipment finance and leasing is a regional capital business.

Mezzanine and other equity-linked capital can come from all over. There are lots of private equity firms in Boston, Los Angeles, Chicago and New York that own businesses in the South. Some outside the region are marketing directly around those states. Most of the time someone is representing the seller – an investment bank like FourBridges or a larger one like JP Morgan – and they know how to find the buyers. There may be a strategic buyer out of Colorado that wants to expand in the South, so they buy a similar business in that region.

Overall, debt capital is more regional, and other forms are a combination. We own companies in Indianapolis, St. Louis, Houston, Dallas, and have owned in Nashville. It really depends on the history of where the businesses and sectors are.

In terms of local investors, individual investors can play in the types of markets we’re talking about on a fund-to-fund basis or investing in a diversified venture type of fund. They invest and then aggregators go and deploy it in certain defined sectors. For instance, if they want to invest in hedge funds, but don’t have the relationship or enough money, they can invest with a group that does the due diligence and puts together a pool of hedge funds.

Q: What roles are local and state governments playing in increasing access to capital in the South? What should they be doing?

A: Growth overall of businesses that are coming into the South continues to be a competition among states. South Carolina and North Carolina are great examples. State governments are opening up their wallets to attract regional headquarters or U.S. headquarters of an international company. For example, we have a large Amazon data center in North Carolina. Charlotte attracted Chiquita brands headquarters from Cincinnati by offering tax incentives, and they guaranteed 100 jobs at $100,000 salary or more. That is where state governments come in, and then capital follows that. They will also provide tax incentives for investing in specific sectors. For example, North Carolina has a lucrative credit available for investing in solar farms.

Q: What roles should other stakeholders be playing?

A: Generally businesses need to think about becoming a company people want to work for in order to attract talent to the city. If I hear a company in Charlotte is great to work for, I will relocate to work for that company. People really pay attention to lists like the Inc. Magazine “25 Best Companies to Work For.” Having companies that are a great place to work helps a region as well as anything else.

Brought to you by the team at FourBridges

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