We can provide flexible solutions for people. One might not be better or worse, but (through this) customized, smaller asset management platform, we can add a lot of value to the funds we invest in because we provide capital, we help them find deals, we help them structure deals, and then we help with portfolio management as well. We have different strategic partners to help boards of directors of companies; to help improve management process procedures, open distribution channels (and) help sell their products and services. All of the above.
A big part of your strategy involves committing to SBIC funds. Can you walk me through what makes those funds particularly attractive?
What’s making it more attractive is that banks are having a harder time providing capital to companies. One of the primary sources of capital to small businesses is banks. Banks have challenges making these growth capital loans when there is no syndication for their loans and no CLO liquidity available; it makes it harder for them to do a $7 million loan…and high quality fund managers are attracted by the returns they’re able to generate by providing growth capital to small businesses. We’re able to help these managers optimize the efficiency of how you format an SBIC fund. How do you get a license, how do you optimize running a leveraged portfolio? All of those different things, we have (those) capabilities, and we can write a check that’s for 20 percent or more of the LP capital for an SBIC fund, which has really helped launch a lot of investors.
Have your investors ever expressed concern at your willingness to take that big of a bite size in an individual fund?
Not really. We’re with sophisticated investors who understand the specialized model and value proposition of what we’re doing. We’re not a traditional ”fund of funds.” We’re a very specialized fund of funds platform. We’ve created a hub and spoke type of business model. We’re the hub—in New York City providing business capital—and the spokes are the SBIC funds spread across the country, sourcing multiple deals, managing multiple deals, and so forth. We’re not one of these traditional passive investors that have to take a lot of comfort in what investors are doing…We want to have a material enough investment in the business where we have a vested interest (to) actually add value to those fund managers.
All of which requires a pretty sizable staff. For a firm focused on lower mid-market managers, is it difficult keeping management fees at a reasonable level, and keep the lights on?
For what we do, pretty large investments in SBIC funds, it’s done in a scale driven manner. We have a lot of very skilled people that have a lot of personal capital invested, and we like the risk/reward in the marketplace. We’re never going to be a Blackstone, but, you know, we built a very differentiated, good product and service that, at the end of the day, provides access to the small business marketplace. We’re eating our cooking. We provide (a) high carry waterfall for investors (and) we’re very focused on the back end. That’s what we’re in this for. It’s a very entrepreneurial mindset for an institutional investor platform.
Are there any strategies or platforms that you’re looking to expand into moving forward?
We have predominantly been focused on mezzanine and mezzanine types of manager. We’re now looking at structured equity and buyout types of managers to complement the deal flow, and what we refer to as our collaborative ecosystem. We think (we can get) a lot of volume through our network, and you want to capitalize on that volume through buyout funds. Each additional manager adds value to the network.