Riverside Co continued to diversify its business with the closing of a $50 million fund earmarked to provide enterprise software companies with growth capital in the form of loans with royalty-like characteristics. The fund is called Riverside Acceleration Capital.
The move is part of broader effort by Riverside Co, best known for sponsoring consolidations in the lower middle market, to expand into credit investing and to provide investors with high-yielding products that have a variety of risk-return characteristics.
Earlier this year the firm hired a three-person team in Boston to launch a senior debt and unitranche operation for sponsor-backed transactions, Riverside Credit Solutions. The three, David Dobies, Tom Gillis and David Kilpatrick, had earlier worked at NewStar Financial. Executives at the firm declined to comment on any fundraising plans for the group.
And in 2013, the firm launched its first Strategic Capital Fund to take minority stakes in small companies — through preferred shares or a combination of debt and equity.
Jim Toth, managing partner, joined Riverside Co about six months ago to launch the enterprise software lending effort from the firm’s New York office. Toth previously spent nine years at growth equity firm Investor Growth Capital. His team includes Principal Jonathan Drillings, previously an associate at Investor Growth Capital; and Analyst Aakash Patel, a graduate of Oberlin College — the alma mater of Toth as well as co-CEOs Stewart Kohl and Béla Szigethy.
Riverside Co raised the $50 million largely from wealthy investors. “This is attractive for them because it has a current pay aspect to it,” said Pam Hendrickson, chief operating officer and vice chairman-strategic initiatives for the firm.
The firm plans to invest $1 million to $3 million in companies generating $1.5 million to $15 million in revenue and growing at a rate of 25 to 100 percent per year. Over a five-year investment period the firm aims to multiply its investment by 1.5x to 2x. Toth described the investment as “like a royalty,” with the companies paying out a single-digit percentage of revenue that ratchets up or down based on how quickly the company grows.
“It makes for a nice alignment” of interests, said Toth. “If the company grows quickly, we both do better.” Toth said the fund may also negotiate warrants and look to invest in future equity rounds.
Target companies may have already raised a few million dollars in venture capital, said Toth. They would typically view an investment from the acceleration fund as a less expensive alternative to growth equity for financing new product development, the introduction of a new sales channel, or related initiatives.
Taking on growth equity can be “very dilutive for these companies,” and the effort can prove distracting for a young business, Toth added.
Toth said it’s rare to run into direct competitors for the kinds of loans his group provides. Seattle-based Lighter Capital appears to have a similar product; its website describes its investments as “revenue-based financing.” Enterprise software companies, many with recurring revenue streams from customers for whom they provide mission-critical services, also have a growing number of lenders to choose from, including such firms as CapitalSource, Golub Capital, Madison Capital, Silicon Valley Bank and Wells Fargo.
Riverside Co has completed three enterprise software loan deals, including financings for OwnLocal, which provides Internet marketing services to media companies; and Doctor.com, which provides reputation-management tools for doctors and dentists. The firm has three or four more deals in the pipeline, according to Hendrickson.
After leaving Investor Growth Capital in late 2014, Toth started a firm, Cirrus Ventures, to sponsor a couple of enterprise software loan deals with what he described as “like-minded investors” to prove out the concept. In an interview earlier this month he said that “it became obvious it was something that should be done on a bigger scale and as part of a formal platform.”
The Cirrus Ventures effort will now be wound down with the expected repayment of the loans, said Hendrickson.