Rather than competing with traditional lenders, private credit and PE firm Capitala Group is leveraging banks as partners, deal originators and LPs to provide capital to non-sponsor-backed, lower middle-market companies.
When Capitala sold its sponsor-backed business development company to a BC Partners affiliate at the height of the pandemic in 2021, firm founder Joseph Alala faced a critical decision: how to reposition what was left of the firm for long-term success.
After some refining and three years of fundraising, Capitala is finally charting a new course to focus on providing “last-mile” financing to non-sponsored-backed, lower-middle-market companies.
“We’ve really focused on the non-sponsor model versus the sponsor model,” says Alala.
Alala says that the strategy pivot also brought with it a different LP base, which took time to build. New investors include 79 banks that committed a combined $300 million to an oversubscribed $1 billion fund, including $300 million in leverage.
The Silicon Valley Bank failure in March of 2023 also slowed fundraising.
“That really put everything on hold for a good period of time,” Alala says. “Now that the banks have recovered, stabilized past that banking crisis, we really started to pull in the banks that had been on the sidelines for that period of time.”
Alala says the firm’s new approach addresses a key gap in the market: situations where traditional bank loans fall short of fully funding capital-intensive initiatives. Capitala also provided non-control equity investments.
“It’s almost all event-driven,” Alala says. “Usually they want to do an add-on acquisition. They need some growth capital to launch a new product or service. They need to buy out a partner, maybe they need to buy out an estate.”
The private credit boom shows no sign of slowing down, though roughly 85 percent of fundraising is concentrated among the sector’s six biggest firms. According to Moody’s, the asset class is projected to grow to $3 trillion by 2028, driven by stronger momentum compared to the past two years.
The banks also serve as deal originators, cutting out investment bankers, industry advisors and other deal-finding middlemen.
“One of the first things a small business that needs capital does is call their banker,” Alala says. “The banker wants to help solve this problem of a long-time customer, so they call us when the capital need is more than they can provide. We’re their partners.”
The banks also served as catalysts to Capitala’s fundraising effort, which picked up steam in the last seven months before closing.
“The banking relationships really benefit us because we get access to deals that other groups are not seeing,” Alala says. “The non-bank investors love it because they see that we have built this proprietary bank origination platform that they don’t see other groups have. So that’s how we get the non-bank LPs to invest.”
Alala, who founded the firm in Charlotte, N.C. in 1998 hopes to add at least 40 more banks to commit to its second fund.
Capitala is a generalist firm, avoiding real estate, energy and consumer, that transacts with profitable companies with Ebitda of up to $10 million that show enough cash flow to handle the debt. It will make loans up to $100 million.
In equity deals, Capitala usually writes checks of between $2 million and $10 million and looks to acquire between 20 percent and 25 percent of a company.
Lower middle-market companies whose bank loans fall short of capital needs can contact Alala at [email protected].
