The Volcker Rule has spurred many a banker to begin sourcing deals in the lower end of the middle market, says Tecum Capital’s Stephen Gurgovits, a managing partner of the recently launched fund FNB Capital Partners.
The Wexford, Pa.-based fund and small business investment company (SBIC) came about via the spin out of the merchant banking business of FNB Corp. (NYSE: FNB) —a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which caused American banks to exit their private equity operations.
Since then, the lower middle market has proven to be ripe with opportunity, says Gurgovits—a message echoed by the Small Business Investor Alliance, a lobbying group for dealmakers that has been working with various banks, including FNB, for their own SBIC plans.
Mergers & Acquisitions caught up with Gurgovits at the SBIA’s National Summit for Middle Market Funds event, taking place at The Breakers, Palm Beach, Fla., from Oct. 13 to Oct. 15.
Has the fund been successful since the September launch?
Yes. We expect to close two transactions by the end of October. They both happen to be in the health care space. At least one deal is slated to close in November. We’re also looking to deploy between $20 million and $30 million by the end of 2013. We’re looking to invest up to $10 million of equity or mezzanine capital per deal, particularly in companies with more than $2 million of Ebitda.
What made the fundraising process such an arduous task?
It took a total of two years, from 2011 – when FNB spun out its merchant banking business – to August 2013. But for a first-time fund, it’s not unusual. We caught the Small Business Administration (SBA) at a time of transition where they had internal changes. (SBA administrator Karen Mills announced that she was stepping down in February.) That slowed the process. There was also a seven month period where they had us under an intense due diligence process. We don’t necessarily view that as a bad thing. It does create a barrier for entry but you have to have a vetted team and track record to attain an SBIC license.
Why did you keep the FNB name if the fund is independent and part of Tecum Capital?
The firm actually had that debate and eventually both sides decided to capitalize on FNB’s halo effect. From 2006 to 2011, the FNB merchant banking business invested $65 million into 20 transactions even through the peak of the recession in 2009. That helped when approaching limited partners. We now have $175 million of deployable capital.