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 SBIC plans.
Has the fund been successful since the September launch?
Yes. We closed our first transaction, a group of physical therapy centers, where we backed a sponsor's acquisition with mezzanine and a substantial equity co-investment. We closed two more mezzanine debt transactions in the health care space within the first ten days of November. By the end of November, we will be closing another mezzanine and equity buyout transaction for a distribution business. We are also working on a food-rated business, a buyout we are backing with mezzanine and equity which we hope to close by year end. We remain hopeful that the pipeline will remain strong into early 2014. If this plan comes to fruition, we should have about 25 percent of our fund invested within the first nine months of launching operations. We would be thrilled with that kind of start. 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?
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.