The Right Fit
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Brandon Cushman grew up around the construction business. And although he was ready to graduate from medical school in 1999, it was the construction business that lured him out of the hospital and back into the hot sun. Today, Cushman's Denver-based company, Fauxcrete Inc., pours nearly $5 million worth of stamped and dyed concrete every year.
Denver's seemingly endless appetite for development fueled strong growth for Fauxcrete. Cushman says he doubled his business annually between 1999 and 2004. But that rapid growth leveled off last year when his banks and investors tightened the purse strings and left him scrambling for cash to buy needed trucks and equipment, not to mention meet payroll. "Every bit of cash we got, we put back into the company," says Cushman. "We needed capital to grow, and we'd exhausted our ability to borrow."
Falling Into a Black Hole
At wit's end, Cushman decided he'd have to sell the company to someone who could afford to fund its growth. But the company's $2.7 million price tag created new problems. "When we put it up for sale, our consultants said we were in a black hole. We were under the radar of private equity groups and over the heads of private individuals," says Cushman. "We were stuck. I couldn't get a loan to grow it, and I couldn't sell it."
If Fauxcrete had been spinning off $10 million a year in profits, financial buyers would have lined up. There are literally hundreds of private equity groups, or PEGs, that purchase companies that have reached significant profitability. But Fauxcrete was too small for a traditional PEG, and Cushman's offer to sell languished at the business brokerage for nearly an entire year.
Enter Silvercloud Companies of Denver, a new boutique private equity group and holding company founded by Chris Younger. Silvercloud is a small fund by traditional standards--with about $10 million total capital--but its size makes it the perfect funding partner for companies like Fauxcrete that are stuck in the "black hole" between individuals and traditional large investment funds.
If the PEG Fits . . .
Cushman says his deal with Silvercloud had benefits in many areas: The fund has enough capital to pursue growth opportunities, the fund managers bring years of corporate expertise to bear on his problems, and although Silvercloud purchased a majority of the shares of the company, Cushman gets to keep his job for as long as he wants it. Compared to selling outright or taking on money from an absentee partner, Silvercloud offers the best of both worlds.
Those mixed capabilities make boutique equity funds incredibly valuable to entrepreneurs. In the world of large, traditional PEGs (or even VC firms, for that matter), it is rare to find fund managers who do more than attend monthly board meetings.
Although historical data is scarce, the emergence of boutique PEGs seems to have coincided with the vast personal wealth created during the internet boom. And the fact that they manage personal wealth, rather than institutional savings, is exactly what makes boutique PEGs different. Traditional PEGs invest on behalf of insurance companies, pension funds and other institutional investors, and therefore end up with a very disciplined approach to making large investments. Boutique PEGs, on the other hand, can do just about anything the individual investors want.
Because they are largely a reflection of the individuals behind them, boutique PEGs come in many flavors. Some, like EJB World Trade of Charlotte, North Carolina, manage the investments of a single wealthy family or small group of close-knit investors. Because the managers are free to invest in a variety of opportunities, EJB defies easy definition. "We just don't know what to call ourselves," says Brad House, EJB's president and managing partner.
EJB has made venturelike investments into very early stage companies as well as PEG-like investments into growth-stage ventures. Plus, the three managing partners take very active roles in management, often going so far as to hire and train key staff.
In other cases, a boutique PEG may represent angel investors through what is called a "pledge fund." One such pledge fund is Compass Point of Carmel, California. Erik Bethel, partner at Compass Point, is looking to invest from $1 million to $10 million in each of two to four growing, consumer-branded companies.
"We help entrepreneurs in many different situations," says Bethel. "It could be a management team that wants to buy the business, a founder who needs growth capital, or an older entrepreneur who just wants out of the company altogether." In any event, Compass Point has the right resources for companies that are stuck below the threshold of larger, traditional finance groups.
Finally, some boutique PEGs look more like entrepreneurial companies themselves. Mac Lackey started Blackhawk Equity of Charlotte, North Carolina, after a successful entrepreneurial career in the technology industry. Now, Lackey's Blackhawk fund is majority partner in an early stage company making high-quality khakis and active wear. Lackey expects to play an operating role in three to five companies as he invests his fund companies in various industries and at various stages of growth.
What to Expect
Like all equity investors, boutique PEGs have investment criteria and expectations that can give an entrepreneur heartburn. Many, including those highlighted above, expect to buy a controlling interest in a company. Giving up control requires an entrepreneur to accept the investor as a boss, no matter how much it hurts. And when control changes, the founder's job description often changes, too. For business owners who love being in charge, giving control to a new investor may not make sense.
On the other hand, when a fund buys control, some or all of the capital will go to purchasing shares of stock from the founder. That means the founder benefits personally from the transaction--a very different proposition than most investors can offer.
Finding a small PEG can be tough, since most prefer to remain under the radar. A web search may turn up a few, but the smallest don't even have websites. Word-of-mouth--through networking with angel investors, VCs and larger PEGs--is often the only way to learn about these boutiques.
Cushman of Fauxcrete says the transaction with Silvercloud couldn't have gone better. Even though he gave up a majority interest in the company, he says the net result was positive for both him and his company. "After getting to know Younger and his management style and the opportunities that he brought," he says, "it was a no-brainer."
David Worrell is author of the e-book Finding Funding.