Q&A: TCA Fund Management's Bob Press on Small-Cap Private Equity

Aug 25 2016 | 8:55pm ET

Editor’s note: The emergence of private credit as an adjunct to, and in many cases replacement for, traditional bank financing since the financial crisis has led to a wide range of innovative strategies, platforms and products in the alternatives space. TCA Fund Management Group’s recently launched small-cap private equity fund takes a hybrid approach between short-term, senior, secured credit business and a traditional private equity model, and focuses it on a very small group of small- and medium-sized companies (SMEs) that meet stringent criteria. 

FINalternatives recently caught up with TCA Fund Management’s founder and CEO Bob Press to learn more about his firm’s new solution for SMEs, a sector often considered the backbone of the American economy. 

Why did you decide to launch TCA Opportunities Fund I?

The post-crisis world has seen a dramatic change in the landscape for financing on every level, especially in the SME sector. Since that time, a whole series of different offerings and products have come into existence placing words in the daily lexicon such as crowd sourcing, peer-to-peer lending, fintech, merchant cash lending and receivables exchanges. These words were largely unknown only a few years ago. TCA’s Opportunity Fund was created to address the underserved niche of small cap finance.

Our approach gives investors many of the elements they seek and provides companies with help on a more traditional merchant banking level. Simply put, the goal is to provide transformational capital to a small group of companies that tick very specific boxes, and marry them with TCA’s operating partners and their decades of expertise.

How have changes in the banking landscape since the financial crisis impacted what you do?

Huge disintermediation has occurred at every level of the finance sector. Within banking, this impact was greatest on small businesses, as banks and other traditional financial institutions retreated from the financing of unrated, less mature, and smaller businesses across all sectors. TCA and other alternative niche players have emerged to fill the void, and we believe that the combination of new technologies on the one hand and highly focused niche strategies on the other will continue to benefit companies in the SME sector as well as the investors who participate in the transactions that finance them.

How does PE lending compare to other alternative lending mechanisms?

Instead of the more typical private credit route, TCA’s Opportunity Fund will make its investments through the equity part of the capital structure.  PE lending is generally done as part of an overall PE capitalization structure and typically through a buyout. This may reward the fund with short-term gains as it takes dividends out of these proceeds, but in many instances, this burdens the company with carrying debt that (at a minimum) inhibits growth, and can strain their ability to survive. TCA’s target is a redeemable preference share that pays a dividend, but at a lower rate than debt instruments like those found in other credit offerings, and with the goal of redeeming them as the company accomplishes its objectives with our assistance and funding. This lower cash flow burden is essential, we believe, to help the company focus their efforts and cash on growth. 

Simultaneously, TCA build in protections that many investors may find comforting, including those afforded through debt covenants, ratios, restrictions, etc. We are not looking to be the principal shareholder of a company, but rather a strategic, medium term investor using its preferred position in the capital structure to protect both TCA’s investment as well as the exit.

What are the opportunities in this space?

Seven years ago, TCA entered the debt space for SMEs, seeking to lend $1-$5 million in a very narrow, short dated, secured instrument. Our experience has shown that larger companies in this range seeking $5-$7 million in debt financing had another level of corporate maturity in terms of execution, business model, and management. Accordingly, we’re seeking companies that fit very specific criteria, doing $25-$125 million in annual revenue and in industries with good growth potential in the medium to long term.

There are literally millions of SME’s in our target market, and we’re only looking for a handful; the opportunity set greatly outweighs our small niche appetite.

How do you gauge an investment? What are your metrics?

We are looking for companies where management has a great record, is invested in the business, and comes with a vision. The company should have a unique market proposition, scalability, barriers to entry, and a fairly large totally realizable market, and what it does should have good margins. Good growth is a plus, both for the firm and the industry as a whole. Preferably, our investment is tied to management’s ability to achieve milestone objectives, and we structure the financing accordingly. We will also match each portfolio company with one of our operating partners, who will be hands-on with management in order to move the company forward.

Much of the PE & private credit worlds revolve around deal flow. What is your pipeline process?

We’re in a unique position because we’ve developed origination sources for more than a dozen years. The same set of brokerage firms, corporate finance boutiques, lawyers and auditors that have worked with TCA since our investment-banking roots are excited to show potential investee companies to the team.  

What is the target amount of financings you hope to achieve in the first year?

We’re looking to finance $5 million to $15 million per company, and hope to have 15 to 25 companies in the portfolio at maturity. In the first year, we expect to close on four to eight fundings. 

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