Saratoga 2014 Newsletter Q4
OVERVIEW
Saratoga Investment Corp. is a publicly traded (NYSE: SAR) business development company (BDC). We provide customized financing solutions for middle market companies located in the United States. Our investment professionals have a combined 80+ years of experience investing over $4 billion in middle market businesses.
Flexible Financing Solutions
We take a solutions oriented approach to investing and seek to craft capital structures that work for all stakeholders. We understand the importance of providing feedback quickly, being creative in transaction structuring, and closing transactions on time. Saratoga offers a broad range of financing solutions for our partners, including subordinated debt, first and second lien loans, one-stop and unitranche structures and equity co-investments.
Partnership Approach
We seek to partner with owners and operators of middle market businesses to help create value over the long term. Our professionals have unique experience investing in all parts of the capital structure across numerous industries. We use the perspective gained from our experience to support business owners (equity sponsors, independent sponsors, family-owned businesses) and management teams with patient capital and guidance as they execute their business plans.
Read the full newsletter at Saratoga Investment Corp.
From One CFO to Another: Does Your Company Have the “Secret Sauce?”
How to Decide and How to Gain BDC Capital
Your smaller middle market company is looking for greater financing than a bank will allow under typical lending rules. But you need capital to expand according to your company’s vision and growth needs, so you’re determined to find alternative sources of funding. A Business Development Company (BDC) might be your best bet, but how do you know? You’ll first want to determine if your company fits the relevant criteria and then you will need to devise a strategy to help prepare your company for BDC funding.
The “Secret Sauce”
The companies that BDCs fund typically fit a certain stereotype — their revenue is somewhere between $8 million and $150 million, the majority of them are privately held, and they have significant capital needs that cannot be satisfied by bank loans. But BDCs assess all of these companies and only fund a small subsection of the potential credit opportunities that hold a proverbial secret sauce.
This distinguishing factor is usually a leading market position or niche with sustainable competitive advantages. The company might have an exceptional management team, promising growth prospects, stable historical performance, or strong margins and free cash flow. Whatever the advantage, it has to be clear to a BDC that your company has a powerful potential to grow and make money.
Preparing a Plan:
Securing funds from a BDC is not just about taking out a loan. It is also a long-term commitment to the BDC to achieve the promised projections and objectives. If accepted, the BDC lender will become a partner with the company management to help build the future of the company.
Therefore, the company’s CFO must first determine precisely what the funding would achieve and how to maximize the company’s returns. Of course, the return will need to cover both the growth expenses and the cost of getting the loan.
Your plan will be a critical part of convincing a BDC that your company is ripe for funding, but that preparation is not as straightforward as you might think. Many CFOs hire consulting firms to help identify system needs and devise a timed and structured plan with appropriate deliverables.
The sooner you start on your search for funding, the more flexibility you have to get the right deal. Assess your company’s performance early and you’ll be prepared to gain the capital necessary to help your company thrive.
Saratoga 2014 Newsletter Q3
Dear Friends,
We hope you are enjoying the summer months.
We’d like to update you on Saratoga’s progress and help you stay informed on what is going on in the middle market.
As Saratoga grows its investment portfolio, we continue to strengthen our team. Earlier this year we welcomed Henri Steenkamp as our CFO. Dave Vavrichek joined soon thereafter as a Principal. We also recently added Nick Martino, Marissa Mann, and Sandy Rodriguez to our investment team.
Saratoga has a strong base of permanent capital and plenty of dry powder to invest. We remain focused on making debt and equity investments in companies striving to do great things. Over the past year we have invested about $100 million in 19 transactions to support acquisitions, refinancings, recapitalizations, and growth initiatives.
The experience of our investment team allows us to provide prompt feedback and reliable financial support to middle market companies. Our goal remains to be a reliable partner in helping you meet your objectives. Thank you for continuing to think of us when your business requires capital.
Read the full newsletter at Saratoga Investment Corp.
Part 2 Working with a BDC. What CFOs Need to Know
Research Studies and Opinions
Despite high-profile commitments by major banks to small-business lending, overall loan volume to small and middle-market companies has declined. Estimates from the Federal Reserve Bank of Cleveland reveal that small-business lending has plummeted from more than 50 percent of non-farm, nonresidential bank lending in 1995 to less than 30 percent in 2014, with little sign of a reverse. In addition, few banks are willing to make cash-flow loans to smaller middle-market companies, those with EBITDA of less than $10 million.
CFOs looking for capital, especially cash-flow loans, are increasingly discovering alternative sources, particularly Business Development Companies (“BDCs”). In the 1970s, a perceived crises in capital markets led Congress to amend the Investment Company Act of 1940 in 1980. This added a new category of closed-end investment companies known as BDCs. BDCs make cash-flow loans as capital providers to private or thinly traded portfolio companies for the long-term, and BDCs work best when they function as a business partner. There are now about 50 BDCs in the US with more on the way. CFOs of companies with $10 million to $50 million in EBITDA should know how to engage, connect and work with them.
Read the full article at Saratoga Investment Corp.
Part 1- BDC: The CFO and the capital raising process
Research Studies and Opinions
A Q&A with Henri J. Steenkamp: Chief Financial Officer of Saratoga Investment Corp
Question: What kind of CFO should know about a Business Development Company?
HS: The CFO looking for financing that is either greater than a bank would allow under asset-based lending rules, or to whom a bank is unwilling to loan because it is a smaller middle market company. Either way, the CFO is in the market for alternative funding sources to meet his company’s growth needs. Business Development Companies serve smaller middle-market companies with revenues of $8 million to $150 million and EBITDA of $2 million or greater.
Question: What is a BDC?
HS: Congress enacted legislation creating Business Development Companies in 1980 as an amendment to the Investment Company Act of 1940. The idea was to create a regulated entity to focus on the capital needs of
smaller middle-market companies. Since January 2007, BDCs have grown from 16 to more than 50 companies. They serve an estimated 65,000 businesses in the US with revenues in the range of $8 million to $150 million, the overwhelming majority of them privately held and family owned. These companies have significant capital needs, but because they work in a highly fragmented marketplace, they are underserved by banks, and often not served at all.
Read the full article at Saratoga Investment Corp.
From One CFO to Another: Exploring What Matters Most
Making Sense of Business Development Companies (BDCs)
With a background that hits a wide range of finance and business management, I came to Saratoga excited to take on the challenges unique to business development companies, or BDCs. I soon discovered that Saratoga – and, by extension, BDCs in general – was unlike any company I had previously worked for. By and large, BDCs require new CFOs to adopt a less-familiar set of public company practices that encourage a flexible and sometimes improvisatory approach toward funding. It’s basically yoga for the underwriting process: the more dynamic your exercise, the better you’ll know how to obtain funding for a broad diversity of situations. Moreover, the better funding you’ll receive. Here’s a brief primer for any fellow CFO who may work with a BDC in the future (you still have to keep up your practice):
- When traditional banks say “no”, BDCs say “maybe”. It’s important to remember that BDCs exist to serve a particular segment of the market economy, namely those businesses that have trouble getting funded by traditional lenders. This doesn’t mean they’re bad bets; it just means they’re either considered sizable credit risks or deemed unworthy due to relatively small funding needs. For BDCs, these criteria describe an underserved segment of the business economy: the middle market. Indeed, BDCs offer funding opportunities to portfolio companies that rival the speed at which private equity and venture capital firms obtain funding for their own portfolio companies. The difference is, BDCs are usually traded on the open market, which enables them to collect capital from the public (often in exchange for regular dividends), as well as a plethora of private lenders more likely to consider a regulated BDC over a middle market company.
- Do your homework (and show your work, please). Any investment from a BDC in a potential portfolio company requires a comprehensive review by the CFO and investment team. (Brace yourself; it’s due diligence on another level entirely.) In addition to a traditional executive summary and top-to-bottom business review, you’ll want a quality of earnings (QOE) review, reasons to invest, a proven record of stability and profitability, risk assessments, evaluation of the market, and realistic projections of future performance. Rule of thumb: if you think it might be worth a closer look, it always deserves one.
- It’s a partnership, not a battle for supremacy. BDCs invest in companies that private equity firms and banks often overlook. Always remember that a company with proven, consistent, and stable cash flow in a sustainable niche market must have done something right to be where they are today. Therefore, their goals are worth paying close attention to. No reason that their goals can’t be yours as well.
That’s just for starters. We’ll plunge deeper into the responsibilities of CFOs at BDCs next time.
