Angels from Main Street
Q&A with Daniel Levinson
Who better to invest in tomorrow’s growing companies than the savvy individuals who built today’s? That’s the novel idea behind one Connecticut private equity firm. The following Q&A are exclusive material for our online readers.
RL: When should a company be considering debt as opposed to equity financing?
DL: Well our view on debt is debt is better than equity for a company’s perspective. It’s cheaper; theoretically if they believe in the company, the equity’s going to be worth a lot more. So they should get debt when they can; when they can support it with their cash flow. Most companies need to have a pretty steady track record, and a decent amount of assets, and be of a certain size to attract lending. Then a reason to go to the equity is if you’re tapped out on the debt, or you want a real partner to help you grow the business.
RL: When you’re looking at the potential investment how do you determine if there’s x-number of dollars needed, how do you determine what percentage should be debt, or how much you can debt and how much will be equity?
DL:It’s usually determined by the transaction, and it can be anywhere on the spectrum. So we’re happy to do an MBO, a management buy out, with a lot of leverage if the company can support, and the financial team wants it. But on the other hand, we’re happy to invest per equity with no debt if that’s a very growing company where they really need all the capital they can get. So we try to match up the amount of leverage with the nature of the business and the nature of the business planning, and every case is different. We’ve been everywhere on the continuum.
RL: Banks usually like to create assets, particularly ones that are collateralized, does the same go for private equity and funding for Main Street?
DL: No, we don’t think of things the same way as bank does.
RL:In some cases, it’s hard to look at the past as a predictor of future performance. How do you get your hands on that?
DL: We sort of can. I don’t mean the future has to be a carbon copy, but it’s got to be grounded in the past. So one of the companies that we invested in was over leveraged with Fleet Bank. And Fleet was being pretty restrictive to the business, so we went in; we provided the capital to take the company out of the bank. And so we said, “We looked at the past results, and we added to it assuming we have the resources to operate more freely.” In another case, we acquired a company from an 87 year old son of a founder who was a marvellous gentleman, but had not allowed the company to evolve into the current time with systems and control, and so forth. And so we took what was there and we sort of projected if we were able to have control and do some other things.
RL:Is there a risk of getting too involved?
DL: What we do is try to make our investors available to a CEO if we think any of the individuals in our network can add value. It doesn’t always happen. A lot of CEO’s think they know it all, and often they do, so it’s really up to them. If they are really yearning to talk with people on our advisory board, we set it up. If they’re happy to take the money and call us when they need us kind of thing, that's fine. We work with them either way.
RL:Do you look for synergies among your portfolio companies?
DL:We don’t have to have it, but when we can it’s a real win.
RL: How has the environment for private equity investors changed post Internet bubble?
DL: It’s all changed. It’s back to basic business and making real money. But for good companies there will always be capital. We didn’t get too involved in the internet thing on the upside or the downside, so we’re just quietly going about our business looking for great teams with business plans that make sense. But I do think funding is starting to come back for high tech as well.
RL: If an investor is interested in speaking with you what’s the best route?
DL:Well, the problem with the way we’re set up is with private equity funds you generally raise the money then you invest the money then you raise money. So there isn’t a mechanism right now for someone to invest in our fund. It’s called a closed fund. But a couple years from now if we do a good job with this we’ll raise more and keep going.
RL:How many investments this year so far?
DL:None this year. We would like to do it one per quarter, but it’s generally lumpy, so we could have a quiet year and then a busy year. We’ve made six investments in this fund that we’ve had for a couple years, two or three years. And four of those companies have acquired competitors.
RL:If a potential portfolio company is looking to get in touch with you?
DL: They should just call, or email, or go to the website.