Investors looking for opportunities in small and midsize private companies like to say that management, not the financial statements, is the best gauge of potential. Well, sure. But how does a private investor looking for great opportunities put that insight to work? Many business owners can talk the talk and walk the walk, but collapse under pressure. Identifying those with the skill, resilience, and mettle to overcome the inevitable obstacles is next to impossible.
Seven years ago, Dan Levinson, then employed by a highly successful New York City private equity firm, had a flash of insight: Why not seek the advice of people who know entrepreneurs best — those who have successfully built their own companies. Levinson quit his job and set up an investment pool funded by wealthy entrepreneurs as well as several New York area banks. With over 90 successful business owners as investors (also known as “angels”), Main Street Resources, run by Levinson and his team, has invested in several small and midsize businesses. It has investments in several northeastern companies, ranging from a distributor of stainless-steel fasteners to a supplier of DVD packaging, and is looking for more.
Main Street has attracted a lot of attention lately, not just for its ability to spot promising businesses, but for the way it leverages the expertise of its investors to maximize the performance of these companies. “We make it our objective to become the CEO’s closest advisor,” Levinson told me recently in the company’s Westport, Connecticut, offices. Here are some excerpts from our conversation.
RL: What do you look for in a potential portfolio company?
DL: Great management that’s financially and emotionally committed to what they’re doing. We focus primarily on established companies that are growing based in the tri-state or the Northeast area, so we can get to them and be close to the CEOs. And we don’t do any technology or start-ups.
RL: How do you find them?
DL: Companies generally come to us when they need capital to do any number of things such as acquire a competitor or to grow. Sometimes they might need money to open a new plant, or to take on a new product line. The company might be owned by a conglomerate or an estate, or a founder who’s no longer active, and we’re very happy to help the guys that are running the company own a chunk of it themselves. Companies also want to use our capital to repay the bank and become safer, those types of things.
RL: What size companies are you looking for?
DL: Generally, $10 million to $100 million in sales.
RL: What other financing options do they have?
DL: Generally, pretty good bank financing, because they’re big enough to have credit lines of at least $5 million or $10 million. There’s also equity and mezzanine [a combination of debt and equity] funding. Those tend to be the pieces.
RL: Does your equity investment usually accompany debt, or is the debt usually in place?
DL: One of the things we bring to the table is the ability to line up new debt with better terms. Often, companies of this size have personally guaranteed debt from a local bank. We can bring in a more business-oriented bank that will eliminate the personal guarantees and usually be more aggressive in offering cheaper or more capital.
RL: Is there a minimum return you look for ?
DL: It’s a little bit a function of how risky we perceive the investment to be, but generally we’re looking for a minimum of three to four times return on our money, which could be also described as a rate of return in the high 20’s to high 30’s, depending on the amount of time until we exit.
RL: What’s your time horizon? How long do you like to keep your investments before cashing out?
DL: Five years is a good average, but it could be three; it could be six.
RL: How do you evaluate a company’s own financial projections?
DL: We generally want to see that the future is securely based on the past, so if future projections have nothing to do with the past, then it starts to feel like a start-up, or a technology transaction. That may be fine for some investors, but it’s not usually within our comfort zone.
RL: It can be hard to predict the future from past performance. How do you get your hands around that?
DL: I don’t mean the future has to be a carbon copy, but it’s got to be grounded in the past.
RL: Can you give me an example?
DL: One of the companies we invested in was overleveraged with a bank that was being pretty restrictive to the business. Our capital could take the company out of the bank and give it the resources to operate more freely. So we adjusted the projections to take that into account. In another case, the company was owned by an 87-year-old son of the founder, who was a marvelous gentleman but had not put in the kinds of systems and controls that would allow it to evolve with the times. So we asked ourselves how the outlook might change if we were able to have control and do some other things.
Robert Levin is the Editor-in-Chief and Publisher of The New York Enterprise Report. Levin has extensive experience with midsize and small businesses, having previously held CEO, CFO, and COO positions with companies in several industries. He is also a contributor for The Huffington Post. Levin can be reached at firstname.lastname@example.org and (212) 307-6760.