Mezzanine Debt For Operating Businesses
Prudent Capital provides mezzanine financing to operating businesses. Operating businesses we look for have a commercially proven product or service plus substantial revenue and profits (typically start-ups, tablecloth restuarants, retail establishments, and software companies are avoided). Depending on the type of Company, Prudent Capital evaluates many different investment criteria as part of its disciplined and opportunistic approach to investing. The emphasis placed on each criterion is dictated by the particular situation.
Target Financials
Businesses should have at least $1 million of EBITDA for the trailing twelve-months; audited financials strongly preferred
Target Industries
Industry agnostic, with significant experience with government contracting, healthcare, business services, light manufacturing, and distribution
Target Geography
Headquartered in the eastern half of the United States; but can have operations elsewhere inside and outside of the United States
Target Deal Size
$2 million to $12 million per portfolio company
To download a full listing of investment criteria, click Here
Our Deals
Use of Capital - Reasons to look into mezzanine financing:
- Refinancings
- Acquisitions
- Growth capital
- Recapitalizations
- Management leveraged buyouts
- Redemption of existing owners
- Liquity/diversification/estate planning of business owners
Debt Terms - Typical terms of our mezzanine debt deals:
- Interest only for up to 2 years, after which the loan will be fully amortized over 3-5 years
- Often no prepayment penalties after the second year
- Blanket lien securing the loan (subordinate to senior debt)
- Interest rate of 12-15% per annum plus warrants; often with a cap on overall IRR
- If $3M of EBITDA and significant tangible book value, a warrentless loan is possible (at a higher interest rate)
- A 2% loan origination fee payable from proceeds
Value Added Services
Prudent Capital’s Portfolio Manager, its Advisory Committee and many of its Investors (the “Prudent Capital Group”) possess excellent track records of building value for companies and shareholders and will be available to assist the management teams of Prudent Capital’s portfolio companies in devising appropriate strategies and tactics to advance the near and long-term goals of the portfolio companies.
The Prudent Capital Group will utilize their contacts to help the portfolio companies network with potential customers, vendors, acquisition candidates, professionals, senior lenders, private equity and investment bankers. In addition, the Prudent Capital Group can help with Letters of Intent, Purchase Agreements, deal structuring, incentive compensation plans for the management team, succession planning and more.
A representative from Prudent Capital will:
- Attend all board meetings
- Review monthly operating statements, annual financial statements and budgets, and projections
- Suggest best practices based on its years of expereice with many middle market companies
- Assist with the strategic planning of the business
- Assist with executive incentive compensation plans
- Assist with qualified and nonqualified retirement plan design and implementation
- Assist with the real estate needs of the business
- Assist with the mergers and aquisitions strategy
- Assist with the senior borrowing needs
- Help optimize the exit strategies for the owners
Due to the collective expertise and contacts of the Prudent Capital Group, many potential portfolio companies seek an investment from Prudent Capital not merely based on the financial terms of the investment, but also due to the desire of such potential portfolio companies to obtain a partner that can make a difference in helping to grow their companies.
Investment Process
- Prudent Capital welcomes requests for capital directly from potential portfolio companies as well as from intermediaries, bankers and sponsors
- After a preliminary telephone call to review the business, its historical financial results, the intended uses of the new capital, the management team and the amount of the new capital needed, an immediate decision will be made whether there is potentially a good fit
- if potentially a good fit, a request for some preliminary written information will be made (see “Request for Capital Checklist” below)
- After an initial favorable review of the information, the Portfolio Manager will either visit the potential portfolio company or participate in a conference call to meet the management team, to review the company's operations, and to answer any questions regarding the company's materials
- After a favorable meeting or call, additional information will be requested from the potential portfolio company, and, upon receipt of such information, a term sheet will be prepared by Prudent Capital
- After the execution of a mutually agreeable term sheet and the payment of the required expense deposit, the Portfolio Manager will request additional due diligence materials and compile the underwriting package required by Prudent Capital and its Advisory Committee to approve the transaction. Such package includes:
- a narrative describing the transaction (if any), the operations of the potential portfolio company, the industry of the potential portfolio company, the pros and cons of the investment and how the potential portfolio company satisfies Prudent's investment criteria;
- historical financial statements of the portfolio company (audited if available);
- projections of the free cash flow to be generated by the operations of the potential portfolio company for the next 3-5 years;
- the executed term sheet; and
- an organization chart for the portfolio company.
- After the approval of the investment by Prudent Capital's Advisory Committee, the due diligence will continue and legal documentation of the investment will commence
- Funding of the investment will occur at closing when all of the documentation is complete and executed
- Depending on the availability of information from the potential portfolio company, and the timeframe dictated by the planned transaction, the entire process usually takes between 30 and 60 days.
Request For Capital Checklist
- 3 years’ historical financial statements prepared by an outside accountant (preferably audited)
- As current as possible year-to-date operating statements
- 3 - 5-year projections with assumptions articulated
- Organization chart with all indirect, overhead or general & administrative employees listed
- If subsidiaries or affiliates, a corporate organization chart with all entities and ownership listed
- Marketing materials used by the business
- A schedule of the amount of capital desired and its intended uses
- A business plan or other narrative describing the operations of the Company, its future plans and how such plans are to be achieved
- A list of the owners of the business
- A list and detailed terms of all interest-bearing debt of the business
- A list of competitors and industry trade associations
- Information concerning the size of the industry and its growth potential