Allied apprentices: As former Allied Capital principals form a bevy of startups, craft investing in the D.C. area sees a resurgence. As seen in the Washington Business Journal, January 18, 2013. By Bryant Ruiz Switzky, Senior Staff Reporter.
Private equity company Allied Capital Corp. was a longtime fixture in the local finance industry until it was sold in 2010 and moved to New York. Now about a dozen small firms started by former Allied folks are trying to recapture the company’s former magic. If they succeed, they could help make the Washington area a hotbed of private equity activity.
Allied Capital invested more than $14 billion in thousands of companies nationwide during its five decades in business. It ran into problems during the financial crisis and was forced to sell itself to New York-based Ares Capital Corp.
Its demise sent a slew of talent into the marketplace. And they seem to be doing well, despite the tough fundraising market. They include Farragut Capital Partners LLC, Rotunda Capital Partners LLC, Juggernaut Capital Partners LP and EDG Partners LLC.
What’s their secret? Connections. A strong pedigree. Confidence. A culture built on teaching. And a foundation, Allied Capital’s former CEO says, in rigorous credit analysis underpinning any deal.
“You look at pretty much all of us, and we’ve all been able to raise a fund,” said Phil McNeill, who founded Farragut Capital with a former Allied colleague. “If all of us are as successful as we think we’re going to be — and there’s no reason to think we wouldn’t be — it plays a role in making Washington much more of an investment hub than it has been before.”
Private equity firms generally raise large pools of money from institutional investors and high net worth individuals to invest in companies that fit their criteria. Many do leveraged buyouts, buying controlling stakes in mature businesses and improving them before selling five to seven years later.
Others focus on mezzanine capital investments, essentially making high-interest loans secured by corporate borrowers’ equity. Other private equity outfits focus on venture capital, investing in startups and betting on their future success.
When most people think of private equity prowess in the Washington area, District-based The Carlyle Group LP is the first that comes to mind. And for good reason. It’s one of the biggest players in the world — with $157 billion in assets under management across 101 funds and 64 funds of funds — snatching up billion-dollar deals on a weekly, or even daily basis across the globe.
If Carlyle is akin to a Citigroup Inc. or a JPMorgan Chase & Co., the boutique shops that spun out of Allied Capital are like community banks.
They do much smaller deals, often investing just a few million bucks into small and medium-sized businesses across the country for activities like acquisitions, debt refinancing and growth capital.
Farragut Capital, for example, is a small business investment company, a designation by the Small Business Administration that allows Farragut to get federal matching money to invest in small businesses.
McNeill and fellow Farragut founder Cabell Williams ran the SBIC program at Allied a decade ago and snagged Farragut’s SBIC license in July.
In the past two months, Farragut has financed a flight control technology company in Reston, a New Jersey digital media manufacturer for independent artists, an industrial coatings shop in South Carolina and an heating and air-conditioning business in Atlanta.
Allied veterans John Fruehwirth, Dan Lipson and Bob Wickham founded Bethesda-based Rotunda Capital Partners in late 2008. The company focuses on equity deals, buying a stake in businesses rather than lending them money.
Rotunda has closed five deals, including a data center engineering company in McLean, a shipping company in Dallas and a lease financing company in Washington state.
“If we can find one to two deals a year that we’re excited about, that’s perfect,” Fruehwirth said, adding that Rotunda is in the midst of an expansion he can’t yet discuss.
As the nascent boutique private equity industry in the region grows, Fruehwirth added, those that support it, like local lawyers and investment bankers, also will benefit.
“You’re building out an ecosystem around deals and transactions,” he said.
That growth also will give local companies more opportunities to get financed by someone in their own backyard.
“I believe it’s already happening,” Fruehwirth said, pointing to a company run by a personal acquaintance that he financed last summer. “But it’s a continuous process. It’s not something that happens in a year or two. It’s a five- to 10-year process.”
As that process plays out and the firms grow, they will help develop a deeper pool of private equity talent, much the way Allied did in its heyday.
“It was the place to learn the craft,” said Joe Burkhart, who began at Allied in 2000, a couple of years out of college. “They would hire young people and grow them from within.”
Burkhart is now managing director at New York-based SBIC Saratoga Investment Advisors LLC, where former Allied colleague Mike Grisus is chief investment officer.
That firm also has had success. Last year, it invested about $75 million in 14 companies.
Allied Capital’s former CEO, Bill Walton, isn’t surprised by his old colleagues’ success at running their own shops.
“We gave people a lot of responsibility to take things and run with it, recognizing that they’d have to go through a rigorous investment review process,” he said, adding later: “Credit [analysis] was the building block of our whole investment philosophy.”
Walton now is only semiactive in the investment community, working on media businesses and investing in Leeds Novamark Capital LLC, run by former Allied colleague Robert Monk.
That company formally applied for its SBIC license last summer and is waiting to receive it before doing deals.
Walton argues that private equity is an apprentice business, and Allied’s culture was particularly geared toward teaching its people how to invest.
That’s a key reason so many up-and-coming boutique investment firms were founded by former Allied folks.
“They’re going to be successful,” he said. “And therein lies the seeds of the next generation of investors in the Washington area.”
About Farragut Capital Partners
Founded in 2011, Farragut Capital Partners, LLC is a private investment management firm providing mezzanine debt and equity capital to finance leveraged and management buy-outs, generational transfers, growth capital financings, and recapitalizations. The firm is actively investing out of its latest investment vehicle, Farragut Mezzanine Partners III, LP. Farragut seeks to invest up to $10 million in established small and middle market companies with proven business models and stable cash flows. The firm targets companies with strong, committed management teams and the potential for significant growth in equity value.
Farragut specializes in asset-light businesses with unique and defensible market positions, stable business models, and reasonable capital expenditure and working capital needs. The firm works with owners (family businesses, equity sponsors, and fundless sponsors), senior lenders, and directly with management teams to create and build value in its portfolio companies over time.