Brandon Cushman grew up around the construction business. And
although he was ready to graduate from medical school in 1999, it
was the construction business that lured him out of the hospital
and back into the hot sun. Today, Cushman's Denver-based
company, Fauxcrete Inc., pours nearly $5 million worth of
stamped and dyed concrete every year.
Denver's seemingly endless appetite for development fueled
strong growth for Fauxcrete. Cushman says he doubled his business
annually between 1999 and 2004. But that rapid growth leveled off
last year when his banks and investors tightened the purse strings
and left him scrambling for cash to buy needed trucks and
equipment, not to mention meet payroll. "Every bit of cash we
got, we put back into the company," says Cushman. "We
needed capital to grow, and we'd exhausted our ability to
borrow."
Falling Into a Black Hole
At wit's end, Cushman decided he'd have to sell the
company to someone who could afford to fund its growth. But the
company's $2.7 million price tag created new problems.
"When we put it up for sale, our consultants said we were in a
black hole. We were under the radar of private equity groups and
over the heads of private individuals," says Cushman. "We
were stuck. I couldn't get a loan to grow it, and I
couldn't sell it."
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If Fauxcrete had been spinning off $10 million a year in
profits, financial buyers would have lined up. There are literally
hundreds of private equity groups, or PEGs, that purchase companies
that have reached significant profitability. But Fauxcrete was too
small for a traditional PEG, and Cushman's offer to sell
languished at the business brokerage for nearly an entire year.
Enter Silvercloud Companies of Denver, a new boutique
private equity group and holding company founded by Chris Younger.
Silvercloud is a small fund by traditional standards--with about
$10 million total capital--but its size makes it the perfect
funding partner for companies like Fauxcrete that are stuck in the
"black hole" between individuals and traditional large
investment funds.
If the PEG Fits . . .
Cushman says his deal with Silvercloud had benefits in many
areas: The fund has enough capital to pursue growth opportunities,
the fund managers bring years of corporate expertise to bear on his
problems, and although Silvercloud purchased a majority of the
shares of the company, Cushman gets to keep his job for as long as
he wants it. Compared to selling outright or taking on money from
an absentee partner, Silvercloud offers the best of both
worlds.
Those mixed capabilities make boutique equity funds incredibly
valuable to entrepreneurs. In the world of large, traditional PEGs
(or even VC firms, for that matter), it is rare to find fund
managers who do more than attend monthly board meetings.
Although historical data is scarce, the emergence of boutique
PEGs seems to have coincided with the vast personal wealth created
during the internet boom. And the fact that they manage personal
wealth, rather than institutional savings, is exactly what makes
boutique PEGs different. Traditional PEGs invest on behalf of
insurance companies, pension funds and other institutional
investors, and therefore end up with a very disciplined approach to
making large investments. Boutique PEGs, on the other hand, can do
just about anything the individual investors want.
Boutique Shopping
Because they are largely a reflection of the individuals behind
them, boutique PEGs come in many flavors. Some, like EJB World
Trade of Charlotte, North Carolina, manage the investments of a
single wealthy family or small group of close-knit investors.
Because the managers are free to invest in a variety of
opportunities, EJB defies easy definition. "We just don't
know what to call ourselves," says Brad House, EJB's
president and managing partner.
EJB has made venturelike investments into very early stage
companies as well as PEG-like investments into growth-stage
ventures. Plus, the three managing partners take very active roles
in management, often going so far as to hire and train key
staff.
In other cases, a boutique PEG may represent angel investors
through what is called a "pledge fund." One such pledge
fund is Compass Point of Carmel, California. Erik Bethel,
partner at Compass Point, is looking to invest from $1 million to
$10 million in each of two to four growing, consumer-branded
companies.
"We help entrepreneurs in many different situations,"
says Bethel. "It could be a management team that wants to buy
the business, a founder who needs growth capital, or an older
entrepreneur who just wants out of the company altogether." In
any event, Compass Point has the right resources for companies that
are stuck below the threshold of larger, traditional finance
groups.
Finally, some boutique PEGs look more like entrepreneurial
companies themselves. Mac Lackey started Blackhawk
Equity of Charlotte, North Carolina, after a successful
entrepreneurial career in the technology industry. Now,
Lackey's Blackhawk fund is majority partner in an early stage
company making high-quality khakis and active wear. Lackey expects
to play an operating role in three to five companies as he invests
his fund companies in various industries and at various stages of
growth.
What to Expect
Like all equity investors, boutique PEGs have investment
criteria and expectations that can give an entrepreneur heartburn.
Many, including those highlighted above, expect to buy a
controlling interest in a company. Giving up control requires an
entrepreneur to accept the investor as a boss, no matter how much
it hurts. And when control changes, the founder's job
description often changes, too. For business owners who love being
in charge, giving control to a new investor may not make sense.
On the other hand, when a fund buys control, some or all of the
capital will go to purchasing shares of stock from the founder.
That means the founder benefits personally from the transaction--a
very different proposition than most investors can offer.
Finding a small PEG can be tough, since most prefer to remain
under the radar. A web search may turn up a few, but the smallest
don't even have websites. Word-of-mouth--through networking
with angel investors, VCs and larger PEGs--is often the only way to
learn about these boutiques.
Cushman of Fauxcrete says the transaction with Silvercloud
couldn't have gone better. Even though he gave up a majority
interest in the company, he says the net result was positive for
both him and his company. "After getting to know Younger and
his management style and the opportunities that he brought,"
he says, "it was a no-brainer."
David Worrell is author of the e-book Finding
Funding.