LBC Credit Partners has a history of working in the middle market, but by creating two separate yet complementary investment strategies, it has developed an active pipeline in the lower middle market as well. Don Rice of LBC Small Cap explains the origins of the business unit as well as its approach and symbiotic relationship with LBC Credit Partners overall.
Capital providers that try to be all things to all borrowers can put themselves in a dangerous position. By trying to attract every borrower and fund every deal regardless of size, a company can overextend itself and ultimately fail at creating value. At LBC Credit Partners, a two-pronged approach to the market has helped the overall company win deals from up and down the middle market while avoiding the risk of stretching itself too thin.
The first of LBC’s two investment strategies is the original LBC Credit Partners, which prefers to invest amounts in the $15 million to $150 million range. The second strategy is LBC Small Cap, which invests in the $4 million to $15 million range. As a result, LBC can partner with companies throughout the middle market.
In addition to an investment size within a certain range, LBC Small Cap has a specific preference when it comes to structure, normally opting for unitranche financing along with a minority equity investment. However, there is plenty of flexibility. For example, LBC Small Cap can partner with banks and provide the mezzanine piece for asset-based or cash flow deals that might reach into the $30 million range.
“We try to work with our fund LP base as much as possible for revolvers and first out/last out opportunities because we’re really not set up to provide larger revolvers, especially if it’s an actively used revolver. We like to bring in our LPs to provide the revolver,” Don Rice, a partner at LBC Small Cap, says. “And if it’s a first out/last out opportunity, we bring our LP banks and others in and work with them on that as well.”
Rice says that LBC Small Cap doesn’t have a specific industry focus but strives to invest with companies that can provide growth opportunities. If there are any restrictions, they are mostly imposed by the company’s standing as a Small Business Investment Company, which requires that all companies in which it invests have 51% of their employees or more based in the U.S. In addition, Rice says LBC Small Cap is careful with “industries that have really deep cycles,” citing examples like restaurants, retail, oil and gas exploration, entertainment and staffing.
Transparency is Key
Rice also infuses his own experience into LBC Small Cap’s approach. As a managing partner for multiple funds and pools of capital during his career, Rice has previous experience at Prudential Capital Group, First Texas Merchant Banking Group, Rice Capital, RSTW and Penn Mezzanine Partners, which he joined after moving to Philadelphia from Texas in 2000.
Throughout his career, Rice has learned that being responsive and transparent is critical in any business relationship.
“I think you learn pretty quickly that the golden rule works in everything you do in life,” Rice says. “I always try to treat people how I like to be treated, responding in a timely manner and being totally transparent in my response. If you like the deal, you’re going to pursue it. Being a good partner once you’re in a deal is important.”
Rice also says it’s important to be cautious when considering debt levels and to adjust based on the type of industry and equity partner. Rice also maintains a consistent message about the importance of the control equity group in each deal, whether they be funded by private equity groups or independent sponsors.
“We want to see some real skin in the game,” Rice says. “Typically the independent sponsors are bringing investors who have worked with them in the past, which is a good sign for us in that they are bringing some significant equity to the table.”
The Right Time
Before the LBC Small Cap strategy was launched, Rice first got to know LBC Credit Partners by working with John Brignola, senior managing partner of LBC Credit Partners. They partnered on a fund portfolio sale of an investment for which LBC Credit Partners was providing senior debt while Rice was with RSTW Partners.
“Over the years we had talked about the attractiveness of the SBIC market,” Rice says. “It just turned out that it was good timing for us to come together and pursue it.”
The interest in creating an SBIC and launching the Small Cap strategy was attractive to LBC because the firm’s increasing fund sizes were forcing it to pass on smaller deals.
“LBC wanted to be effective to their customer base, so as they continued [to] raise larger funds, they couldn’t justify investing in these lower middle market companies,” Rice says. “They didn’t want to be forced to focus on only the larger deals; they wanted to be able to focus on smaller deals as well.”
LBC Small Cap was licensed as an SBIC in 2017 and, according to Rice, had a final fund close in January 2019. Since then, LBC Small Cap has worked harmoniously with LBC Credit Partners, utilizing the firm’s many assets.
“We focus on lower middle market, smaller companies. If it’s a larger deal, we can send it to LBC Credit Partners,” Rice says. “So regardless of the size of business, the company could come to LBC for financing, whether it’s a lower-, mid- or upper-middle market entity.”
The flow of prospective investments from LBC Credit Partners to LBC Small Cap is active with smaller opportunities.
“We get very good quality deal flow from the LBC Credit Partners’ originators,” Rice says. “So when they send a deal over to us, it receives top priority.”
It goes beyond simple deal size, however, with Rice noting that the scale, experience and back-end capabilities of the overall LBC platform give the Small Cap team an abundance of resources, including full-time teams in originations, IT, professional compliance, investor relations, accounting and treasury.
“They’ve got systems in place that only larger firms can justify in a form that we can use,” Rice says. “We utilize all of those aspects and it’s very helpful. We’re a small firm that has the capability and resources of a much larger firm.”
Rice also sits on the investment committee with three of LBC’s founders, ensuring that the Small Cap side of the business has a very experienced investment committee.
“As an investment committee, they have seen a lot and experienced a lot, and that’s very helpful because we get into a committee meeting and as much as we think we know about a deal, they’ve always raised very good points,” Rice says. “Having a number of good minds and eyes focused on the deal is always helpful.”
Looking for Good Deals
Future plans for LBC Small Cap are simple enough on paper, but ambitious in reality. They are built on continuity of the approach and success of the strategy.
“We want to continue to grow it. We’d like to stay in the market that we’re in because it’s such a good fit with LBC Credit Partners,” Rice says. “We would like to grow our Small Cap lending business through the SBIC.”
As with all companies, any future plans have been and will continue to be adjusted due to the COVID-19 pandemic, although Rice says that LBC Small Cap has avoided much of a pandemic-related impact to its portfolio and deal flow. As other companies come back to market and competition heats up, Rice wants to remain focused on the opportunities being created in this environment while maintaining a good line of communication with portfolio companies.
“Purchase prices are coming down some, leverage ratios are more realistic and the risk/reward ratio that lenders are receiving is more attractive,” Rice says. “There’s a lot of money on the sidelines. So the competition is always there, especially for good deals.”