Beyond The Magaloans
If you are in the market for working capital financing, the chances are you won't go looking in the insurance industry. After all, everybody knows that the big insurance companies, with billions to invest, are not going to mess around with small loans to small companies right? Well, not so fast.
Consider the case of ALPAC Corp., a privately held, Seattle-based soft drink bottler serving the Pacific Northwest, Alaska, and Hawaii. Last summer, ALPAC began searching for a way to refinance $5 million of short-term bank debt, which it had been using for such things as plant expansion and the purchase of delivery trucks. Although the level of financing was adequate, the cost of the money fluctuated with the prime rate, says controller Dennis Ryan. "We looked at the balance sheet and felt we wanted some more stability." So ALPAC approached several institutions. Oddly enough, the one that offered the most favorable terms was the San Francisco regional office of PruCapital Inc., the $4-billion-asset corporate lending subsidiary of The Prudential Insurance Co. of America, which wound up lending ALPAC $5 million for a period of five years at "a favorable rate," according to Ryan.
Insurance companies generally don't talk much about their role as small business lenders, but Prudential companies have been making loans of as little as $3 million to small and medium-size businesses for about 30 years. For instance, PruCapital, which is based in Newark, N.J., has 11 regional offices around the United States that are authorized to lend to companies with sales of around $20 million and up. According to Susan Morse, vice-president of corporate finance and head of the San Francisco office of PruCapital, the insurance company not only makes long-term, fixed-rate loans, "but we also do floating-rate lending based on commercial paper costs or alternative pricing, such as certificates of deposit."
Although insurance companies usually seek senior debtor status, PruCapital will consider other arrangements as well. "How we structure a deal really depends on what a company is willing to give up and on our perception of the risk level," Morse explains. "We will do subordinated debt, preferred stock, and debt with warrants. We do a lot of lending for leveraged buyouts and alternative-energy projects."
Not surprisingly, Prudential, like other big insurers, prefers to lend to stable businesses with proven management. "We don't typically lend to high-tech companies unless there's a good operating history," Morse says. And what does PruCapital like to invest in? Among the businesses she mentions are grocery store chains, non-fashion retailers, and specialty chemical manufacturers.
"The perception on the part of a lot of people is that insurance companies are only interested in megaloans," Morse acknowledges. "But if you look at some of the things we do, we're basically a middle-market lender."
Management buyouts may be all the rage these days, but until recently they have been pretty much confined to mature, stable industries. The reason is that most management buyouts are also leveraged buyouts, wherein the debt used to purchase the company or division is secured by property and other assets, then repaid with cash-flow from operations.
That may be changing, however, judging from the recent experience of Josef Ref and two of his fellow managers at Coors Ceramics Asia-Pacific Pte. Ltd. in Singapore, a growing ceramics-packaging business owned by the privately held Coors Porcelain Co. in Golden, Colo., a subsidiary of Adolph Coors Co., the well-known brewer.
Founded in 1978, Coors Ceramics was in the business of manufacturing packages for high-quality semiconductors. It produced them at the plant in Singapore and, last year, generated revenues of about $9 million. Looking to the future, Ref and his colleagues -- Aime Avniel and Eng Seng Chew -- urged Coors to invest in a new plant that would be able to turn out more advanced products. Instead, Coors decided to get out of the business, and offered to sell the division to Ref's management team.
The managers put together a business plan and began approaching investors. "We figured we'd need a total of between $4 million and $5 million," says Ref, an Israeli-born electronics engineer. "We needed money to pay off Coors for the existing business, which included a plant and a market reputation," says Ref. "But we also needed money to produce the next generation of products. Without them, we'd be in trouble."
Several prospective investors offered deals that would have required the managers to raise a portion of their money by borrowing against business assets or issuing convertible debentures. Ref wasn't interested. "We wanted to avoid debt so we could concentrate on expanding the business," he explains.
Eventually he succeeded in convincing a group of venture capitalists, headed by Greyhound Computer Corp. of Phoenix, that he was right. They put in all of the new money -- about $5 million -- as an equity investment, allowing Ref and his team to retain nearly half the stock. "Any major debt would have inhibited the growth," says David S. Timson, Greyhound's director of venture management and analysis. "Unlike most management buyouts, [in this case] we wanted them to build the company rather than maintain it. We want to participate in the growth."
The new company is called Microelectronic Packaging Inc. and is based in Scottsdale, Ariz. As of this spring, plans were under way to establish a manufacturing facility in Arizona, where the company will produce a new line of semiconductor packages. Says Ref: "We hope to be doing sales of $50 million to $70 million within five years."
And will we be seeing more management buyouts of growing companies? Greyhound's Timson, for one, believes that we will. As more and more diversified companies shift their investment priorities, opportunities will arise, and managers will seize them, he says. "Wherever there's an existing base of business, it often makes sense to build on what's there rather than creating a brand new company."
When most of us think of Holland, images of windmills and tulips come to mind. But Holland is also a land hit hard by Europe's recession and persistent double-digit unemployment, and now it has joined a growing list of European countries looking to American entrepreneurs for help in stimulating their economies. The Dutch, however, are taking a different approach from the others: They are coming to the United States as venture capitalists.
Leading the effort is Daniel J. Piliero, formerly the managing director of Chevron Corp.'s Dutch subsidiary. In February; he set up U.S. operations for the $400-million MIP Equity Fund, with offices in Greenwich, Conn. The fund, financed equally by the Dutch government and private industry and managed by industry, will seek to generate economic growth in the Netherlands by having foreign companies establish facilities there. But Piliero insists that this social purpose will not keep the fund from being "very much profit-oriented. We don't give outright grants like other countries. We're interested in equity in the business -- or at least in the Dutch operation."
As a rule, MIP Equity Fund is looking to invest a minimum of $1 million for minority equity stakes in businesses with proven track records. Among its early prospects were a New York City pharmaceuticals distributor with annual revenues of around $20 million, and a $12-million-a-year technology company seeking to establish a research and production facility somewhere in Europe. For private companies, the Dutch fund is willing to structure deals so that the owners can repurchase equity on prearranged terms. "Because we aren't an early-stage investor," Piliero notes, "we're content with a 10% to 15% annual return" -- substantially less than most venture capitalists are willing to settle for.
Like other venture capitalists however, the fund usually requires representation on the board of directors of any company in which it invests. "We do it not because we want to manage the company," Piliero says, "but so we can provide as much help as we can in doing business: in Europe. We know a lot about the whole continent, and we think we've got some awfully good contacts."