The VC on the Corner

 

If you have a relationship with a lending institution, it's worth investigating whether that bank maintains a private-equity arm to invest in growth companies.

Aggressive networking is, as always, a good idea. "The banks that have made private-equity investing a priority either have set up subsidiaries or acquired companies that know how to do it, so they're already out there following market trends and looking for good investment prospects," says Laurence Markowitz, a Salans partner who assists clients with private-equity placements and sometimes works with bank investors on equity deals. "If they haven't yet approached you, then you're best off working with some kind of middleman, whether it's an investment banker or your attorney or accountant, so long as they've got a proven record of dealing with banks as well as other sources of capital."

For any business owner who's been frustrated by the time-consuming loan-application process, there's some good news. When it comes to handling private-equity investments, banks are just as fast and efficient as any other players in the market are. That's because the decision makers in the banks' equity deals often gained their expertise working at traditional private-equity funds or investment banks.

If you're interested in pursuing this financing path, keep in mind a couple of caveats: Small-but-steady-growth companies need not apply. Also, if your growth model is very high risk, your prospects with bank investors may not be too strong, especially given the current state of the economy. Private-equity insiders say that the downturn in the Nasdaq market and, most especially, the dot-com collapse have raised caution levels and made banks likelier to nix deals that lack very clear exit strategies.

That's not too surprising. After all, willing and able as bank investors may be, they are simply not the same as other private-equity players. According to Miller of the ABA Securities Association, many banks have been spooked by proposed Federal Reserve Board regulations that would require them to set aside large amounts in reserve against such risky investments.

"Banks have problems with these rules, especially as they were initially proposed by the Fed, since they would have needed to set aside reserves worth 50% of each investment," says Miller. "That's very different from the requirements that they're used to dealing with, which allow them leeway about which loans they make small or large reserves against." One way that the nation's largest banks have tried to cope with such restrictions is by wooing outside investors to put up some of the funds the banks will invest. Chase Capital Partners has been particularly active in that regard.

The bottom line for business owners: look for new and expanded opportunities on the bank-equity front. And keep in mind a lesson that you've probably already learned in your search for a line of credit: bankers can be a hard sell, at least the first time you approach them. So build a good business plan, concentrate on achieving your growth objectives, and keep knocking on those doors.

Jill Andresky Fraser is Inc. 's finance editor.

Prospecting Online

It's hard enough to come up with a list of investors that are worth approaching in the private-equity market. It's even harder when a new trend is developing, as is the case today with banks.

Although there's no comprehensive, up-to-date source of information regarding which banks are doing what in investing in growth companies, the Internet is always a valuable tool when you're hunting for capital. One site that provides a wealth of leads about both debt and equity options is www.businessfinance.com. There you can explore local microloan programs and all kinds of government financing opportunities (including those connected with the Small Business Administration). The site also covers equity options (with investors divided into different categories, based on the type of private-equity money you're seeking).

After that, try doing an Internet search using such word combinations as "banks and merchant banking" and "commercial banks and venture capital." You won't generate a bank vault full of leads, but you may come up with some interesting prospects that you haven't learned about elsewhere.

Please e-mail your comments to editors@inc.com.

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