In 2020 we established a HoldCo focused solely on buying US companies. Unlike our first HoldCo we decided to not go it alone and raised outside capital.
We were looking to invest a total of $40,000,000. My partner and I invested $12,000,000 of initial equity and the capital raise would be $28,000,000. We had yet to buy anything, so the investor was entering a blind pool. We gave them guidelines of what types of businesses we would buy and that they would be in the US.
We would have a total of 5 years from the first acquisition or the limit of $40,000,000, whichever happened first, to deploy the funds.
We offered the investors two different convertible debt instruments.
The first paid 8% interest. As we are buying established cash-flowing businesses, we can make interest payments from the very beginning. The convertible debt had a warrant attached to it. The warrant gave the holder the right to convert up to 20% of their debt for common stock. The conversion would take place on the 5th anniversary (or when all funds had been deployed) and would occur at par value. In essence, the investor would have a “free look” at the companies we bought and how we operated them before deciding to become a shareholder or not. But they would be able to enter at the same valuation as the businesses were acquired for. Each calendar year after that moment we follow a repayment schedule for the remaining debt position.
The second debt instrument was non-convertible. It paid a fixed 10% coupon but had no warrant attached to it. All debt holders would follow the same amortization schedule.
We charged no performance fee. We do receive a management fee in line with what all our companies pay us for shared services.
We buy our businesses for a 4-5X multiple and when combined with the 30% of equity my partner and I invested, the HoldCo starts each deal with a respectable 4:1 interest coverage ratio.
What do the investors get? A decent coupon with the upside of private equity-like returns. Investment in a blind pool, without the risk of equity in businesses they do not yet know. A low-risk interest coverage ratio and scheduled return of their capital. We verbally committed to a public listing or share repurchase program beginning in year 10 for those who want to exit their equity investment.
What did we get? Well-negotiated leverage. We are not charging a performance fee. We are not money managers or asset accumulators. We are building a business. The terms of the debt we were provided are highly favorable. Our interest payments are based on our results, so default risk is nearly inexistent. Our repayment schedule is based on a percentage of our earnings as well. So once again, default is nearly impossible. We secured $28,000,000 of leverage for our US business while nearly eliminating default risk. For that, we gave up a piece of the equity.
We made our first acquisition in February 2021. So, in February 2026, or when we deploy the full $40,000,000 the “conversion date” will occur. We have bought two companies so far and are closing our third acquisition. After that acquisition, we will have invested 67% of the $40,000,000 and probably have one more left until full deployment.