Enhanced Capital Group has held a final close of Enhanced Credit Supported Loan Fund (ECSLF). The fund raised $105 million in limited partner investments and has the ability to utilize another $50 million in bank leverage. Through its Arch Note product, ECSLF solves equity needs of financial sponsor-backed portfolio companies with non-dilutive debt. ECSLF has completed ten financings within the last eleven months.
Arch Notes are one to five year loans to portfolio companies backstopped by an unsecured fund guarantee from a financial sponsor. The Arch Note utilizes the extra credit support to provide “off market” debt financing for these portfolio companies. Because of the fund guarantee, ECSLF can lend to companies at below-mezzanine rates (without warrants or any equity upside) in situations that would typically require equity-like returns. Arch Notes typically range from $5 million to $20 million, with the ability to lend up to $50 million through a co-investment pool.
According to Enhanced Capital Group, sponsors use the Arch Note product to obtain (i) non-dilutive debt capital in situations where other lenders would not provide debt (negative EBITDA, challenging industries, new technology risk, high existing leverage); (ii) unlock the value of older funds that are at or beyond their investment period, (iii) bridge to an exit, (iv) reduce the equity required to make a new or add-on acquisition, or (v) free up undrawn capital pledged to a bank. Arch Notes may be structured as first lien, second lien, unsecured, or holding company loans.
“We structure our deals to solve equity problems with debt solutions in an effort to maximize a fund’s returns,” said Douglas Cruikshank, Managing Partner for ECSLF. “This gives financial sponsors an attractive alternative to finance growth or pivots in lieu of using equity. Our approach allows sponsors to leverage their portfolio value, instead of undrawn capital commitments, to support their companies. Because we focus on the value of the financial sponsor’s portfolio, rather than the standalone credit quality of a single borrower, we can close transactions quickly and with a high degree of certainty, without the need to perform costly quality of earnings analyses.”
Enhanced Capital invests in established small and mid-sized companies overlooked by traditional sources of capital. The firm was founded in 1999 by former Welsh Carson Managing Partner Andy Paul and is headquartered in New York (www.enhancedcapital.com).
© 2014 PEPD • Private Equity’s Leading News Magazine • 12-2-14