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Second Street Capital: New business funding source 1/27/2012 One of the reasons recovery from the great recession has been wobbly is a lack of bank lending and corporate investment that is stifling business creation and expansion.
According to Capital IQ, which provides data and analytics for financial professionals, big U.S. banks are sitting on huge cash hordes. As an example, the company reports Bank of America, JP Morgan Chase and Morgan Stanley have a combined total of nearly a trillion dollars in cash and cash equivalents gathering dust in their vaults while business stagnates for want of investment capital.
Now, a new company, Second Street Capital, is riding to the rescue of small and medium-size companies, with plans to fund a range of businesses in Indian River County and throughout Florida.
"We want to promote old-fashioned, value-oriented investment policies by backing well-managed local companies - places where we can eat, shop and watch our investments grow while contributing to the local economy," says Executive Vice President Jack Rodgers.
The company, which Rodgers says was a year in the making, announced in November it had raised initial capital through private placement of common stock. It plans to make its first investments, including investments in local firms, in the next two months.
"We have our eye on a couple of deals we like a lot," Rodgers says.
The company will invest in restaurants, real estate development, manufacturing and other segments, putting between $500,000 and $10 million into existing companies with strong management and growth potential.
"Big hedge funds and venture capitalists are all chasing elephants - the $150 million deals," says Rodgers. "The more people that chase the elephant, the skinnier it gets.
"We are looking at deals that banks won't touch and that are too small for big hedge funds to pay attention to. We think there is a lot of opporttmlty in that part of the market."
As an example of a typical deal, Rodgers says the company might help a restauranteur buy the buiding he is leasing or expand into an adjacent building.
"We would provide a loan at say nine percent interest that the business would pay back on a set schedule and for a period of time take a portion of the increase in profits resulting from expansion," Rodgers said.
Another example would be a real estate deal in which an experienced developer would present a plan to buy and revitalize a bankrupt housing track. "We might fund the deal with a loan that would be paid back with interest and at the same time participate in the profits, taking our share as lots were sold to builders or homes were built, exiting the deal when the development was complete."
In an alternative scenario, Second Street Capital might put $1 million into a small development deal, shifting it into a category that could attract bank cash for the rest of the financing.
"Trying to describe us is a little bit unique," Rodgers says.
"We are not venture capitalists. We are not looking for the person who comes in and says they are going to create the next Google, someone who needs funding to get space and put a bunch of engineers in there and develop a revolutionary product. We are more like merchant bankers.
"We are looking at established companies that have proven they can run their business and that have an opportunity to expand or do something that is exciting, but that do not have access to capital because of the virtual shutdown of commercial banking."
Besides putting up money - mostly raised from high-net-worth individuals looking for a place to put their cash to work - Rodgers says Second Street Capital will help structure deals and provide other types of expertise born of the long business careers of the investment company's founders.
Summerp1ace resident Rodgers and Kyle E. Meyer, the new company's chairman and CEO, have worked together in high finance and real estate development for decades.
Another company they created, Ironshore Capital, bought and relaunched the River Club Community in 2011, where a new display home will be complete in the next week or two and 70-some luxury home lots have been put back on the market.
Other area business people serving as Second Street corporate officers and executives include Anthony Caldarone, formerly president of Vero Beach homebuilding firm Calton, Inc., his daughter Maria Caldarone, who was Calton's executive vice president, and Laura Camisa, formerly CFO at Calton.
"Calton wound down its business operations after the real estate crash and was basically a company with a corporate structure and a clean balance sheet but no assets," Rodgers says.
"We renamed it and used its structure because we think it gives investors a greater sense of security than if we started a new private equity firm.
"As a publicly traded company, we have an advantage in raising additional capital going forward and are subject to all the guidelines, transparency and scrutiny required by the SEC.
"With this structure investors wil1 have greater liquidity, too. Instead of having to wait five years to cash out of a deal, they can sell their stock whenever they want."
Besides providing an established, publicly traded corporate structure, Anthony Caldarone purchased shares of common stock and invested in the new firm, according to a company press release.
Rodgers says he will continue as Ironshore Capital's managing partner at River Club but otherwise focus his efforts on developing deals for Second Street.
Calton is headquartered in Fort Lauderdale but will be opening an office in Vero Beach and hiring what Rodgers calls "smart MBA-types" to help analyze deals in this area.
The company plans to put several hundred million dollars into promising business enterprises in the next few years, playing in a part of the financial services sandbox where there is surprisingly little competition.
"Every time I open my mouth about what we are doing, I have 50 people coming to me to ask for funding," Rodgers says. "Local banks are even coming to us and asking if we can fund depositors they have had long-term relationships with who need money for business expansion."
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