GROWING THE BUSINESS
Helping Venture Capital and Private Equity Firms Finance Promising Companies
If you’re an investor with deep pockets, there are Florida-based venture capital (VC) and private equity (PE) firms that will put your money to work in the business world. If you’re an entrepreneur, those VC and PE firms can provide the equity capital to grow your company or cash out on your sweat equity.
And there are experienced South Florida attorneys, accountants and other professionals who can help both sides of a financial transaction achieve those goals.
“An improving national economy is creating more opportunities for many growth-oriented businesses,” says Daniel H. Aronson, who leads the Corporate, Securities and M&A practice group at Berger Singerman LLP in Miami and chairs the Florida Venture Forum. “Because debt capital is still hard to get, many entrepreneurs are looking for sources of equity such as venture capital.”
Florida’s VC and PE markets have been heating up for the past year, according to John Igoe, partner, Locke Lord in West Palm Beach. “The current trends are very positive for the venture capital market. It’s a sellers market now and there is a lot of merger and acquisition activity.”
But it’s important for business owners and potential investors to understand the different levels of the equity financial markets:
- Founders, family and friends. Many businesses start small with capital contributed by the entrepreneur, and partners who have a personal relationship with the owner.
- Angel investors. This might be an individual or a group of investors who pool their resources to support early-stage companies that may need managerial advice along with additional funds to reach a new level of growth.
- Venture capital firms. A company that appears to be gaining traction in the market may attract the attention of a VC firm, which typically takes a minority ownership position and hopes to exit with a positive return in a few years.
- Private equity firms. Unlike a VC firm, a PE firm seeks to acquire companies that can generate significant profits with a larger pool of capital or a different market strategy.
Legal, accounting and financial professionals are needed in all these transactions, from helping to raise funds to drawing up agreements, negotiating deals and finalizing the details.
“Our private equity practice is growing tremendously,” says Scott A. Mager, audit partner, Grant Thornton LLP in Sunrise. “In today’s financial environment, many investors are looking for PE opportunities that can provide higher returns without the volatility of the stock market.”
Looking for Venture Capital
VC investors from around the world are showing a growing interest in Florida companies, particularly in fields like life sciences, business and financial services, and information technology (IT), according to Aronson. VC deals in the life sciences tend to be larger because new products take longer to develop and may need regulatory approval compared with IT and software companies that may be able to accelerate their growth curves with smaller injections of funds.
“Florida has seen more IT and software ventures in the past few years as our research universities are spinning out interesting new technology,” adds Aronson, who teaches VC classes at the University of Florida and is the author of “Venture Capital: A Practical Guidebook.”
Aronson notes that it’s not just the availability of potential equity investments, but the health of the exit market that’s important to venture capital funds. “Higher returns on investments (ROI) make investors happy, and more likely to contribute to the next VC fund,” says Aronson. A typical VC investment horizon for a new company would be three to seven years, and about one to three years for a mature company, says Aronson,
For instance, Ballast Point Ventures, a Tampa-based VC firm, recently announced its successful exits from life science companies KBI Biopharma in North Carolina and Innocutis in South Carolina. With Igoe’s assistance, the VC firm also invested $15 million in TissueTech, a Miami regenerative tissue engineering company.
A Growing Deal Flow
While Florida lags behind states like New York, Massachusetts and California, VC funds are actively pursuing deals here. The Money Tree™ Report by PricewaterhouseCoopers and the National Venture Capital Association reported 44 VC deals in Florida in 2014 totaling $865 million. That included a $542 million financing deal led by Google for Magic Leap, an augmented reality technology company based in Dania Beach. For the first two quarters of 2015, the VC total was 36 deals totaling $238 million.
“That’s a big change from the early 1980s,” says Igoe, who has been active in this field for nearly 35 years. One of the positive steps in recent years was the creation of the Florida Growth Fund in 2009. Using approximately $750 million under management from the state’s pension plan, the fund makes PE investments and co-invests with VC firms in innovative Florida companies with a focus on the technology sector.
Igoe says another supportive program is the Florida Institute for Commercialization of Public Research, which helps startups capitalize on research discoveries at the state’s universities. The institute provides $50,000 to $300,000 in seed funding to qualified companies that license university-developed research and technology. “It is designed as a matching program, so startups must also obtain private funding from angel investors and groups,” Igoe says. To date, the program has raised more than $35 million and funded more than 40 companies around the state.
Some universities are also providing start-ups with financial and mentoring support through incubators, such as the LaunchPad at the University of Miami and Tech Runway at Florida Atlantic University in Boca Raton. These incubators provide access to mentors, and networking opportunities for potential investment, Igoe says.
“We are also seeing greater interest and a growing deal flow from angel investment groups,” adds Igoe. One example is New World Angels, which has chapters in Boca Raton and Tampa. Its portfolio of early-stage investments includes Bioceptive, a women’s health company developing innovative medical devices for a variety of gynecological procedures.
In the past few years, Aronson has seen a steady growth of Florida-based VC funds, although there are only a few like Ballast Point Ventures with more than $100 million under management. “Most of the angel investments and VC capital comes from outside Florida,” he says. “However, there are many wealthy seniors and retired entrepreneurs who become limited investors in VC funds. Others become mentors and coaches to early stage companies, becoming true angel investors.”
Another source of funding is through family offices that might involve one or more generations of investors. “They hire professional managers who source, value, negotiate and close their deals,” Aronson says. “Because they have longer time horizons, they are usually not in a hurry to make an exit, and can become part of a longer-term success story.”
In addition, South Florida benefits from its international connections, attracting angel investors and funds from overseas sources. “Many wealthy non-U.S. families have businesses and investments in South Florida,” Aronson says. “They know their own markets and the ecosystem that operates in those fields. As a result, they are often well equipped to invest in new entrepreneurial opportunities.”
The Private Equity Side
Private equity opportunities are particularly attractive to investors in the low-rate financial environment, according to Mager. “While banks are loaning again, they have not gone back to their flexible underwriting,” he says. “That means many business owners must rely on equity capital.”
But there is a large gap between companies that would like to obtain PE or VC funding and the number of potential sources. “South Florida is not well known around the country as a financial service metropolis. There are groups in New York, Boston and Philadelphia that will send their business development executives here to source transactions,” Mager says. “They just don’t open offices here.”
That situation may be changing, as a number of private equity and hedge fund firms have relocated from New York to South Florida in the past few years. “The tax landscape here is perfect for a wealthy individual,” Mager says. “When the CEO of a fund already has a home here, relocating the office here can be a logical next step.”
In general private equity firms are most interested in technology, healthcare, light manufacturing, restaurants and service companies, Mager says. “There is a great deal of appetite for ventures with disruptive technology.
On the other hand PE firms are less interested in the aviation, tourism and real estate sectors because they are riskier in terms of cyclical ups and down. But there are other real estate funds that look for investment opportunities in commercial and residential properties.
Mager says private equity continues to be attractive to high net worth (HNW) individuals. “They can invest on their own, through a family office, or as limited partners in a fund. They can also do their own research and find a specific investment that appeals to them.”
A Long Track Record
One of South Florida’s successful private equity firms is Trivest Partners in Coral Gables. Founded in 1981, Trivest is the oldest private equity firm in the Southeast U.S., according to Troy D. Templeton, managing partner. “We have never strayed from our strategy of investing in small, privately held businesses and helping them grow,” said Templeton.
Although the pace of private equity deals has slowed this year, Trivest is on track for a record year in 2015 with 10 deals through August, along with several successful exits.
Trivest focuses on founder and family-owned middle market companies with annual revenue between $25 and $250 million. “We have the friendliest model out there for founders to do a deal with a PE firm,” Templeton says. “They can sell and take the proceeds for retirement, estate planning or a host of other reasons. Or they can reinvest and be a participant going forward.”
One recent addition to Trivest’s portfolio is GetixHealth, a Houston-based healthcare business process outsourcing services (BPO) company serving providers. “We closed on several add-on acquisitions that complemented the company’s services and have already doubled the size of the business.”
Other Trivest companies include Northstar, an independent pizza distributor in Fort Lauderdale that has grown sales by 50 percent with complementary acquisitions, Templeton says.
For its acquisition Trivest is drawing from a $415 million equity fund (Trivest V) that closed in 2013 with investments from corporate and public pension funds, foundations and universities. It usually takes five or six years to invest a fund of that size, Templeton says.
“Private equity is one of the hottest types of investments today,” says Templeton. “PE returns overall are still 200 to 500 basis points (2 to 5 percent) higher than public equity with less volatility. Because small and middle market companies are the economic engines of the country, they will continue to attract PE investors in the years ahead.”
|The Florida Venture Forum|
Many South Florida professionals participate in the Florida Venture Forum, a statewide member-based organization that helps entrepreneurs obtain funding through education, strategic partnering, and effective networking. “The forum’s board includes every member of the eco-system, including angel, VC and PE investors,” says Daniel Aronson, chair. “Our members include CEOs, service providers, technology professionals and representatives of our biggest research universities.”
On January 28-29, 2016, the forum will host its 25th annual Venture Capital Conference at the Renaissance Vinoy Resort & Golf Club in St. Petersburg. The event has helped Florida-based entrepreneurs gain more than $3 billion in funding to date. The forum also hosts an annual Early Stage Conference, which has helped presenting companies obtain over $36 million in funding, and the Statewide Collegiate Business Plan Competition, which has generated nearly $15.9 million in funding for student entrepreneurs.
South Florida Legal Guide 2015 Financial Edition