Competition in the small-business banking field is increasing all the time. But Dallas-based Stratford Capital Partners is one competitor banks won't have to worry about.
The recently formed small-business investment company actually invests in partnership with banks, says managing partner Michael D. Brown. "Most of the time we work with the banks or bring in a senior lender - and a lot of our referrals are from banks," he said.
Typical of Stratford Partners' approach was its first deal, a $24 million financing package for The Leather Factory Inc. of Fort Worth. Stratford Partners joined together with Little Rock-based Center Street Capital Partners to provide $10 million in equity to be used for strategic acquisitions by Leather Factory in return for convertible preferred stock.
NationsBank of Texas, meanwhile, expanded Leather Factory's senior credit facilities for use in future acquisitions and increased working capital requirements.
"A bank may have a good customer, but from a collateral or loan-limit standpoint really can't provide any more capital," Mr. Brown said. "But with another infusion of either subordinated debt or equity capital from us, the bank might be able to provide some additional senior bank debt."
Stratford Partners became active in August with $45 million in funding provided by several institutional investors. As an affiliate of the Dallas- based buyout firm Hicks, Muse, Tate & Furst Inc., the partnership's major investor is a Hicks, Muse venture capital fund known as Hicks, Muse, Tate & Furst Equity Fund II.
The other limited partners are Life Partners Group Inc.; Luther King Capital Management Inc.; Sanchez-O'Brien Partners I; Laredo, Texas-based International Bank of Commerce; DLJ Fund Investment Partners; and Shawmut Capital Corp., which is now part of Fleet Financial Group's asset-based lending unit.
As a small-business investment corporation licensed by the Small Business Administration, Stratford Partners has access to long-term financing at attractive interest rates. The SBA will provide as much as $3 for every $1 invested by a small-business investment corporation, to a maximum of $90 million.
Stratford Partners' current capitalization of $45 million makes it eligible to receive $90 million in matching funds under the SBA program, which ranks it among the largest of approximately 200 of the corporations in the country.
Many large and midsize banks also operate small-business investment corporations, but Mr. Brown said Stratford Partners can be a bit more flexible than a bank-run version.
"We don't have the same restrictions a bank-affiliated SBIC would have in either trying to service existing customers or certain regulatory problems," Mr. Brown said. "We think we can be more flexible to the capital needs of a particular small business."
Headed by two managing partners - Mr. Brown and John G. Farmer - Stratford plans to focus its investment activity on later-stage growth and expansion opportunities, strategic acquisitions and select recapitalizations. The partnership said it intends to develop a diversified portfolio as to industry but will primarily focus on manufacturing, distribution and niche service segments.
Stratford Partners plans to invest between $2 million and $6 million in 35 to 50 fast-growing companies over the next five years, with most of the money spent in Texas. Unlike Hicks, Muse itself, which takes a controlling interest as high as 100% in a company, the investment corporations are typically limited to a 49% stake. Stratford Partners' stake is expected to range from 15% to 30%.
Mr. Brown and Mr. Farmer both have a long acquaintance with the corporations, having begun their career together at MVenture, the small- business investment corporation arm of the failed MCorp of Dallas.