The Tribune

• RF seeks to fill ‘huge void’ for private equity

• Could translate into $300m economic boost

• And ‘build back’ businesses post-COVID

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Bahamian investment bank yesterday unveiled ambitions to “make a massive difference” for the economy by growing the country’s ‘first-ever’ private equity fund to $100m within five years.

Michael Anderson, RF Bank & Trust’s president, told Tribune Business its newly-created Strat Equity Fund aims to fill “a huge void in the market” by providing Bahamian businesses with much-needed equity capital to jumpstart the expansion of their enterprises.

Asserting that the fund’s investments into local companies could easily translate into a collective $300m injection into the Bahamian economy, as it makes these firms more attractive to banks and other debt financiers, he disclosed that the Strat Equity Fund is already working on four different acquisition/share purchase opportunities. 

The RF (formerly Royal Fidelity) chief also told this newspaper that “the multiplier effect” of that $300m could be equivalent to 10-15 percent of Bahamian gross domestic product (GDP) “once that money is put to work”, adding that the Strat Equity Fund - if all targets and objectives are realised - could impact the economy at every level from job creation to greater returns for the investment bank’s clients.

Unaware of any existing private equity funds operating in the Bahamian dollar space, Mr Anderson said the Strat Equity Fund is targeting investments in ten-20 local companies that typically range in size between $5m to $10m. 

“We think between $50m to $100m is reasonable in terms of the total assets under management for this fund,” he told Tribune Business. “I’m sure it may get higher than that, but as I sit here today I think a reasonable target in the next three to five years is to get up to that $100m.

“We believe that if we put $100m in equity into this market it’s a huge multiplier effect for the economy. I think if you look at a typical transaction, the banks are willing to put up 60-70 percent of bank loans against equity. If you inject $100m in equity, you get businesses able to take on another $200m in debt, so you will have $300m in combined debt and equity financing because banks are now willing to lend in this space.

“A $300m investment in this economy could make a big impact in terms of overall growth...... Turn that over multiple times with inventory, and it really has a huge multiplier effect putting equity in at the bottom. It’s really about the economy ultimately. The investors benefit by the investment hopefully becoming successful, but they also get a chance to buy into these larger, more profitable companies when they go public,” Mr Anderson added.

“Putting $300m into a $13bn economy, the multiplier effect of that $300m could easily be a 10-15 percent impact on the GDP of the country once that money gets put to work.” While the likes of private equity and venture capital firms abound in larger, more developed countries, they have been conspicuous by their absence in The Bahamas.

Private equity funds work differently from how traditional mutual and investment funds have operated in the domestic Bahamian capital markets. While the latter acquire shares in companies, these tend to be firms that are publicly traded and listed on the Bahamas International Securities Exchange (BISX), with positions often held for the long-term.

In contrast, private equity funds acquire shareholdings in private companies with the goal of turning these firms around, generating returns for their investors by making them more profitable and efficient before recovering the initial principal outlay by seeking an exit route for their investment. This is often done by taking the firm public via an initial public offering (IPO), and the Strat Equity Fund will typically seek an exit after five to seven years.

Mr Anderson revealed that RF Bank & Trust had been working on the Strat Equity Fund, and the private equity concept in general, “for about 18 months” prior to its licensing by the Securities Commission being concluded in late 2022. He added that it was initially developed in response to the perceived urgent capital needs of many Bahamian businesses as they emerged from the devastation of COVID-19 lockdowns and other restrictions.

“The concept of the fund has been around for many years,” the RF chief confirmed. “The opportunity that COVID created, there was always expectation that as people came out of COVID there would be a need to rescue businesses, some would close down and people would want to sell out of their interests.

“The idea was there would be a significant change coming out of COVID, and there would be a need for people to build their businesses back or take over businesses that they might be competing with. We’re putting back in equity to grow the economy. This is to help businesses who might not be generating the right amount of cash flow but, if given an equity injection, can come through this period and get into a cash flow generating position.”

Equity capital is often the hardest financing source for companies to locate and obtain. Acknowledging that all markets, including The Bahamas, suffer from shortages, Mr Anderson told Tribune Business: “Equity is the lifeblood of companies. It’s not just this market where it’s needed. It’s an essential component of businesses, and one of the biggest shortages.

“If we can find a significant source of equity it will have a significant impact on the economy. There’s a huge requirement for equity, and if we can make equity available for companies here it will make a massive difference to their growth and this economy’s growth. It will fill a huge void in the market for equity.”

Mr Anderson disclosed that the Strat Equity Fund has already closed its first private equity deal, buying into a Bahamian business, although he declined to name the company involved or provide further details. “We currently have four projects we are working on,” he added, while conceding that the fund’s role and purpose will have to win acceptance among the private sector to become successful.

Given the number of family-owned businesses in The Bahamas, a number of whom will be grappling with succession issues, and there should be fertile ground upon which a private equity fund can grow. However, Mr Anderson added: “People are reluctant to take on equity partners because they fear they will lose control or do not want to share with others.

“They instead go to the bank to borrow money.... It has to overcome this reluctance to partner. If we can find the right partners we can grow the business beyond most people’s expectations.” The RF president said the Strat Equity Fund’s goal is to identify businesses (and industries) with strong growth and expansion potential, and either acquire them or partner with their existing owners/investors to “scale up” if they can agree on the company’s future direction.

“It will be huge over time,” Mr Anderson said of the fund’s potential. “It takes a while for people to adjust to the fact they’re going to have a partner, and particularly an institutional partner. It’s unusual to have an institutional equity partner in your business, and people have to get their heads around what makes sense. 

“We think as an institution we not only bring knowledge of how businesses work, but access to a broader range of financing options - bank loans, mezzanine financing. It has all the opportunities of broadening beyond the initial equity injection. This opportunity to partner with an institution like RF should be attractive to the market once they get their head around partnering. I think in time it will grow.”

Mr Anderson said the Strat Equity Fund is not a provider of start-up financing for new entrepreneurs, or micro, small and medium-sized enterprises (MSMEs), instead targeting established enterprises that are already operating but require more equity capital to get to the next level through expansion that creates extra jobs.

“The biggest problem we are having is people looking for equity are looking for $1m-$2m, and the minimum amount we are looking for is $5m equity participation and interest in the business,” he explained. “We’re ending up with too many small people looking for equity. For us it has to be a certain size to make sense. 

“We are receiving a lot of interest from small businesses but, from our side, we have to be disciplined with where we take our capital. We’re looking for more established businesses that have a business case that looks promising, where we understand the potential, and they are looking for $5m and above. At the moment, we think above $5m-$10m is a good area and makes sense. There’s a number of areas and businesses of size to put $5m of equity into.”

Mr Anderson said the Strat Equity Fund’s role is to act as “intermediary” between investors seeking higher rates of return and companies in need of equity capital. “The investors we are looking to come in and participate in the Strat Equity Fund are looking for returns in excess of 15-20 percent,” he told Tribune Business. “If investing in equity that will generally be the rate depending on the risk.”

The RF president also explained that the fund will be structured as a segregated accounts company (SAC) with each investment held in a separate “cell” from the others. This, he added, will allow investors to select the firms they want their capital injected into, with the minimum investment set at $50,000.

The Strat Equity Fund will invest in a diversified range of industries, including technology, healthcare, consumer goods and hospitality, with selected firms needing to meet its corporate governance standards. “There is a clear need for additional equity capital in The Bahamas market to help fund and build younger companies,” said Jim Wilson, RF’s vice-president of investment banking.

“The Strat Equity Fund will identify and provide equity capital to viable businesses and help them scale in a sustainable way. The fund will act as a catalyst to take early-stage businesses that don’t yet have the track record to get listed to a position where they can transition from private to public ownership via an IPO”.

CAPTION

Caption (L-R): Jim Wilson, RF Bank & Trust’s vice-president of investment banking; Jontra Harvey, regional manager of investment banking; and Michael Anderson, RF Group president