At Wing Lake Capital, the focus has long been on working with distressed small businesses caught up in high-interest merchant loans, and its original Franklin Fund works with clients to “clean them up, restructure them,” said Baum, who referred to the business as a “restructuring firm that also writes a check.”
Still, as more companies have “graduated” from the firm’s established Franklin Fund for companies overwhelmed with high-interest debt, Baum said many are expressing need for more growth funding.
Baum said he sees two distinct groups for the nascent Capstone Fund, which he said earlier this month closed on $50 million, a mix of debt and equity.
The first group is made up of companies that have gotten through distress and are now in growth mode but still lack the financial history that most banks will want.
On that front, Baum noted that because the companies are in a much more stable position, the cost of capital that Wing Lake can provide becomes significantly less costly than in the initial phases as businesses are trying to get out from under the payday lending debt.
Other companies, Baum said, will have a growth opportunity, but in a space where payment could be delayed for several weeks or months, such as a government contract. Banks will be reluctant to lend in such an instance.
“So this Capstone Fund will allow us to really expand the services that we offer our clients and expand our client base,” he said.
Baum acknowledged the relatively risky nature of such lending, but said the fund is “very selective” in selecting deals and chooses only a small percentage. The fund looks for good businesses with a great operator who simply lacked “the right capital structure,” he said.
“Having purchasing power reduces your expenses … If you have cash up front to pre-pay, obviously your cost of goods is going to drop,” Baum said. “We build a plan for the business saying if you’re well capitalized, here’s what you can really afford in debt service. And at that point, from our perspective, it doesn’t become a high-risk endeavor.”