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Alternate View: The Podcast Guide for Alternative Investments
Why add alternative investments to your portfolio? How do private equity or private debt risks compare to stocks? "Alternate View" answers your key questions about alternative investing. Host Matt Andrulot and experienced fund managers break down alts, covering real estate, infrastructure, hedge funds, and more private investing categories. Gain clarity on this often misunderstood asset class, learn how they differ from public markets, explore the functions and risks of alternative assets, and explore their power for diversification. This is your essential resource for understanding alts.
Alternate View: The Podcast Guide for Alternative Investments
What Is Mezzanine Capital? with Greg Barger from NewSpring Capital | Episode 005 | 05-08-25
🎙️ Inside Mezzanine Capital with Greg Barger of NewSpring Capital
Welcome back to The Alternate View #podcast - your front-row seat to the evolving world of alternative investments.
In this episode, host Matt Andrulot sits down with Greg Barger, a leader on the Mezzanine Team at NewSpring Capital, a multi-strategy private equity firm with over 25 years of experience. Discover how mezzanine capital fits into the private equity landscape and why it offers unique opportunities for both investors and growing businesses.
💼 What You’ll Learn in This Episode:
• 01:58 - What exactly is Mezzanine debt? Greg breaks it down in simple terms.
• 03:12 - How NewSpring approaches mezzanine lending and what makes it different from traditional private equity.
• 14:31 - The strategy behind structuring a buyout of equity—how returns are engineered.
• 24:09 - Why the lower middle market offers compelling opportunities for investors.
• 33:05 - What early fund investors need to understand about pacing, liquidity, and performance pressure.
• 38:12 - The role of mezzanine financing in balancing risk and reward in a portfolio.
• 39:21 - How NewSpring sets expectations and measures success.
📍 Whether you're a family office, financial advisor, or just curious about non-traditional investments, this episode delivers expert insight from the inside.
🔗 Resources & Links: https://www.AlternateView.FM
🌐 Learn more about NewSpring Capital: https://newspringcapital.com
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📩 Subscribe for more!
💬 Have questions about the episode or want to suggest a future guest? Drop a comment below or connect with us on LinkedIn:
https://www.linkedin.com/in/matthewandrulot/
#AlternativeInvestments #PrivateEquity #MezzanineCapital #NewSpringCapital #InvestingPodcast #FinancialEducation #CapitalStack #MiddleMarketInvesting #FamilyOffice #TheAlternateView
Welcome to the Alternative View. Excited about our guest today, we have Greg Barger from New Spring Capital Mezzanine's team. So, greg, thank you for being here. My pleasure, appreciate the time. Why don't you give us a little background of yourself and New Spring Capital and then we'll dive into talking about some Mezzanine capital, which I'm excited about? Sure, yeah absolutely so.
Greg Barger:New Spring Capital is a 25-years-young private equity firm. We're headquartered up in Radnor, Pennsylvania. We're currently a multi-strategy private equity group, so we have five different strategies underneath the New Spring Capital umbrella, of which mezzanine is one of them and actually it's our largest strategy at this point, based on funds that are management. Currently, as a firm, we have about $3 billion under management, and the mezzanine strategy, as I said, is about we're on our fifth fund. It's about a billion a little over a billion under management in the mezzanine strategy.
Matt Andrulot:Excellent. Yeah, how about a little bit about what you do there?
Greg Barger:Sure. So I'm one of the general partners of New Spring Capital and the general partner of New Spring Mezzanine, so I'm one of three other or four other partners that lead the mezzanine strategy for the firm.
Matt Andrulot:Great, well, great.
Greg Barger:I'm looking forward to having a conversation about mezzanine capital, I feel like it doesn't get due in the world of investing.
Matt Andrulot:I feel like people just like glaze over it. So you know it'll be good to have a conversation about it and hopefully our listeners and watchers will be able to learn a little bit about mezzanine and what you guys are doing there. So first I guess we should start off with what is mezzanine lending, like how do you guys define it in the simplest terms and you know what makes it unique relative to other lending?
Greg Barger:components. Yeah, sure, so mezzanine lending is a loan for the most part. Now, the way we're structured, we do both lending and equity investments under our mezzanine strategy. But essentially mezzanine debt is the middle layer of the capital structure of a business, where you have senior debt as kind of the priority first lien, you have mezzanine debt and then you have your equity. So we're kind of in the middle and that's why it's somewhat of a hybrid between senior debt and pure equity.
Matt Andrulot:Yep, and then who typically takes on the senior kind of portion of that? And then you know why mezzanine yeah.
Greg Barger:Where does that?
Matt Andrulot:come into play. You guys are a private lender to businesses, obviously right, so you know why.
Greg Barger:So the senior lenders are primarily that you know we would work with. Are, you know, the typical banks you'd see anywhere where you know, like a PNC, bank of America, wells Fargo, you know they're the senior lenders and they have, you know they're senior lenders and they're highly regulated businesses and banks. So the amount of lending they do is pretty restricted and pretty I wouldn't say limited, but there's certain boundaries that they won't go beyond from a risk standpoint for a bank and we kind of come in behind that. So because we're behind the senior lender, it's a slightly more risky piece of leverage. But on the flip side it's also, it's, you know, for the businesses that we do the mezzanine lending to. It's the ability not to dilute, you know, not to have to raise equity if the bank's not going to do it. It prevents the dilution of the owners of those businesses somewhat in a higher rate, slightly higher risky debt piece.
Matt Andrulot:And obviously it's more costly for them, right.
Greg Barger:Yeah.
Matt Andrulot:To an extent, right, exactly, why are these business owners looking? Well, why would they take a mezzanine slice? I mean, obviously, senior lending, you're typically probably less expensive, right, you're dealing with the big firms and things like that, and then you guys are kind of that secondary private lender that's providing capital. Why, typically, like when you were lending to these businesses, why do they need a mezzanine slice in their business? Obviously, you mentioned limits to the senior lender. But, you know what are they using it for and like what is it?
Greg Barger:Yeah, it's usually part of some sort of transitional transaction, whether it's generational change. It's someone just selling, maybe selling to the management team. That's kind of running the business day-to-day. That doesn't have enough capital to do it on their own. But some of the advantages of it is with a senior loan you're typically personally guaranteeing the owner's, personally guaranteeing that debt and, frankly, when banks make a loan to you they amortize it pretty quickly to get that money back.
Greg Barger:Mezzanine debt is much more, I would say, patient in terms of the capital we charge. It's a higher interest rate but it's interest only. We usually set some sort of a target in the future. It's typically five to six years for us where that debt would come due and allows during that period for the business to be able to grow or the transaction to happen that they're trying to finance. So I see some of the benefits, like I said earlier, the owner's taking less dilution by having debt. But they're also likely not personally guaranteeing it and they're not having to amortize it back. So when you do the pure cash out of the business, if you do the interest rate even though ours is higher but you combine it with the amortization on the senior debt side, it may, and often, especially in an interest rate environment like we're in now, it's actually less costly to the business to use our form of financing as opposed to senior debt that's amortizing quickly.
Matt Andrulot:Really that's interesting. Yeah, yeah Now. So obviously I mean I think sometimes mezzanine might get a bad rap in terms of the quality of credit-wise right. I mean, the senior lender people might think mezzanine is kind of a high-yield type of investment as it relates to the public market. Sure Is that a misconception.
Greg Barger:Maybe somewhat, I would say on a pure institutional basis. If you would take the debt instruments that we're lending, that would be considered high-yield debt in the public markets. But we're focused very much on the lower end of the middle market. So, companies $20 million to $150 million in revenues is kind of where we focus and there's some really really strong businesses there. But you know the way the banking market's structured. There's just they don't have a lot of flexibility in how much debt capital they can provide to those things. So and we underwrite those businesses. Some of them, you know, been around for decades, generations. They're really solid, they're just, you know it's a $50 million business. It's been doing great, but it just doesn't fit the institutional category that you would think from a Wall Street-type business.
Matt Andrulot:So these are functional businesses generating revenue Absolutely. It has a product or service that's actively participating in the marketplace. This isn't, you know, someone that's not generating revenue. No, no.
Greg Barger:It's the largest. If you look at the number of US businesses, privately held or publicly held, the category that we invest in is by far the largest category in terms of size. It's the things you're seeing the little manufacturing operation in your neighborhood down the street that's been doing $30, $40, $50 million in revenues for, you know, 20 years.
Matt Andrulot:Yeah, and what are they? I mean, you mentioned some transition. Do they use it for growth capital as well? Yeah, absolutely yeah.
Greg Barger:It's often we get involved when there's some sort of either transition taking place or it. You know, there's the, the, the. The owner doesn't have family members or a management team that wants to take it over. He may be looking to private equity to sell the business. We may partner with a buyout firm where they're trying to buy the business to put it with another one or continue to grow it. So we'll provide some of that capital for a structure like that. So it's usually some sort of transition or transaction or sale when we get involved.
Matt Andrulot:You mentioned small mid-market kind of participation. Yeah, like that was your kind of niche in where you guys participate. Does size, transaction size matter, size of business matter? I mean, are there bigger firms doing large mezzanine transactions? And then are there like why do you think your small mid-market kind of component is beneficial? Beneficial to, I guess, investors or to you guys?
Greg Barger:yeah, yeah, yeah, so looking to it's, it's, um, you know, like I said, there's, there's a. It's by far the largest market in the us in terms of number, number of businesses of the kind of the size that we focus on, and that's that 20 to you know, call it 150, 200 million in revenues. That's, that's by far the largest category, um, and it's it largest category. And because of that size it's not the multi-billion dollar company that's got full management teams and all kinds of institutional capital behind it. So they're very much sophisticated. So these are much less sophisticated businesses.
Greg Barger:So the opportunity to find undervalued businesses in this market, we feel, is where we like to focus. It's not as competitive. So there's a lot more value add you can do to those businesses that don't have a full management team. So we help them kind of round out a management team. They may not have, you know, great marketing programs. They're not used to going out and having to find business. So there's some of the management supplements we can provide to those type of businesses to kind of help professionalize them and then they kind of graduate on to the next category, kind of that middle market. You know, 500 million revenues in there, great.
Matt Andrulot:And do these businesses have kind of alternate solutions other than investing in mezzanine capital? Is it like Is there any other way to go? Do they just have to give up equity?
Greg Barger:No, I mean look, there's all kinds of different financing options out there. I think Aris fits really well in the market that we focus on because, again, at that size they're going to be capped out at what they can do from a senior lender standpoint and a lot of them don't want to give up a lot of their equity yet. So if they can find that blend where maybe they are giving up a little bit of equity but they still have control, but they still have the capital to be able to kind of execute their growth plan, it tends to be a really, really nice fit for those type of businesses Okay.
Matt Andrulot:Can you walk me through a transaction a little bit like structurally Like what does that look like? You mentioned interest rate.
Greg Barger:Yeah, yeah sure.
Matt Andrulot:You mentioned like, what does that look like? Uh, you mentioned interest rate. Yeah, yeah, you mentioned a little piece of equity. Yeah, you mentioned interest something, but give me an example like uh, tell me about, like, a recent transaction and how it was structured in terms of you know, how are you guys generating, um, you know, a return for your investor, sure, with the structure of a deal?
Greg Barger:um, actually there's. I'll give you an example.
Greg Barger:There's a there name names but there was a company here in Baltimore right off the Beltway. It was in the contract manufacturing space. It was two non-active owners that had owned it for about 10 years. They had bought it as an investment, didn't really know the business that well. They hired a really strong operator to help them run the business. He got it on track and was helping it to grow again. They wanted to retire out of the business so they went to a local investment banker here in Baltimore to try to raise capital. So they came to us.
Greg Barger:We were one of the people they came to to try to put together a structure to allow that operator to buy that business from them. So we put together a package where he actually personally invested almost a seven-figure number. We invested about I want to say it was about $12 million in mezzanine debt and another $3 million in equity, and then the other owners had rolled some of their equity back into the deal. So we structured it Basically. The debt was a five-year note. It was a 12% interest rate, interest only Matured in five and a half years, which was six months after the senior debt was brought in to do the transaction. And then he owned roughly we owned just over 50% of that business because of the equity we put in. He owned a material amount as well, so helped him grow the business we brought in, you know, helped him hire a CFO.
Greg Barger:We brought in a business development person you know together to help kind of expand out of more of a local market. We wound up he found another buyer that wanted that business as an add-on to what they already had in the private equity space. So it was about a six-year hold for us. We got the 12% interest rate for the duration. We had some warrants in it as well. So we benefited from the upside of that and it wound up being for our investors. On a straight. It was, you know, slightly over on a combined basis between the debt and the equity investor. It was about a three and a half times return over that, you know five and a half year period to our investors.
Matt Andrulot:So yeah, that sounds fantastic I mean, it seems like everyone worked out with that transaction.
Greg Barger:It was, it was and that was, and that was a very that was kind of right down the middle. For us it was the typical split between the debt and equity we provide. I think the business was about $25 million in revenues and maybe $3 million in EBITDA. When we bought it. It was pushing $40 and almost $7 million in EBITDA when we sold it. So that's the kind of perfect scenario for us Over that five-year period if we can kind of double EBITDA when we sold it. So that's the kind of perfect scenario for us. We, you know, over that five-year period, if we can kind of double EBITDA, we're getting paid a nice 12%, kind of 12%, you know, as we go along in terms of the returns we're providing and then we get the upside at the end. So it was, you know, plus a 20%, you know, over 20% IRR, over a 3X return for our LPs.
Matt Andrulot:Yeah, borrowers happy.
Greg Barger:Everybody's happy. Yeah, it worked out. You guys are happy, right?
Matt Andrulot:Yeah, it was good for everybody Is that typically what you see from a transaction at the end as well? I mean, are they usually a sale that takes place at the end of it, or are they trying to recap you out at some point in time? You're not cheap, definitely not.
Greg Barger:No, not at all. So that's actually one of the benefits of a mezzanine debt is that we don't have to have a sale transaction to exit out of a business. So if they kind of execute on the plan that we go in with, they can recap us out for lower cost debt, and that may happen before the end of our holding period. So it's often where, three or four years into a deal, they're hitting their plan, they're doing well, and then they have that capability to use the senior debt. They'll pay that piece off. We typically would have some sort of equity component to our investment and that would happen either in the next transaction whether that was a sale or they continue to do well and we'll negotiate a buyout of our equity and we're done. So, yeah, so they continue to do well and they can. Just, we will negotiate a buyout of our equity and we're done so yeah, so again a win, win.
Matt Andrulot:Yeah, it seems like you have much more flexibility than a traditional like private equity transaction where you're kind of like hey bought it at this price. Really do a lot of the same components that you guys are doing from a business perspective in terms of helping them try to grow, grow like help management teams, but they kind of need a financial exit transaction.
Greg Barger:They need a transaction.
Matt Andrulot:Like where you guys have motivation to that underlying business, to be like hey, get get rid of me at some point in time, just because we're costly.
Greg Barger:That's exactly right, yeah, and I mean that's what I see is. The beauty of mess is, is that it we don't have to have that kind of sale transaction to get a return and to be able to execute the plan. And there's often times where, even if it's not a recap, they're generating enough cash where they just start paying us back in chunks and they're allowed to do it and that's great, so they just pay it down in principle. They just pay it down with excess cash. Yeah.
Matt Andrulot:Oh, okay.
Greg Barger:Great Well.
Matt Andrulot:I mean, since we're talking like debt in general interest rates, obviously we've had a very big movement from a market perspective over the last, you know, a couple of years here. Like, how does that impact you guys? I mean you guys, are you guys provided interest rate to? The underlying investor, like is it fixed, is it floating? Like what are some of those impacts to that? And so I'm going to lead you a little bit. Like what is mezzanine's floor? Like is there a floor to mezzanine or is there, how high can it?
Greg Barger:necessarily be. Yeah, it's interesting.
Greg Barger:Over the last you know and I've been doing this similar stuff for the last 20-plus years our band of interest rates in the structure of our debt has been very narrow and it's kind of run in the 11% to 14% range on a current pay basis for us.
Greg Barger:So it does fluctuate.
Greg Barger:But I would say and I kind of touched on a little bit earlier the rising interest rate environment that we've had recently has really actually been a benefit to us because we're kind of still in that 12, 14% range but the senior debt's gone almost double it if you look at it over the last couple of years.
Greg Barger:So when you add that additional senior, the rate from the senior debt's gone almost double if you look at it over the last couple of years. So when you add that additional senior, the rate from the senior debt plus their amortization, the actual cost of the business, while it's being higher than that kind of 12%, 13% coupon they're paying to us. So we tend to benefit in a situation like that where if you look at the cap stack and maybe senior lenders were kind of doing two times EBITDA they start to pull back or are not as competitive when their interest rate environment is rising. So we actually typically move up in the capital stack and it's a more opportunity for us to be higher in that capital stack but still get that kind of same 12% to 14% coupon. So the rising interest rate environment makes us more competitive and we typically can see stronger credits at kind of similar pricing that we would historically do.
Matt Andrulot:That's pretty fantastic it can be. I mean it makes it easier for you right.
Greg Barger:I mean, I would say senior lending is probably. You know, there's obviously a lot of mezzanine funds out there that focus on our space. But I would say where we see more opportunity is when senior banks start to pull back or their interest rate spreads are starting to go the opposite way on them. That's when we see more and more business, because from a business owner, it's a more viable financing strategy and we're much more patient capital. To be honest.
Matt Andrulot:Yeah, I mean we've had this on other podcasts, but we've talked about the shrinking regional bank component of lending, absolutely. So I can see that being a benefit to you guys, as you guys look as a subordinate lender alongside of a senior to provide more to that.
Greg Barger:Yeah, help help them, support their, their business and their lending yeah, no, absolutely that's I mean, and I came from a you know, I was at a mercantile bank here in baltimore which was a solid regional, you know bank, and those banks are going away and um, so the large you know multinational banks that you know that are left, they can't, they're too large to be able to overly focus on kind of the local smaller markets and they basically that's more of a kind of check the box If it fits, they do it, if it doesn't, it doesn't. Whereas those regional banks that were more interactive with their business owners, they're going by the wayside. There's less and less of them.
Matt Andrulot:Yeah, how do these businesses necessarily find you guys you just mentioned? There's a variety of other mezzanine lenders out there. Yeah, I mean, and you guys lend to a variety of different businesses in a variety of different sectors and you know, across the country here in the united states. So how are they finding you and you finding them?
Greg Barger:yeah, um, so, so we're. So our, our firm or our mezzanine strategy. We're what's called an sbic, a small business investment company. So so that is a. It's a licensing process you go through. It's under the small business administration. So a lot of the you know businesses that are looking for financing capital, they go right to the SBA website and there's a list of SBICs that are right on that website. You know. So that it could be as simple as that, or there's usually some sort of there could be. If there's a transaction taking place, it would be an investment banker that we interact with a lot, obviously, and they may be bringing them to us in terms of a capital provider that may be helpful for what the business owner is trying to execute, right.
Matt Andrulot:So you brought it up SBIC right. I find that to be a very unique structure, and not everyone does it, which makes it even more unique in my mind.
Matt Andrulot:So everyone's not willing to become an SBIC lender necessarily especially in the mezzanine space, Like why did you guys feel like that was a route to go down and explain a little bit more about what that means? And we can talk a little bit about SBA as well as business administration, Like what? Because that that's all. I feel like it's all combined yeah, yeah, it really is sure they're matching businesses with sbic yeah components, and then you're borrowing from the small business administration, so, yeah, that kind of like leverage.
Matt Andrulot:So let's talk a little bit about all of that. I think it's sure super interesting. You know, first, why, why you guys thought that as a lender, the SBIC route is the structure necessarily to go and what are the benefits to you guys as a firm.
Greg Barger:So I think there's a lot around SBIC. There's a lot. Yeah, there is. I have plenty of questions around that.
Greg Barger:So we can keep on going about that, but I'll let you go. Sure, yeah, that's a big subject. So SBIC, as I said, it's the acronym for a small business investment company, so it is a public private partnership. It's actually I think it's one of the you know, and I'm biased, obviously, but I think it's been one of the most successful public private partnerships in our country. I mean, I think the program was started back in the 1950s and it think the program was started back in the 1950s um and it's a it's and again, it's under the sba, it's a um, it's, so it's a, it's a government um, a backed program, um, where we have a licensed sbic and I'll go through kind of the process of getting there has access to and the. There's a lot of regs around it, but it's essentially you have access to 10 year treasury priced capital as almost a two to one depending on the size of the fund, kind of a two to one leverage that you can use that, that capital to draw down to invest in the in the small business.
Matt Andrulot:So $1 to equal two. Exactly so you can lend $2 versus the $1 you put up.
Greg Barger:Exactly so, so. So if lend $2 versus the $1 you put up, exactly so, if we want to raise a fund of $100 million, we'd have an additional $200 million access through the SBA to invest in. So it's A from our standpoint. It leaves a smaller pool of capital that you have to raise from the private sector to get access to more capital to have a slightly larger fund so you can deploy more. But from the investor, the LP standpoint, you know they have a priority in that return but all they're getting back is the 10-year rate and some fees around it. So it runs 3.5. It's been running 3.5 to 5% for us for most of our funds. We pay that back at that rate. Then all the upside and if we're returning kind of high teens in most of our deals to low 20% IRRs, only that 4.5, 5% comes off. So the benefit of that extra $2 that was invested goes to our LPs when they're $1 they invested. So it's really a win-win for everybody. Honestly it really is. So that's the benefit of the program. That's why all of our funds have been SBICs from the beginning.
Greg Barger:But it's a very rigorous and vetting process. So you go through pretty in-depth, you know, review audit process just to get the license. You have regular quarterly reporting, you know, as part of it. So there is a lot. There's a pretty heavy regulatory burden, if that's the right word probably not but that you have to make sure you're maintaining in terms of how you're doing business, you're following all the rules, all the regs. It's audited regularly. So there's a lot of additional work around that you need to do. But on the financial side, I think for the business owners and for the LPs and for us, it's a real win.
Matt Andrulot:So do you think that's why some other folks don't do? That is because of all those regulatory components to get that done. Yeah, I think that's.
Greg Barger:That's part of it. The other part is that you know some, you know a lot of. You know we're again, we're in the lower middle market. Yeah, the whole basis for the SBIC program starting was to focus on smaller businesses. So some of the regs are around the size of the businesses that we can invest in. It's what we like to do. It's the area of the market we focus on anyhow. So it really never impacts us because they're the size businesses we're always looking at. But there's certain people that want to do. They just want to be bigger funds and invest in bigger businesses. So they wouldn't do it for that reason alone, just because regulatory wise you can't. You know there's a cap to the size businesses you can put money into.
Matt Andrulot:Well, I mean from an LP standard. Like we love the fact that you know you guys are an SPIC Number one. You have a government entity regulating you guys to some extent, so you know you have an extra kind of layer of eyes and due diligence that are covering a lot of things and our firm has.
Greg Barger:We have multiple layers because we're a multi-strategy and we have growth equity, so we're, you know, over $3 billion. So not only is the SBA a regular regulator for us, but we're SEC regulated as well. So we have a lot of regulation, which is as a limited partner, investor, right Like you're like okay, we have lots of people kind of looking over your shoulder to make sure that things are going the right way. We literally just finished the SEC audit yesterday, but they just left Congratulations on that one. Thank you Very well.
Matt Andrulot:So I guess you know I think the SBIC is very unique and you know I think you're doing a service number one from the SBA side of things and lending to small businesses. I mean small businesses kind of run this country and they need the capital to grow. So it's almost a good thing, right yeah?
Greg Barger:and it's amazing If you go look at some of the firms that started with an SBIC as their first investor, lead investor, we're talking like FedEx, callaway, golf, I mean. There's some really well-known companies. They're first, and that's kind of what we love is like that's we're doing it, that's what we're doing. We're starting the companies that are ultimately going to become like that. That's they're starting with us. We're the kind of that first institutional level of, of of capital that that they you know they they had access to.
Matt Andrulot:Okay, now I'm going to go to the other direction of this and say, okay, well, that's great, but you're adding leverage right and leverage turns both ways ups and downs right. So I want to make sure that you know, we're everyone's aware of that. So do you find that you know being in SBIC adds additional risk to investors by having that leverage component to that, or do you just? How do you guys?
Greg Barger:look at that. Yeah, I mean, look, anytime there's leverage, there's more risk. So that's, I mean that's just the bottom line. But we, you know this is what we've always done. So, yeah, there's additional having a levered fund. If you're not kind of hitting that 8%, 7%, 8% return overall in your fund, it can start to work against you or, based on what level that capital is, the cost of that capital is. We've never had that. You're going to have some bad deals in every portfolio and we we do just like everybody else does. But I mean, for 20 plus years we've been, you know, kind of net high teens and over 2x or about 2x return to our investors. So it's never impacted us in terms of. It's always been a benefit in terms of our own, you know, and we have very strict underwriting standards and we we know we're in a, you know, inefficient market which is more risky. But it's also a lot more upside because it's an inefficient market and we can provide a lot of value add to those companies to help them get through that period.
Matt Andrulot:Yeah, it opens up opportunities.
Greg Barger:Absolutely.
Matt Andrulot:Absolutely. So what happens if you know you guys are borrowing money from the SBA to do a transaction and it's not a great transaction, right, like how does that affect with the SBA?
Greg Barger:No, because it's all pooled capital, so it's not on a deal-by-deal basis, it's on a fund basis. So that's why, as I said, you're going to have a bad deal. It happens If it's earlier in the fund. It impacts slightly when you can start making distribution to your LP, because you have to get over certain hurdle rates before you start distributing capital. So the biggest effect would be the timing of when it would happen. But when it's all said and done, it's pooled capital. So it's really not on an individual basis, it's on the pooled capital basis. So we've never come close to even that being an issue.
Matt Andrulot:Yeah, so diversified portfolio, like lots of different loans with inside of the portfolio. So if one impacts it, they're looking at it, the total fund size Exactly, and you guys have already.
Greg Barger:We're typically kind of, I would say we've averaged about 25 to 30 companies within a fund. So there's real, there's good diversity, and we were very conscious about you. There's good diversification, and we're very conscious about industry diversification, geographic diversification, so we're very conscious of making sure we're de-risking as best we can at every aspect.
Matt Andrulot:Yep. So let's talk a little bit from a an investor and lp perspective a little bit, um, you know. So I look at your, your strategy, and you have a lot of different components to it, right, like there's a debt component. You have kind of an equity component, like how do investors like look at you guys as part of like an investment?
Greg Barger:right, yeah, I mean because you're generating a pretty.
Matt Andrulot:You can generate a pretty good return from your equity warrants or equity itself, but you're generating a pretty. You can generate a pretty good return from your equity warrants or equity itself, but you're also generating an income component to it. Yeah, as an investor. Like how? How have you seen other people look at mezzanine as part of a strategy within a broader yeah, that's actually been one of our hardest.
Greg Barger:Uh, you know, from a fundraising standpoint, that's one of the hardest things we have to we deal with in terms of talking with LPs because, as you like you said, there's very some you know, alternative investors have very, very defined buckets and what they invest in and we're not we're not a pure debt investor and we're not a pure equity investor. It's a blend and that's again, that's what we like about it. We and we we are showing we're generating the return to where it makes a lot of sense and it's been very beneficial to our LPs. But that's probably the biggest hurdle we run into and you know we have, and it's more. You know it's the larger pensions that have very that have huge alternative asset pools that typically are that struggle with it most in terms of I got a debt bucket, I got a private debt bucket, I got a equity bucket, I got a venture capital bucket and we don't fit neatly into a couple of those. So that's where we find the most difficulty. So that you know, that's something we've always had to deal with.
Matt Andrulot:What do they typically put you in then? Do they create their own, or do they? Actually think like, hey, you guys are debt because you're on the cap stack.
Greg Barger:It's usually within their debt and we try to build our portfolio that we kind of keep a roughly 70-30 debt equity split. Yeah, we've been very consistent in doing that. It's. I think some of the especially the bigger, the larger, you know kind of alternative investors have gotten more comfortable that we're. This is what we do. We're sticking to our knitting. We're not like we're not trying to float one side or the other. We're very consistent and we get a nice, um, nice kind of current return, you know, on on the bulk of the portfolio and then on the back end there's some can be some really nice upside to you know the benefits, the lps.
Matt Andrulot:so I mean, when you're evaluating a business, a company making that investment, how do you guys foresee it? Like right is it? You're looking at it as debt, like we want to provide this, we want our loan back, we want our interest in the upside potential of warrants and equities is like a call option yeah, so are you are you blending it in, right? Yeah, yeah, you know where I'm going. I know where you're going, yeah.
Greg Barger:So I think for us, we're always looking at the downside.
Greg Barger:I said, that's our first kind of, that's our first. What can go wrong here? That's kind of where we start and then as we, you know, as we kind of get over that hurdle, then we kind of focus on all right, where are we in the portfolio, Is it? You know, if we know, and honestly you can, you know, as a portfolio is maturing, we typically may up our equity to kind of build to that 70-30 from the equity standpoint, knowing that we kind of had a pretty solid you know we've got a real solid portfolio here. We know we've got a good you know kind of a good return baked in.
Greg Barger:We really like an equity story. So then we may put a little more equity in something later on in our fund if that makes sense. So it's all about kind of building that portfolio. But when it's all said and done, that 70-30 split has kind of worked well for us and that's kind of where we try to stay. It's not going to be like that in every deal, but we may do an all-debt deal, but we may do a 60 40 deal at some point down the road, you know if that makes sense no, definitely does.
Matt Andrulot:Yeah, so, as an investor, like cash flow wise, like how do they consider? Is it like, are they going to receive income, like as distributions to them, or are they waiting for, like, the end transaction? Like how does how does that kind of flow? It probably helps in terms of defining where you guys sit.
Greg Barger:Yeah, yeah, so I I think it's, it's the cash flow early. So because, especially early in a fund, if we can find some really solid income debt deals that are generating good, you know, coupons for us right out of the bat, we come out of the j curve pretty quick. So, you know, if you get a and we're fortunate to have, you know, being on our fifth fund, we've we've always, as we go to the next fund, we always have a nice backlog of opportunities to be able to invest in when we first go into that fund. So, and you know, we've gotten better each fund and hopefully we'll continue to do so. And so that I think you know when investors see that that we're coming out of the J curve and they can start to get distributions pretty quick, which you know, if you a typical equity fund you're, you know four or five years down the road before you're really seeing any kind of returns, you know within 18 months we're typically able to start to make some distributions, which I think goes a long way with certain investors.
Matt Andrulot:Yeah, Everyone kind of I use the term get paid while you wait kind of thing Exactly.
Greg Barger:It's nice to get paid while you wait a little bit. That's a good way to put it, yeah.
Matt Andrulot:And to kind of show the investment. And obviously the J curve is important.
Greg Barger:People hate to understand it. To some extent they hate to see it, but you know.
Matt Andrulot:The outcomes at the end of the day are pretty interesting. Yeah yeah, what does your investor base look like today? I mean, you mentioned pensions and things like that, but do you see firms like you know, pensions and things like that? But do you see firms like you know, firms capital advisors as as investors, or is it primarily like larger institutions?
Greg Barger:in that space, um, so for, as an sbic, so I will say our, our largest um, our, which is interesting because we talked about a lot today our largest and lp base are banks. Yep, um, and it is a um as part of the bank regulatory environment. The only thing banks can invest in and get CRA credit, investment credit is our SBICs. So banks are our largest pool of capital and it's been a great relationship because we you know, a lot of the senior lenders that we work with on our on on opportunities, are LPs. So it's so that's our biggest pull and I would say our next is is probably so is this is this.
Matt Andrulot:This is like it's great because you know you see the banks pulling back and things like that, but they're making investments into SBIC driven driven funds. It's just like I mean, is this regulatory capital for them? Is it their personal? Like? What's the why are they investing with you guys? They get CRA credits, so they're getting credit for action. They get CRA credit and you can generate a higher degree of return relative to that.
Greg Barger:It's by far, and having been on that side, it's by far. Banks get CRA credits for various things, whether it's you know inner city housing. You know different SBIC investments are one of the things they get CRA credits for. It is by far the highest returning investment they make, not even close.
Matt Andrulot:Yeah, I know. I mean I'm assuming everything else is kind of very low in terms of the return and risk spectrum to that. This is obviously you know. We talked about this hybrid type of solution where you can get some equity components to that. This is obviously you know. We talked about this hybrid type of solution where you can get some equity components that we were generating a.
Greg Barger:You know you mentioned some pretty yeah, and it's honestly, it's a win-win because we, you know, not only do they get a nice return on their investment, we interact a lot in terms of, you know, getting them opportunities to provide senior lending to as a same, and that comes, we get a lot from our senior lenders as well. They get a lot of deposit balances not only from us but from our portfolio companies and things like that. They provide lines of credit to the firm for different capital call lines and things like that. So it's really been a win-win situation between, kind of our bank LP partners and ourselves. It's worked well.
Matt Andrulot:So during this environment I got to ask anyways like did they have they been upping their like or trying to up their allocations, or looking for more like relative to what they have done historically in the past?
Greg Barger:We haven't seen any you know, yeah, and again, we went raise fund five two and a half years ago. It was kind of right at the tip of when things were starting, so we haven't seen. You know we haven't seen anything. But yeah, we'll see. We'll see in the next fundraising cycle if there's any change there.
Matt Andrulot:So who's some of the other ones? I interrupted you on the bank side, I couldn't help myself. But who are some of the other type of investors?
Greg Barger:You know, for us, we, you know one thing we do not only do we try to diversify in terms of our portfolio companies, we also want to diversify with our LP base. So I would say, you know, firms like Verdance have become a very good option for us and hopefully it's a good option for Verdance and your clients. So those investment management firms are a strong category. We do see a decent amount from insurance companies, and pensions would probably be the next two in our strategy. Our other private equity strategies are slightly different in terms of who their LPs base.
Greg Barger:I would say I'll give an example Our healthcare group they have a lot more strategic investors Interesting, whereas our growth equity group is probably more traditional pens a lot more strategic investors Interesting, whereas our growth equity group is probably more traditional pensions and things like that. So it kind of varies between all of our strategies. But for the mezzanine strategy, you know banks are number one. I'd say investment managers are probably two, and then high net worth individuals slash. You know, traditional pensions and things are probably the next largest category.
Matt Andrulot:Great Now. So I mean, we've talked about it a little bit, but I'll wrap up a little bit with this From an investment return perspective. We've talked about cash flows. We've talked about equity warrants or direct equity. As investors, what's kind of traditional for mezzanine? What should we expect? As investors, like, what's kind of traditional for for mezzanine? Like what? What should we? What should we expect?
Greg Barger:We always we, we target a kind of a high teens net IRR to our LP base and a and a two X kind of return on capital is kind of what what our, our goal is. And obviously we're always striving to do better than that and we have. But if, if you, but if you know, we feel like you know, especially if you put that up against other asset categories, I think it stands up pretty well and we've been able to hit those numbers and we'll continue to try to do so. So that's kind of our target. And you know, on a portfolio basis, we, you know, underwrite similar, you know we kind of price between our mix of debt equity. We're, you know we're going to be able to. We're always kind of looking at at least a 3X in our equity, 1.75 in our debt, if we can kind of blend that together. That's kind of the formula.
Matt Andrulot:Yep, well, hopefully we've educated our listeners and viewers a little bit about mezzanine and where it sits on the capital stack and the benefits associated to having a nice cash flow component to that as well as that equity type of kicker, and they learned a little bit about you know what the SBIC is and you know how the SBA is working with that.
Greg Barger:So I appreciate all the time and spending time with me Anytime.
Matt Andrulot:You know. Thank you very much, my pleasure. Thanks, Matt, all right you.
