Direct vs. Indirect: The Case for Purposeful Partnerships
December 7, 2009
By Joe Avenatti
Why does RSF have a strong preference for direct relationships in its lending and investing activities? There are several reasons for this preference, which are all rooted in our desire to make transactions direct, transparent and personal:
- A 1:1 relationship is formed with the borrower
- There is greater control of the loan or investment
- The assets and income are not shared with another lender
However, there are advantages to partnering either through loan participations or equity co-investments. Some of the advantages are:
- Protect assets through risk-sharing
- Increased capacity through operating efficiencies
- Sharing of best practices
The RSF Mezzanine Fund, L.P., entered into its first non-direct loan recently with Rustic Crust. Rustic Crust (based in Pittsfield, New Hampshire) is an organic certified manufacturer and wholesaler of all-natural and organic artisan quality pizza products (see RSF Newsroom for more info). RSF’s initial approach was to provide a separate, stand-alone senior subordinated loan to Rustic Crust. However, there were compelling reasons to structure our loan as a “reverse participation” with Vested for Growth being the lead lender. A reverse participation is when a lender purchases a portion of a loan from the lead lender, whereas a participation loan is the term used for when the lead lender sells a portion of its loan to another lender.
Vested for Growth (VFG) is a part of the New Hampshire Community Development Loan Fund and provides similar lending products as RSF, but solely to companies in New Hampshire. VFG had already provided a subordinated loan commitment to Rustic Crust by the time RSF became involved. However, there was still a need to raise additional capital for Rustic Crust, in the form of debt or equity. What was the best way for RSF to proceed?
Upon reviewing the situation, I collaborated with the various parties to find the best solution for all: a reverse participation with VFG in equal partnership. RSF provided Rustic Crust with its needed capital in the same amount and on the same terms as VFG; the equity investors were able to leverage their return by using debt instead of equity; and although we received warrants, there was less ownership dilution for management and the other equity holders as a result.
In all lending and investing relationships, whether direct or indirect, there are important factors to consider as in any personal relationship – clear communication, fair expectations, aligned objectives, and mutual trust are of paramount importance if the relationship is going to succeed. At RSF, we believe we can achieve this with our partners and that we can all benefit from collaborating with one another in order to help organizations with strong social missions achieve their greatest impact.
For information on how to invest in the RSF Mezzanine Fund, click here, or for information on mezzanine financing from RSF, click here. To learn more about Rustic Crust, visit www.rusticcrust.com.
Joe Avenatti is Managing Director of RSF Capital Management.
- Published by Jillian McCoy
- Categories: Deals, Food & Agriculture, Investing, Lending, Mezzanine Fund, Social Finance
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