Changing Times: Merchant Bank Branches Out Into Private Equity, Hedge Funds

Nov 29 2007 | 11:24am ET

After years of turning distressed small-cap private companies into cash cows via a pair of private equity funds—with a third on the way—the ComVest Group is looking to the public markets to fuel its growth.

The West Palm Beach, Fla.-based merchant-bank-turned-private-equity-shop earlier this year launched an offshore version of its 18-month-old hedge fund, ComVest Capital, and plans to begin actively marketing both vehicles next month. The firm is opening the funds, which currently manage over $80 million in combined assets, to new investors in February. 

ComVest Capital, which is up over 10% year-to-date, invests in public and private companies providing loans and other structured financings including convertible debt, asset-backed loans and senior equity securities. The fund’s target investment size is $5 million to $15 million, although smaller and larger transactions are considered on a case-by-case basis.

From Private Equity To Hedge Funds

The ComVest Group is the private equity arm of Commonwealth Associates, which was founded in 1988 as a merchant bank focused on the small-cap market. But as the markets shifted during the late 1990s, the bank decided to form a p.e. group, headed by Commonwealth’s co-founder, Michael Falk, and Robert Priddy, founder of AirTran Airlines. The group launched its first private equity fund in 2000 and is currently raising its third fund, a $400 million to $600 million offering, with Lehman Brothers acting as its placement agent.

Last year, the firm launched its first hedge fund—based on a failed deal in its second private equity fund. “We had a medical imaging company that we tried to restructure in the form of loans with hard assets and the company did poorly in terms of growing as a private equity company,” says Perry Green, vice president.

“But we felt it had valuable receivables and intellectual property so we sold off the collateral and returned a 23% [internal rate of return] to ComVest II. That type of strategy didn’t really fit the format of a traditional private equity fund so we felt that if there was enough need in the market to make loans instead of take controlled investments, then we would be able to sustain a hedge fund vehicle.”

Distressed Vs. Growth
 
Unlike its private equity predecessors, ComVest Capital is looking for companies with strong management and growth potential. The firm sources some 80 to 100 public and private companies through its internal business development team and external consultants, and separates the companies for its hedge fund and private equity units. The firm then filters this group down to approximately six to10, of which two or three are actually selected.  

Green stresses that there is no overlap between the two groups, so the private equity group won’t turn around a company and prep it as a loan candidate for ComVest Capital. “We do not participate in each other’s loans, so they’re completely separate companies,” he says.

Green says the firm estimates there are well over 12,000 small- to mid-sized companies in the U.S. looking for capital to grow and regional banks and other lenders are just unable to be as creative or work in the time frames that these companies are looking for. “There’s no way if you’re a California-based company looking to make an acquisition in Italy that a regional bank would lend to you,” he says. “We have the expertise to evaluate both companies and make a loan on the consolidated company so we provide a lot more flexibility.”

Defaults? No Problem

ComVest's Gary JaggardComVest's Gary JaggardAlthough the fund is diversified across industries and geography, managing director Gary Jaggard says it will avoid the real estate sector because “it’s just not a good time for us to be involved in that.” Jaggard joined the firm in March from Presidential Financial, where he served as president of the national asset-based commercial and healthcare finance company, and has been in ABL business for 30 years.

Jaggard says he’s not put off by companies in default because of his experience with turnaround situations. “I started on the workouts side of the business and I don’t have a problem with a company going into default, because when we underwrite these loans, we underwrite them with the understanding that we have to fall back on our collateral and management. Obviously, we always underwrite cash flow but that’s the first to go if there’s a problem.”


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