News Column

The Quest for Capital

March 2006, Hispanic Business Magazine

Joel Russell

Maria_Contreras06

For the entrepreneurs and investors in attendance at the Hispanic Business CEO Capital Markets Roundtable, November 10 wasn't just another day at the office.

The meeting brought together top CEOs and financiers to match money with opportunity in the U.S. Hispanic economy.

The instructive day included:

• An overview of issues affecting U.S. Hispanic entrepreneurs' access to capital, presented by Hispanic Business Chief Economist Juan Solana, to the audience of about 50 financiers and 30 CEOs;

•Capital-seeking CEOs' presentations of their growth financing strategies and rationales;

• Helpful feedback, questions, and clarifications following each presentation from financial experts, including lenders and venture capitalists – also known as private equity investors (see sidebar "Debt Vs. Equity"); and

•An afternoon discussion of equity financing challenges and strategies in the Hispanic economy, featuring a diverse panel of investors (see sidebar, "The Investor Angle").

Where Equity Belongs

"Minority businesses in the middle market lack access to advantageous types of financing," Mr. Solana told the assembly. "The perceived risks to investing in Hispanic-owned companies are higher than the real risks." The lack of detailed data about the U.S. Hispanic economy, and the investment industry's lack of experience with it, contribute to this problem.

Speaking specifically of private equity funding as a source of capital, Mr. Solana also pointed out the difference between investing in the Hispanic market and investing in Hispanic entrepreneurs.

•Most private equity funds tap into Hispanic market demographics by investing in companies that sell goods or services to Hispanics – often broadcasters or retailers – regardless of whether these companies are Hispanic owned.

•It is equity investments in Hispanic-owned firms that can multiply wealth and create jobs in the Hispanic community.

Looking For Growth Capital

Ten entrepreneurs then pitched their companies to the investor audience. First came those with a strategy requiring working capital.

•Olga Martinez, CEO of California-based Allright Diversified Services, described how her construction company has grown more than 30 percent every year since 2000. As a federal contractor in the 8(a) program, she needs working capital for future growth because her former sources of capital – family and personal savings – have tapped out.

"I want to be proactive in finding that [future] cash," she said.

• Steve Meneses, CEO of Continental Financial in Chicago, explained how his equipment leasing company has filled a niche. He looks for companies large enough to need expensive equipment but small enough to fall below the radar of large banks and financial conglomerates. For example, many restaurants, both Hispanic and other, meet the criteria and have revenues in the $250,000 to $5 million range that Mr. Meneses targets.

Traditional banks and lenders need balance sheets, "but we don't look at that," says Mr. Meneses. "We know the [Hispanic] market. We know our customers and their assets."

•In contrast to CEOs in search of working capital, Eugene Constance of Excel Railcar needs money for a major project. Instead of leasing railcars, he wants to start manufacturing them at a new facility in Illinois.

With manufacturing in the mix, Mr. Constance projected growth from present revenue levels ($7.89 million in 2004, based on Hispanic Business 500® data) to about $400 million. The company has grown steadily at 6 percent per year, he notes, but "the reason it's lower [than other entrepreneurial companies] is because we finance it ourselves."

•Hilario Navarro of Bonanza Meat Co. raised smiles when he described a visit to a pork farm. His children wanted to close the car window to keep out the stink, but the CEO told them "that smells like money to me."

Bonanza sells about $19 million (2004 revenues) in meat to carnecerias and shops across California, but at one point had to turn down orders from the Albertson's supermarket chain, Mr. Navarro explains, because suppliers wouldn't extend him credit. "Suppliers demand payment in net seven, while our customers don't pay for seven to 14 days," he said. "That gap is what we're trying to fix."

• David Hernandez, CEO of Liberty Power and winner of the 2005 Hispanic Business EOY® (Entrepreneur of the Year) Award, presented his plan to garner a capital injection of $25 million to $50 million. Because Liberty – a Florida-based independent power broker – buys large quantities of electricity, the cost of capital has a direct impact on the price of its product.

Of all the CEOs, Mr. Hernandez had the clearest exit plan: grow revenues to the $1 billion to $2 billion range, and then "either go public or become an acquisition for a strategic player in the energy sector."

Mature Companies Pitch Acquisition Plans

The entrepreneurial parade continued with mature companies, defined as those with revenues above $30 million.

• Fred Flores, CEO of California-based Diverse Staffing Solutions, described a common problem for companies such as his: After years of fast growth, Diverse Staffing no longer competes with "mom and pop" agencies, but now must deal with industry giants.

The company has grown to its current size ($44 million in 2004 revenues) by acquisition, a strategy Mr. Flores plans to pursue in a broader geographical market with a new capital infusion.

• Florida-based KIRA, another mature company, competes against Raytheon, Lockheed, and other prime suppliers for federal contracts involving construction and related services.

CEO Carlos Garcia said that in the aftermath of Hurricane Katrina, the company booked reconstruction work at a rate of $100,000 per week. In outlining his plans, Mr. Garcia acknowledged that the federal markets defy the experience of most finance executives. "Private equity financiers perceive low margins, but they don't really understand the federal market," he said. Although government work lacks the high-return potential of software or pharmaceuticals, its lower level of risk – many of KIRA's contracts will run for another nine to 14 years – make it a solid investment, according to Mr. Garcia.

•The highest tech presentation came from Jorge Granados of LatiNode, a provider of VoIP (voice over Internet protocol) services to Latin America. The company has ranked first in the Hispanic Business Fastest-Growing 100® directory for the past two years, and recent acquisitions in Mexico and Germany point to future growth. LatiNode reported 2004 revenues of $42.6 million.

Mr. Granados predicted the VOIP industry will evolve along the lines of cellular telephony and Internet service providers to the point where basic service will be "almost free." The frontier lies in delivering content – voice, data, images, and video – in a format tailored to each customer. To survive the next round of industry consolidation, LatiNode needs size and services that will require capital investments.

Plain Old Success Stories

Not every CEO hoped to win over investors.

•Mario Molina presented Molina Healthcare, a managed-health plan provider serving Medicaid and low-income populations in six states, as an example of a Hispanic-owned company that went public. Mr. Molina offered a presentation long practiced before shareholders and analysts. Financially, the company has the public market plus a $180 million credit line, currently untouched. Mr. Molina joked that he sometimes thinks about taking his company private again, especially when the share price falls.

•Pinnacle Technical Resources finished the entrepreneurial presentations. CEO Nina Vaca, who later won the Hispanic Business EOY InfoBusiness Award for the second consecutive year at the EOY Gala held that evening, explained how her company's proprietary Web-based Progata software streamlines communication between managers, customers, and third parties. Texas-based Pinnacle provides computer services to federal agencies. While the industry has grown only 5 to 10 percent for the past three years, Ms. Vaca's company has averaged 200 percent annual growth.

She ended with financial advice for other entrepreneurs: "For the past 10 years, I've taken every cent of profit and put it right back into the business. Banks love that. When they see you have skin in the game, they like your company."

Rippling Out

The roundtable discussion continued with advice and insights from the afternoon panel of equity experts. But the impact will broaden further as many of the companies – starting with Liberty Power and KIRA – hold talks with financiers they met at the event. And all the attending CEOs walked away with insights gained in the exchanges between entrepreneur and investor.

For example, "Don't sound so apologetic," Jesus Arguelles, CEO of Arguelles Capital Access, advised one presenter. "Tapping into the psyche of investors is very different than selling to customers." Also, he noted, "You need a sustainable competitive advantage, and I didn't hear that."

And be aware that Hispanic cultural expectations may run counter to investor demands, counseled Melinda Guzman, mistress of ceremonies and an attorney specializing in lender and partnership issues at the California firm Goldsberry, Freeman, Guzman & Ditora. "When we buy a car, we want to keep it forever. When we build a business, it's going to last forever. But you need an exit strategy to attract venture capital," she said.

Sounding the final note, Johnny Hernandez, CEO of North American Latino Beer Industries and brewer of Otra Beer, stood from his seat at the end of the presentations and quietly announced: "I'll be here next year."

The Investor Angle: Five experts on equity finance share their wisdom

The afternoon of the CEO Capital Markets Roundtable featured a panel discussion on equity financing in the Hispanic economy.

Panel Members

• Ronald Langston, national director of the Minority Business Development Agency;

•Daniel Villanueva of Bastion Capital;

•Maria Contreras-Sweet, president of FORTIUS Holdings;

•Guido Caranti of Pinto America Growth Fund; and

•Alberto Gomez of Bank of America.

Mr. Caranti emphasized the importance of articulating a clear "exit strategy" to give investors their money back. His fund looks to make commitments of $5 million to $10 million, but wants the pay-off in four to six years.

Mr. Villanueva told attendees (an audience of about 80, made up of financiers and CEOs) that venture capitalists "won't only ask you for [financials] three to four years back, but also three to four years going forward. And they will hold you to those numbers."

Majority or Minority?

The panel differed on the advantages of taking a majority stake (51 percent or more) versus a minority position in the entrepreneur's dream.

Mr. Villanueva said his firm prefers majority positions, stating that "if an entrepreneur wants his money but wants to stay [as CEO], we walk away from the deal."

But Ms. Contreras-Sweet said her fund prefers "minority positions because the entrepreneur is totally committed" to saving his or her own equity value.

Moderator Melinda Guzman, an attorney with the California firm Goldsberry, Freeman, Guzman & Ditora, explained that equity investors with minority positions use warrants to protect their investment. If the entrepreneurial company's performance fails to meet expectations, warrants allow the investors to buy more equity and take managerial control.
Mr. Gomez agreed that control looms as a big issue for many Hispanic families that own companies. He told of his experience with two cheese companies, both earning about $25 million in revenues. One brought in professional managers and grew to $300 million; the other retained full family control and still has revenues of $25 million.

From the audience, Eugene Constance, CEO of Excel Railcar, gave a nightmare scenario: Early in his entrepreneurial career, a large oil company with extensive holdings in the rail industry offered him financing but demanded 75 percent of his company.

In response, Mr. Villanueva explained "there is a direct correlation of risk to reward in this business. The earlier the investment, the more the investor asks for."

Compatible Interests?

Ms. Contreras-Sweet explained that there's a fundamental difference between a financial investor, such as a fund, and a corporate strategic investor that is looking for needed expertise or market access. Once strategic investors learn the busi-ness, they may become competitors.

"When you bring in a corporate partner in an allied industry, you have to be careful," she warned.



Source: HISPANIC BUSINESS Magazine


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