News Column

Corporate Courtship

March 2007, HISPANIC BUSINESS Magazine

Hildy Medina

Marcos Rodriguez, Palladium's managing partner.
Marcos Rodriguez, Palladium's managing partner.

For entrepreneurs seeking cash to grow their companies, the chances of tapping the private markets is slim to none.

That doesn't stop them from asking. An estimated 125,000 companies sought venture capital in 2005, yet fewer than 3,000 firms received funding.

The good news is that venture firms are investing more money today than they have since the dot-com downturn in 2001. The National Venture Capital Association reported that it expects U.S. venture firms to invest $27.6 billion in 2007, about $2 billion more than last year.

And while the Hispanic market is not a niche that professional investors typically target, as the number of Hispanics has grown, so has the number of potential equity investors.

"In the past year we've seen a very significant amount of interest and it's from private equity funds that are interested in companies benefiting from the growth of the Hispanic market," says Alex Ryshawy, a partner at merger-and-acquisition go-between Mission Capital Group LLC, in Miami. "Now you're getting the whole financial community in Wall Street becoming aware of the growing Hispanic market and its purchasing power and growth."

While the growing interest in the Hispanic market is encouraging, the amount of money being invested in minority-owned enterprises is nothing to crow about, say some industry experts.

"In the economic markets you have these inefficiencies where you've got 28 percent of the population which is black and Latino, yet only 1 percent of private equity capital is going to entrepreneurs from these communities," says Duane McKnight, a managing partner at Syncom, Inc., a 30-year-old venture capital fund specializing in minority-owned businesses.

COMPETING FOR FUNDS

Despite the increase in venture capital fundraising over the last five years, private equity investments in minority enterprises hasn't changed.

"Essentially what you have is minorities trying to compete with majority entrepreneurs who have substantially more resources at their leisure," Mr. McKnight says. "So you really have to know your markets and your opportunities, you really have to laser focus on what you're trying to do in order to compete. It's difficult to compete head-to-head with these guys who are going to be much more highly capitalized."

Some Hispanic investors say they are better equipped at dealing with this market than their more conventional counterparts.

"I think the population of Hispanics has a tendency to prefer to deal with fellow Hispanics who understand their business initiatives beyond just being a commercial lender at a bank," says Manuel Henriquez, a managing partner at Hercules Technology Growth Capital, a publicly traded specialty finance company in Palo Alto, California.

Hercules focuses on life sciences and technology. However, it has not invested in any Hispanic-owned or focused businesses.

"We haven't done a pure Hispanic-type investment yet, but we're certainly looking at them somewhere down the road," Mr. Henriquez says. "We have two fluent Hispanic individuals on staff, me being one of them."

OPENING DOORS

New York City's Palladium Equity Partners also says it is uniquely positioned to tap into this market because it understands the communities where the businesses come from and can access the capital markets. The firm works closely with a network of entrepreneurs in the U.S. Hispanic market to help spot investment opportunities.

"We've certainly seen a myriad of Hispanic companies that have strong management teams and networks and tremendous financial plans, such as Promerica (Bank)," says Marcos Rodriguez, Palladium's managing partner.

Palladium is among a group of investors that provided startup capital of $25 million for the bank, one of the few Hispanic-owned commercial banks to open in Los Angeles in the last 30 years. "Promerica, a Latina-led bank in L.A., was a must-do deal for us given the strength of that management team," Mr. Rodriguez says.

Palladium, which has more than $750 million under management, typically provides equity financing in the $15 million to $50 million range.

The kinds of investment opportunities Hispanic-owned equity firms look for are no different than the ones other U.S. equity investors seek – strong companies with great investment potential.

As the Hispanic market gets Wall Street's attention, a good company stands a chance of attracting venture capital. Hispanic purchasing power is expected to hit $1 trillion in 2010, our HispanTelligence® unit has predicted, and numbers like these have been attracting potential investors to Mission Capital in the last year.

"They're interested in investing in companies that have a product or a service that targets the Hispanic market, food, restaurants, media, the Internet, and financial services," Mr. Ryshawy says.

And it's not just the Hispanic-focused or Hispanic-owned funds that are showing an interest. "It's really some of the mainstream and blue chip players that are interested in the Hispanic market," he says.

Still, having a great product or service in a booming market is not enough to guarantee private equity. An investor's criteria may vary when it comes to deciding whether to fund a company, but most agree on several key elements that a business company must have.

Having a top-notch management team in place and a team that knows the business inside and out is critical. Excellent financial records are also essential. Private equity firms will send in a team of accountants to trace revenue sources and comb through every expense.

"We try to identify red flags as early as possible; what that usually means is we've found something that we had believed to be true, told to be true, but wasn't," Mr. Rodriguez says. "Accountants go in and find issues that talk to the integrity of the numbers, the financial statements."

DISCOVER DISCIPLINE

This is where some entrepreneurs could lose a potential investor because they didn't take the extra time to look for areas that needed some work or didn't want to invest in an accountant.

"When you bring in outside investors, whether debt providers or equity providers, that discipline and that rigor must change," Mr. Henriquez says. "And that may be a difficult thing for you to do when you're expensing your personal vehicle or paying for a party for your children or what have you; those disciplines must change when you're bringing investors into your company."

Corporate governance is also an important element and one that historically has been lacking in some Hispanic-owned firms, Mr. Henriquez says.

"The clear control of governance from an administrative point of view, meaning a board of directors, for example, may not typically be seen in some of these Hispanic businesses," he says.

Also seen among Hispanic-owned business, especially among the older generation of Hispanic entrepreneur, is a more cautious view toward expansion and seeking capital.

"What you have is a new generation that perhaps is starting to assume control of the (family-owned) company and maybe want to expand more aggressively," Mr. Ryshawy says. "So, therefore, instead of just going to the bank, which has always been the traditional lender, perhaps they start to think of looking for equity capital and expanding into new areas."

TIPS FOR ATTRACTING INVESTORS
1. Have a top-notch management team in place and a team that knows the business inside and out
2. Keep excellent financial records
3.Welcome corporate governance – a board of directors



Source: HISPANIC BUSINESS Magazine and Hispanicbusiness.com, Copyright (c) 2007 All Rights Reserved.


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