Enhanced Capital makes three deals from new fund in 2015

Enhanced Capital, the New York private investment firm, has done three deals so far this year from its Enhanced Credit Supported Loan Fund (ECSLF), focusing on sponsor-backed lower mid-market companies controlled by older private equity funds and require refinancing or are going through a transition or growth period, explained Doug Cruikshank (pictured), a managing partner on the fund.

The fund closed at $105 million in December and is about two years into its investment period. It did 13 deals in the fund's first 12 months and Cruikshank expects to execute between six and 10 this year. Loans total between $2 million and $15 million anywhere in the capital structure. Cruikshank describes the investments as “a good equity substitute that’s priced like debt”. The borrowers are normally backed by a guarantee from their private equity sponsor. Although the platform looks across the industry spectrum, some of the recent investments have been in the oil & gas, technology and industrial sectors.

Enhanced Capital announced the final closing on this fund on 2 December. The fund raised $105 million through limited partner investments and uses another $35 million in bank leverage.

Through its Arch Note product, ECSLF provides loans to sponsor-backed portfolio companies with non-dilutive debt. Arch Notes are loans with tenors ranging between one and five years to portfolio companies backstopped by an unsecured guarantee from the financial sponsor (a private equity fund, venture capital fund or family office).

Enhanced Capital's Arch Note facility uses the extra credit support to provide “off-market” debt financing for these portfolio companies. With the guarantee from the sponsor, ECSLF can lend to companies at cheaper rates than typical mezzanine financing (without warrants or any equity upside) in situations that would typically require equity-like returns.

“This gives financial sponsors an attractive alternative to finance growth or pivots in lieu of using equity. Our approach allows sponsors to leverage their portfolio value, instead of undrawn capital commitments, to support their companies,” Cruikshank said in a statement at the time. “Because we focus on the value of the financial sponsor's portfolio, rather than the standalone credit quality of a single borrower, we can close transactions quickly and with a high degree of certainty, without the need to perform costly quality of earnings analyses.”

Enhanced Capital, headquartered in New York, is a diversified private investment firm focused on established small and mid-sized companies overlooked by traditional sources of capital.