Memo to entrepreneurs from FirePower: retain the equity and issue debt with equity kickers

Ilan Jacobson, chief executive of FirePower Capital Corp., has a straight-forward message for small to mid-market Canadian companies that need growth capital: don't issue equity.

Instead, the boss of the company, which defines itself as “Canada's leading entrepreneurial investment bank,” said that such companies which are not normally cash flow positive, are better off by issuing debt, even debt that comes with so-called equity kickers. Those kickers add to the coupon cost of issuing debt.

“In these growing companies, the valuations increase so dramatically that if you look at the cost of capital it can be in the hundreds of percentages,” said Jacobson, who formed FirePower in 2009. “There is nothing more expensive than giving away equity at that growth stage.”

Now FirePower is attempting to fill the financing gap for smaller companies with a product that sits between the seed capital provided by venture capitalists and the senior debt provided by the banks.

FirePower, which is home to 16 employees and which normally involves itself with providing M&A advice and helping clients raise debt capital, has formed a private capital division that will offer so-called mezzanine debt.

The initial $100 million available to that division comes from FirePower's employees, from high net worth individuals and from a strategic partnership with a U.S.-based private investment firm. The private capital division operates a 2 and 20 model meaning it charges an annual two per cent to manage the fund and receives a 20 per cent carried interest.

And it plans to make loans in the $500,000 — $5 million range. “We are focusing on that market size of up to $5 million because it's underserviced,” said Jacobson, who regards the capital being provided “as a great bridge to an increased valuation milestone.”

Those loans could be amortizing — meaning that borrowers pay a mix of principal of interest prior to maturity — will have a term of three-four years, and are intended to generate returns in the “high teens” for FirePower. “We are not balance sheet based lenders. We come at it from an equity and debt mindset,” said Jacobson.

It's an area in which the banks don't participate, in part, Jacobson says because “they don't price to risk.” And it's an area — dominated in Canada by the government-owned BDC Capital. That lender said that it provides mezzanine capital of between $250,000 — $35 million to companies that have “high growth, high revenues and strong management teams,” with each loan targeted to each client. It could not provide the amount of such loans made last year.

Jacobson said, “the private sector needs to play a part in helping these great entrepreneurs. Canadian companies aren't getting their due; they are not given the same resources (as those in the U.S.)…. This is a long term solution for clients.”

As for an ideal candidate, Jacobson mentions a technology company that is generating $3 million to $4 million in sales and that is now near break-even.

“It wants growth capital but does not want to raise any more equity. They have done the dilution,” he said.

Among more traditional companies, Jacobson mentions a managed service provider — meaning that it offers outsourced IT services for large companies — that wants to either expand outside of its home base or make an acquisition. “The capital we provide is all growth, to throw fuel on the fire,” said Jacobson.

You may also like