PUBLISHED BY SECURITIES DATA PUBLISHING, VOL. 16, NO. 21

JLS Capital Premieres $200M Deal

Although still in its infancy, Beverly Hills , California based JLS Capital Inc. announced last week the completion of its first private placement - a $200 million transaction combining debt and equity for Tartan Textile Services, Inc .

All of the debt - roughly $118 million - was purchased by an equity-sponsor group. The remaining $82 million was issued in preferred and common stock.

The Tartan Textile management team will use the funds to finance the acquisitions of four linen service providers with 21 processing locations and 23 service centers.

After the acquisition, Tartan Textile will be one of the largest linen supply companies in the U.S. and the second largest operator serving the health-care sector.

"The mechanics of acquiring four different companies needed the support of a single strong equity group," said Jonathan Schwartz, the founder of the company, explaining the structure of the transaction. The deal, from the time JLS was approached by the management company to the closing and funding, took four months to complete.

JLS Capital was started last fall by Schwartz, who was also the former private placement group head at Libra Investments. "The management was referred to us by their former investment bankers who did not have experience in the institutional private placement market and knew our specialization," said Schwartz. "Our primary focus is on management-led buyouts or acquisition of middle-market companies with total enterprise value from $20 million and up."

JLS is working on a $20 million management buyout in the health-care sector, a $15 million publishing sector recapitalization and an $8 million private placement in a retail roll-out transaction. - A.S.R.

Private Placements Offer Unique Financing Opportunities for the Private Company
by Jonathan L. Schwartz, also in the Los Angeles Business Journal

Your business is looking for expansion capital. You are looking to acquire a division of a company you have spent a life time working for. Or perhaps you simply want to recapitalize your business and take a few dollars off the table. When the public financing markets are not available and the banks fall short of supplying the needed capital many small businesses turn to the Institutional Private Placement Market.

The Institutional Private Placement Market involves raising private debt and private equity capital from institutional financing groups. Private Placements, unlike the public financing market, and within certain guidelines, are exempt from the normal regulatory registration requirements of the Securities and Exchange Commission.

What often surprises companies seeking financing in the private placement market is the size of that market and the number of transactions financed through private placements. According to The Private Placement Letter , $145 billion was raised in the private placement market between January 1, 1997 and June 30, 1997 .

Unlike the venture capital markets that look to invest in early stage companies in return for significant equity stakes, or the public markets that look to multiples of earnings, the institutional private placement markets look for companies with at least three years of operating history and companies that generate positive cash flow. Generally these funds look for companies seeking expansion capital, management buyouts or re-capitalization's.

One major advantage of this market is the speed with which the institutions can complete their due diligence and fund a transaction. The normal time frame from the time of initiating a deal to the completion of due diligence and funding is six to eight weeks.

In one case the parent company of an environmental remediation company was prepared to auction off the division, a situation the existing management team did not want to find themselves in. Management approached me about raising the capital necessary to purchase the company, emphasizing that they feared losing this opportunity while they negotiated their purchase agreement. I immediately approached a number of institutional equity funds and presented the transaction. Ultimately one group provided the management with a term sheet guaranteeing all financing, subject to due diligence. We were able to obtain this commitment to finance the transaction in just two weeks and subsequently management was able to successfully negotiate the purchase of this division.

Much of the decision process to invest in your company is based on your historic and future cash flows. From these numbers the funds determine how much equity will be required in your company to achieve the rates of return they desire. A very important source of private placement financing comes from groups called "Mezzanine Funds". Unlike traditional bank debt, mezzanine funds look to your cash flow rather than assets to determine how much to lend the company. This leverage can increase the rate of return on the equity and require the company to give up less equity to the investors.

One company that was seeking financing needed $16 million to complete their acquisition. Their hard assets consisted primarily of inventory, some receivables and a manufacturing plant appraised at around $20 million. They quickly found that all the senior lenders they talked to would not lend them more than $10 million secured against existing assets. Because the cash flow was so strong a mezzanine lender was willing to finance $3.5 million, with the balance being provided by an equity fund. With this additional capital infusion, the senior lender was more comfortable with the company and we were able to obtain a lower cost of capital.

More than any other factor institutional funds bet on management. As one mezzanine lender said to me "Our bet in the beginning was on management and it still is. Every company hits rough spots, all we ask is that management keeps us closely posted and not get sidetracked. If we get that much our approach is to be hands off".

Before seeking private financing take a close look at your management team. Do they make a good presentation, are they clear on the company's mission statement, is current management able to handle the newly financed and often larger company?

In financing one acquisition the company had experienced a dramatic slow down in their business during the recession and the parent company had refused to provide any additional growth capital. When the equity and mezzanine funds met with management they saw a team that was cohesive, had weathered bad times and stayed on course. The division's problems were one of capital constraints, far easier to fix than a broken management team, so the transaction was funded.

The private placement market has always been a place where investors have been willing to accommodate complex or difficult deals. But rarely have they been as eager to do so as now.

Contact Information:
Jonathan L. Schwartz
JLS Capital Partners
310-475-3382, e-mail: jlscapital@verizon.net
www.jlscapitalpartners.com