In 1999, Gastonia native Joe Alala II raised $30 million for his first investment fund. Since then, his various companies organized as Capitala Group have invested more than $1.4 billion in small and mid-sized businesses across the U.S.
It hasn’t all been milk and honey: Alala took business-development company Capitala Finance Corp. public in 2013 at about $19 per share. It closed yesterday at $7.95 because of setbacks suffered by its portfolio companies. Because of the credit problems, the company reported a $7 million loss last year, with its stock among the nation’s poorest performing BDCs.
Capitala focuses on making mezzanine-level investments that have less priority for creditors than bank debt and senior debt securities. In some instances, the company gains some equity as part of its lending.
To shore up his businesses, Alala’s management company, Capitala Group has raised $1 billion from limited partner investors mostly in Europe, he announced yesterday. The investors are mainly large pension funds, he said.
Unlike previous funds, Capitala will use the $1 billion to make senior debt investments that Alala says are less risky than mezzanine debt. “This funding is a vote of confidence in the strong growth prospects of our country’s economy and the soundness of Capitala’s relationship-focused investment philosophy,” according to a press release.
In an interview, Alala said the interest rate for senior debt to be issued by Capitala will range from 7% to 9%, versus the 11% to 13% common in mezzanine funding.
Capitala’s goal is to provide financing for promising businesses that have been abandoned amid the consolidation of the banking industry.
“We are later in the credit cycle,” Alala said. “If there is a recession or pullback in earnings, we want to be the businesses’ partner to work with them to get through the difficult times and continue to grow.
“In a mezzanine position, you don’t have ability to make decisions. The senior debtholder is making all of the decisions.”
The $1 billion commitment will help shore up the company’s publicly traded BDC unit by providing a stronger capital base, Alala said. The BDC has been unable to issue more stock because its weak performance has caused its trading price to sink below book value.
With the new capital, Capitala plans to open a New York lending office next month and is looking at Los Angeles and Dallas, where it previously closed an office. The company employs 25 and expects to add another 10 people by the end of the year.