NCtrend: Big fish, small pond
What happened with the New York investment fund?
Painter: I took the job for all the wrong reasons. My role was to go out and find opportunities for the fund. It was exciting, and it stroked my ego in all of the wrong ways. I had this idea that I could live in Raleigh and commute to New York five days a week. That really was a big life experience for me. That is just not what life is all about.
Did you get fired?
Painter: I don’t have a tape of the conversation. All I know is, I was smiling and told my wife, Molly, “I’m not sure if I got fired or I quit, but I know I’m coming home.” It was a big ego hit.
How did you two meet?
Anders: Centura CEO Cecil Sewell had a program where he’d hire one top student each year out of UNC Chapel Hill’s business school to work for him at the headquarters for a year and then pick a job anywhere he wanted at the bank. We had a merchant-banking group called Centura Capital that was considered sexy, so we were lucky enough to land those top students three years in a row, including Michael.
Thirty-five banks, most of them in North Carolina, have invested in Plexus. What’s in it for them?
Anders: First, you get Community Reinvestment Act credit. Banks aren’t allowed to invest in private-equity firms, but they are encouraged to invest with small-business investment companies. Second, there’s the business-development aspect, because we collaborate with banks and refer opportunities to each other. Third, we’ve provided a return on equity in the midteens, which is a really nice asset for a community bank.
Painter: The banks get what we do. We’re investing in the same kinds of companies they bank. We just take a little more risk.
How does the SBA figure into your business?
Anders: They match what we raise privately. So in our third fund we have $150 million of private investment and $150 million from the SBA. As the cash comes back in, we have to repay our SBA debt before making any distributions to our limited partners. We’d have to lose every nickel of our investors’ money before the SBA loses anything. It’s not for everyone, because you’re dealing with the government. But we’re bankers, and we’re used to dealing with regulators.
How did the recession affect Plexus?
Painter: It couldn’t have been a better time to start the business because of the credit environment and the pullback of the banks. With more regulations put on banks, the more they had to pull back. In a $5 million deal, for example, there used to be $2.5 million lent by the bank. Now perhaps $1.5 million is being lent. Somebody has to fill the gap, and we are an alternative source of capital.
How did your first two funds perform?
Painter: For every dollar we invested, we got $1.61 back on the first fund and $1.65 on the second. We’ve only invested $120 million of the $300 million in the third fund. We aren’t swinging for the fences. It’s more about protecting principal than figuring out which company has the most upside.
How come Plexus deployed $50 million in 2014 after lending $100 million in the previous year?
Painter: We learned a lot of lessons in the last downturn, and we try to be disciplined. We only close about 1% of the deals we see. The amount of money that has come into our space and the pricing of deals resemble the credit statistics we saw in 2007. What matters more to us is that we had a record year, with $35.5 million of distributions to partners in 2014.
Anders: Our portfolio companies are paying us typically 11% to 14%. In 90% of our deals, we also get equity warrants, which means we’ll share in some of the upside. Our limited partners are receiving a more predictable income stream.
Why the CEO change? Bob didn’t leave and still has a 20% share, same as the other four partners.
Anders: We’ve got two older guys —me and Kel Landis — and three guys in their 40s. We’re doing management succession, just like we ask our portfolio companies to do.
Painter: I’ve always liked Bob’s approach. He comes into work every day, and he’s not searching for validation. He knows who he is. He likes working, but he also has a life.
Is loan demand increasing?
Painter: Half of the 60,000 small businesses in North Carolina are owned by people over the age of 50. Over the next two decades, many are going to change ownership. When they trade, they need not just capital but mezzanine funding like we offer and bank loans. Because of the regulatory environment, fewer banks want to deal with smaller companies.
What is your growth goal?
Painter: In our first fund, we were investing about $25 million a year. Now, we are investing $25 million a quarter. Five years from now, we’d like to invest $25 million a month. We saw 860 deals last year, but how do we see 1,000 or 1,100 next year and in 10 years get to 5,000? That’s our big challenge.
Your dad, Dean Painter, sold his computer-leasing business to Centura for $62 million in 1996 and has since invested in other ventures. Why didn’t you go work for him?
Painter: He had a leasing business when IBM wouldn’t sell mainframes directly to customers. So he’d lease the mainframes to businesses that wanted fixed rates. The banks wanted to offer variable-rate loans when interest rates were as high as 18%. When rates came down, he had some very good cash flow to help with his business. I worked for him for a summer, but I’ve just always wanted to do my own thing and to prove myself.