July 23, 2018
Finance

Ironwood Capital’s $424M fundraise, its largest ever

Photo | Contributed
Photo | Contributed
Ironwood Capital Chairman and CEO Marc A. Reich meeting with interns.
Gregory Seay

In the world of business finance, banks, thrifts, credit unions and other asset-based lenders — all essentially investors — predominate.

But within that realm is a slender class of lenders-investors providing essential growth capital to relatively small, privately held businesses in the form of mezzanine financing, a cross between debt and equity.

Avon mezzanine investor Ironwood Capital has built an impressive book of such investments in Connecticut and nationwide since its 1990 founding.

According to Marc A. Reich, a former Aetna Inc. investments adviser/analyst who founded Ironwood, his firm over nearly three decades has invested more than $190 million in over 50 Connecticut companies, among them Cromwell's Ripley Tools, Glastonbury's Healthtrax Fitness & Wellness Inc., and South Windsor aeroparts maker Capewell Components LLC.

Of that total, Ironwood's four mezzanine funds have invested about $90 million in 10 companies, Reich said. Its latest fund, IMF-IV launched in May 2017, so far has pumped just over $135 million into 11 companies, including $19 million to a pair of Connecticut firms.

Ironwood's investments are spread across a broad range of companies, including manufacturers, distributors and environmental firms. In June, it announced the addition of American Residuals Group, through an unspecified investment in the expanding private Arkansas industrial-waste processor based in Dardanelle.

Ironwood's model, he said, is to invest $8 million to $20 million in middle-market companies for non-controlling debt and/or equity stakes to support their growth. Typically, private-equity managers like Ironwood earn fees for managing the funds and identifying, analyzing and vetting investment prospects. It also shares with investors in the funds' gains.

Recently, Ironwood successfully raised $424 million for its fourth and largest fund yet — $24 million more than targeted — from banks, insurers and pension-fund investors that it will use to invest in midsize companies.

Ironwood Mezzanine Fund IV is the successor to Ironwood Mezzanine Fund III, which in 2012 raised $307 million that Ironwood invested into about 20 companies, Reich said.

In all, since Reich and partners bought in 1990 former life-property-casualty insurer Aetna's investment-banking subsidiary that Reich launched four years earlier, Ironwood has created four funds that have raised nearly $1 billion, much of that eventually being invested in more than 80 companies.

Such junior lending is the life-blood, particularly for small but growing companies that cannot obtain or afford a bank loan and do not yet have a product, service or track-record viable enough to lure equity investors through a stock offering.

Typically, junior or mezzanine financing, observers say, is cheaper and more readily accessible than other commercial forms of financing.

Reich is tight-lipped about his four funds' yield returns to investors, citing federal securities rules against such boasting.

"We've done it a long time,'' he said recently. "We've done it well from time to time.''

The goal, and part of the recipe for success in the mezzanine-financing realm, is identifying growing companies in which to invest to produce above-market returns for investors, Reich said.

To do that, Reich and members of his 20-person team regularly get away from Connecticut, down South, or out West, in search of investment opportunities. Places like Jackson, Miss., or Idaho, are outside the traditional capital bases of New York, Chicago and San Francisco. So Ironwood goes to those remote areas, hosting networking sessions/events, to introduce itself.

"When you're investing in a company, you're really investing in the people. We try to identify strong teams that are committed to the company,'' said Reich, a biking enthusiast who lives in Avon.

The state Treasurer's office is among Ironwood's satisfied investors. After investing $10 million of state funds with Ironwood in 2011, the office followed in May 2017 with $50 million from its mainstream retirement fund into Ironwood's newest and fourth fund, said Laurie Martin, the state treasurer's chief investment officer.

Via email, Martin said a treasurer's office analysis "indicates that Ironwood Capital is an effective investment partner. The successful closing of its largest growth investment fund to date shows that other institutional investors have come to the same conclusion."

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