This article was published by the CVCA on October 18, 2019. You can find the original version here.
On Sept. 28, Toronto-based investment bank and credit investor, FirePower Capital, announced it had entered into a joint venture with New York City-based investment management firm, Arena Investors LP to increase the availability of its debt financing product “Gap Debt,” to entrepreneurs in Canada.
At FirePower, the new JV falls under the umbrella of the Private Capital group, which is led by Jared Kalish, Partner, and allows the firm to provide debt investments across the capital structure ranging in size from CAD $1M to CAD $20M. FirePower is focused on identifying and investing in companies with strong enterprise value and cash flow visibility, which are seeking capital for growth, acquisitions, or dividend recapitalizations.
We caught up with FirePower Capital to get some more details about the exciting new joint venture and to learn what sets it apart from this increasingly populated private credit industry.
What is the history of FirePower Capital?
FirePower was founded by Ilan Jacobson in 2012, incubated out of a family office in Toronto. The firm initially started advising lower mid-market companies on non-dilutive capital raises, but quickly expanded to advise on mergers & acquisitions (primarily sell-side) not only to those same companies, but also into the mid-market.
FirePower’s Private Capital group (its private debt and equity arm) was formed in 2016, growing out of the advisory work we did on non-dilutive capital raises:
- Ilan Jacobson recognized that Canadian entrepreneurs faced a lending “gap” — that is, a space where traditional lenders weren’t willing to go, which created a financing issue for high growth, asset-light businesses; and
- Jared Kalish (the head of FirePower’s Private Capital group) started to work with FirePower in his lead role at Investec Canada, with the intent that FirePower would originate loans and Investec would provide the capital. In 2016, Jared joined FirePower and launched the Private Capital business.
The Private Capital group is now comprised of lending and private equity teams. The private equity business was launched in April 2018, with the acquisition of Interwork, a cybersecurity software distributor. In addition to Interwork, FirePower’s portfolio of PE investments includes BATL (the world’s largest urban axe throwing company), Last Call Analytics (a big data play in beverage & alcohol), and Health Casa (a home care service provider). As Jared Kalish says: “We like to build businesses.”
How many private capital funds have been operated by FirePower?
FirePower operates funds where investors are family offices and high net worth individuals. For larger deals, FirePower looks to their recently announced joint venture with Arena.
What is the investment focus of the FirePower/Arena Joint Venture?
The focus is on:
- Deals between $5-$20 million in size, but can go larger
- Companies that are entrepreneur-driven (i.e.: operated), typically non-sponsor backed (without PE or VC backing), though we would work with sponsor-backed companies as well
- Businesses that have strong recurring revenues and a compelling growth story; companies that could be generating losses to drive growth; special situations (i.e.: potential turnarounds, distressed situations).
FirePower, whether lending on its own or in partnership with Arena, is a cash flow or enterprise value lender, and does not have an asset-backed lending mentality.
What are some recent investments?
FirePower closed several transactions in September 2018 and in the first few days of October. One deal (Kontrol Energy) was announced by the borrower, a public company. As a general rule, however, borrowers prefer that their transactions remain confidential, and of course, that preference is respected.
How will this offering differentiate FirePower from similar players?
The main difference, as we understand it, is that FirePower doesn’t require the borrower to be sponsor-backed. FirePower will typically have a greater risk appetite and more flexibility in structuring a deal and may work in tandem with debt providing banks as a junior lender, depending on the situation.
Another differentiator: FirePower can and does look outside of tech. 50 – 60% of what the lending team looks at is comprised of technology companies (the recurring revenue nature of SaaS companies works particularly well with FirePower’s type of venture debt), and the rest is in a broad range of sectors, excluding mining and resources.
In addition, FirePower’s ability to lend into complex, unusual or challenging situations is a differentiator. In addition to venture debt for growth, dividend recapitalizations, mezz debt for acquisitions, and, as mentioned above, turnaround situations, are all in play.
Why did FirePower use a JV versus the traditional fundraising route? What are some of the advantages?
The partnership with Arena (formalized as a JV) works very well for both sides. FirePower and Arena worked together on several deals over the past year and developed an excellent working relationship. Arena is strong on credit and has a significant amount of capital that they need to deploy.
Partnering with Arena allows FirePower to do larger deals under the JV arrangement, while continuing to do smaller deals on its own. As FirePower’s ecosystem is built around following companies as they grow, this flexibility is very important. And again, quoting Jared Kalish: “If FirePower doesn’t have to do all the fundraising, we can concentrate on doing more deals”.
What standard terms, if any, will this JV will use when issuing debt to clients?
- 1 – 4‑year terms
- Rates from 10% plus some sort of bonus that may be in the form of warrants to get to a mid-teens return
- Significant flexibility in how terms are structured