Private Equity Investment May Signal Factoring as Fresh Source for Business Capital

Anticipating that small businesses will continue to have difficulty accessing capital in the coming years, Presidio Investors LLC has expanded its holdings in the financial services sector to take advantage of a market that will be in demand.

The San Francisco-based investment management and private equity firm told insideARM that it bought a minority interest in The Interface Financial Group, a Potomac, Md.-based factoring company that buys discounted receivables.  Founded in 1971, IFG has more than 150 franchise operations in the U.S., Canada, New Zealand and Australia.

Presidio already owns a stake in a bank and is looking at other financial services opportunities. Managing Director Barry Rudolph said investing in a factor gives Presidio the opportunity to serve small businesses that need immediate working capital and expansions.

“We saw a lot of opportunity because banks have pulled back [from lending],” Rudolph said, adding that many firms have told IFG, “The banks weren’t there for me.”

Neither Presidio nor IFG would disclose the terms of the deal.  However, Rudolph said the purchase was financed through its dedicated private equity fund established to invest in lower middle market companies. According to Presidio’s website, it targets investments sizes of $3 million to $10 million, but may participate or lead larger investment sizes.  

This is the third investment out of that fund.

Many financial experts expect factoring, which has enjoyed a resurgence in recent years, to fill the financing void left by banks and traditional lenders in the wake of the global credit crunch. According to the Commercial Finance Association, a trade group for the asset-based financial services industry, factoring volume grew to a $135 billion industry in 2007, up six percent from the previous year.  George Shapiro , IFG’s chief executive, estimates factoring’s annual volume has grown to about $180 billion, a reflection of increased demand for factors’ service and new factors entering the space. 

“Small businesses need our services now,” Shapiro said.

After searching nearly a year for the right factor to invest in, Rudolph said Presidio selected IFG for its market niche, business model and strong fundamentals. IFG buys receivables across all sectors, with the exception of healthcare, because it lacks expertise in health care receivables, Shapiro said. About thirty to forty percent of its receivables purchases are in construction, an industry most factors avoid because it takes longer to collect on the receivables, Shapiro said.  The company also serves local business markets with independently owned and operated franchises.

“We thought IFG was very unique. Not only in terms of the construction niche, and franchise aspect of the business, but how IFG goes about factoring and thinks about factoring,” Rudolph said.

Added Shapiro, “We don’t lock clients up in long term contracts. We can do one invoice at a time.”

Rudolph said Presidio wouldn’t reveal growth and revenue expectations for IFG, but anticipates higher growth for IFG’s services than the 6 percent compounded annual growth enjoyed by traditional factors.

“We think it will be a very successful company and that we are at the right place at the right time with the right team,” Rudolph said. “We think IFG will be a very successful long term investment for us.”