CNL Strategic Capital, LLC – A New Approach for Alternative Investors
July 24, 2018 | James Sprow and Luke Schmidt | Blue Vault
On February 12, 2018, CNL Strategic Capital, LLC (the “Company”) filed a prospectus for a $1.1 billion continuous offering of four classes of common shares in this limited liability company that seeks to acquire and grow middle-market businesses.
CNL Strategic Capital, LLC, (“CNLSC”) currently has acquired interests in two companies. Unlike, for example, a BDC that makes loans to a broad selection of companies and may fill a void left by commercial banks that have withdrawn from certain business lending markets, CNLSC has purchased controlling interests in two companies by purchasing majority percentages of their respective common stock while using little to no leverage. Looking at this strategy, we are reminded of Warren Buffet’s approach to building value: investing significant equity positions, often controlling interests, in companies whose products and businesses are relatively easy to understand and have stable and protected niches in the market.
On February 7, 2018, CNLSC commenced operations and acquired their initial businesses using a substantial portion of the net proceeds from a private offering. With respect to the private offering, the Company issued 3,268,260 shares of Class FA shares for aggregate gross proceeds of approximately $81.7 million. The $81.7 million in gross proceeds included contributions in excess of $15.0 million at a per share price of $25.00 per FA share from the directors and officers of CNLSC, with $12.0 million from Mr. James M. Seneff, Jr. and affiliates of CNL, $2.5 million from Mr. Levine and affiliates of LLCP, and an additional $0.5 million from independent directors and officers of CNLSC.
The Company owns approximately 62.9% of the outstanding equity interest in Lawn Doctor, at a cost of approximately $30.5 million, along with making a $15.0 million senior loan to Lawn Doctor bearing interest at a 16% rate. The Company also acquired 87.1% of the outstanding equity interest in Polyform, a leading manufacturer of premium clay products, at a cost of approximately $15.8 million, along with issuing a $15.7 million senior loan debt investment which also bears a fixed interest rate of 16%, payable monthly in cash.
Lawn Doctor is a leading franchisor of residential lawn care programs and services. Lawn Doctor’s core service offerings provide residential homeowners with year-round monitoring and treatment by focusing on weed and insect control, seeding, and professionally and consistently-administered fertilization, using its proprietary line of equipment. Lawn Doctor had 535 franchises as of December 31, 2017. (Note the stable characteristics of this market sector, as lawn care is not difficult to understand and is relatively recession-resistant.)
Polyform is a leading developer, manufacturer and marketer of polymer clay products worldwide. Through its two primary brands, Sculpey® and Premo!®, Polyform sells a comprehensive line of premium craft products to a diverse mix of customers including specialty and big box retailers, distributors and e-tailers.
These two acquisitions, which include both an equity and debt investment in two relatively small, stable companies, illustrate CNLSC’s strategy. It seeks to acquire controlling equity stakes in combination with loan positions in durable and growing, middle-market companies. They seek to partner with management teams that will have a meaningful ownership stake in their business. They use debt investments with relatively high interest rates to provide cash flow to CNLSC investors while creating tax-deductible interest expense on the books of the acquired companies.
The Company has engaged Levine Leichtman Strategic Capital, LLC, under a sub-management agreement pursuant to which the sub-manager is responsible for the day-to-day management of the Company’s assets. The sub-manager is an affiliate of Levine Leichtman Capital Partners, Inc. (“LLCP”), an asset manager that acquires controlling and minority equity positions in middle-market companies located primarily in the United States. Since its inception in 1984, LLCP and its senior executives have managed approximately $9.0 billion of institutional capital and invested in a total of over 75 middle-market companies.
Under the public offering, the Company will pay the Managing Dealer a dealer manager fee of 2.50% of the price of each Class A share and 1.75% of the price of each Class T share sold in the public offering (excluding sales pursuant to the Company’s distribution reinvestment plan).
The Company has removed many of the fees that typically exist in private equity, private credit and retail funds. It has no management fees on committed capital or cash equivalents, no origination or monitoring fees, no investor servicing fees on Class A and I shares, no financing fees, and no acquisition or disposition fees. The company has also instituted a “High Water Mark” on its total return based incentive fee that takes into account any declines in NAV before determining any incentive fees.
On March 7, 2018, the Company began offering up to $1,100,000,000 of shares on a best efforts basis, consisting of $1,000,000,000 during the continuous public offering and $100,000,000 in connection with their distribution reinvestment plan. The Company is offering four classes of shares in the public offering: Class A shares, Class T shares, Class D shares and Class I shares. The initial minimum permitted purchase amount is $5,000 in shares. The initial per share public offering price was $27.32 per Class A share, $26.25 per Class T share, $25.00 per Class D share and $25.00 per Class I share. There are differing selling fees and commissions for each class. The Company will also pay annual distribution and shareholder servicing fees, subject to certain limits, on the Class T and Class D shares sold in the public offering (excluding sales pursuant to the Company’s distribution reinvestment plan). The Company publishes monthly estimated NAVs and has declared regular cash distributions at an annualized amount per share of $1.25 for Class A and I shares, $1.125 for Class D shares, and $1.00 for Class T shares.
For more information about CNL Strategic Capital, please see its prospectus at: https://www.cnlstrategiccapital.com/
Sources: SEC filings for CNL Strategic Capital, LLC, and CNL Strategic Capital, LLC
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