Frequently Asked Questions
Cyprium recognizes that finding the right financing partner can be complex and time-consuming. Here, we answer some of the more frequently asked questions that we receive from management teams, shareholders and their trusted advisors, including investment banks, lenders, wealth managers, accountants and attorneys. We hope that this information about our investment philosophy, process and approach will be helpful in your evaluation of Cyprium as a potential investor and partner.
If you are unable to find the information you’re looking for on this page or our website, please do not hesitate to contact us.
Cyprium focuses on non-controlling investments in profitable middle-market companies headquartered in the United States and Canada with a minimum historical EBITDA of $4 million. We look to invest alongside committed owners, management teams, entrepreneurs and independent sponsors who are interested in maintaining economic control, building great companies and creating long-term value for all stakeholders. The firm will not invest in unprofitable companies or startups.
Our portfolio generally includes companies operating within the following sectors: business services, manufacturing, distribution, technology, healthcare, plastics and packaging, building products, aerospace and defense and food and beverage, but we have invested in companies that don’t operate within these sectors based upon a variety of compelling characteristics. Ultimately, we are looking for risk-adjusted subordinated debt, preferred equity and minority common equity investment opportunities in founder, family, management and entrepreneur-owned companies with a history of predictable cash flows and defensible market positions serving stable end markets.
For companies that meet our investment criteria, Cyprium can make investments ranging from $5 million to $60 million structured as subordinated debt, preferred equity, common equity or any combination thereof.
Subordinated debt and preferred equity can offer flexibility when compared to raising only senior debt from a commercial bank or selling control of your company. To balance a company’s cost of capital with the flexibility to manage through unforeseen demands on future cash flows, we recommend a capital structure with a manageable amount of senior debt that is complimented with non-amortizing subordinated debt, preferred equity or some combination thereof. Typically, the combination of commercial bank debt and junior capital will be less expensive on a blended basis than unitranche proposals for founder, family, management and entrepreneur-owned companies.
- Flexibility: Subordinated debt and preferred equity instruments generally have less onerous covenants and restrictions than senior debt. Due to the underlying structure and protections that are inherent in these securities, they are also less dilutive than issuing common equity. Operational, economic and board control reside with the shareholders.
- Limited dilution – preferred equity: Cyprium generally structures preferred equity with a payment-in-kind (PIK) feature, which is also known as accruing interest, and an equity warrant. With no current yield, this security offers a company the flexibility of common equity while at the same time limiting the amount of ownership dilution that might come from issuing common equity.
- Cash flow management – subordinated debt: Cyprium’s subordinated debt is generally non-amortizing, meaning that the company is only required to pay interest. Subordinated debt is typically structured with a fixed return, the bulk of which is generally paid current and a portion of which may be structured as PIK interest. The PIK feature of the subordinated debt reduces the financial burden on the company during the investment, as it is not obligated to pay the accrued portion of the interest until the investor exits. The fixed aspect of this security’s return allows for enhanced budget visibility versus floating rate debt, particularly in a rising rate environment. Subject to the amount of total debt on the balance sheet, a portion or all of the subordinated debt interest may be deductible.
- Non-Control: Cyprium offers companies the opportunity to raise capital through issuing subordinated debt, preferred equity or common equity. This feature of Cyprium’s capital investment means owners and management teams maintain economic, operational and board control and will capture the bulk of the equity value they create for as long as they want to continue owning the company.
Cyprium has a long-standing track record of originating and executing non-control transactions, investing $2 billion in over 100 platform companies since 1998.
Our team focuses exclusively on providing non-control capital to founder, management, entrepreneur and family-owned companies, whereas many other firms choose to provide junior capital to private equity managers in support of leverage buyouts, which is often referred to as sponsor mezzanine.
There are substantially more funds focused exclusively on sponsor mezzanine due to the annual volume of private equity M&A transactions in any given year. Because founder, management and family-owned companies may only look to raise third-party capital when an event occurs (e.g.: a sizable acquisition, buyout of an absentee shareholder, formation of an ESOP or refinancing), there are fewer opportunities to invest junior capital and minority common equity in these companies. Therefore, most of the larger asset managers will rely on private equity relationships in order to maintain investment pace and may be less inclined to spend much time building relationships with founder and family-owned companies or their advisors.
Non-sponsored junior capital funds like Cyprium will review and invest in only a handful of opportunities annually. Cyprium and the firms that are targeting founder and family-owned companies are self-selecting into this subcategory because we want to develop and maintain close relationships with our portfolio companies’ shareholders and their management teams. Many times, this relationship will extend beyond our investment horizon. Most of our portfolio company executives have gone on to become references and referral sources for Cyprium, some have ultimately chosen to become investors in the funds we manage, and a select few have been invited to join our team of Executive Advisors.
Recently, control-oriented private equity funds have started offering “minority” structures. Despite their openness to taking a minority position, these funds typically build board control into their structures, and for those who don’t, few have the experience necessary to remain comfortable in a minority position over the course of an investment. Cyprium has a proven reputation for being a patient investor, which is critical as a non-control investor doesn’t “own” the company or control decision-making. We encourage each company that we are evaluating to check our references as well as the references of any other firms they might be talking with to better understand how that firm acted over the course of the investment.
Cyprium’s long-standing relationships with boutique and middle-market investment and reputation have established us as the go-to partner for non-control investments.
Trusted advisors and lenders refer us to their clients as a potential financing source in five common scenarios (amongst others):
Scenario 1:
Buyout shareholders who are either inactive or interested in selling their shares in the company
Retirement, divorce, personal financial considerations, aging and intergenerational stock transfers, shareholder disagreements and health issues are just some of the reasons a shareholder may want to sell their relatively illiquid stake in a privately held company.
From time to time, companies will hire an investment bank to sell their company when it may not be the desired outcome for all shareholders. Instead, Cyprium recommends that the shareholders begin with a third-party valuation. At that juncture, if the shareholders collectively agree to sell the business at or near the appraised market value, they should hire an investment bank to explore a sale to a financial or strategic buyer. If the shareholders are not all in agreement on selling the company at the estimated market value, then it may be time to start thinking about a leveraged or minority recapitalization in order to buyout the shares held by those individuals or entities who remain interested in selling at the prescribed value. This can be achieved by raising senior debt, subordinated debt and/or preferred equity to redeem the shares held by those stockholders who are interested in liquidity, which accomplishes two critical goals. First, it allows the exiting shareholders to receive market value for their ownership stake. Second, by using debt and structured junior capital, the preferred equity is often less dilutive than raising outside common equity to facilitate this transaction. This allows the shareholders who remain committed to the company to increase their ownership stakes without investing any additional capital into the business.
Scenario 2:
Improving Valuation Outcomes
For shareholders who have a 3-7 year exit plan, now is the time to start thinking strategically about what needs to be done to achieve your target valuation. Is there a strategic tuck-in acquisition or two that you’ve wanted to pursue? Is it time for a geographic expansion? Have you been putting off a much-needed ERP implementation? Do you need to recruit board members that will help you identify and address existing or potential weaknesses? An institutional, non-controlling shareholder will invest their time and money to help you complete any number of strategic initiatives. This makes you better prepared and positioned to maximize shareholder value if and when you are interested in selling the company.
Scenario 3:
Funding Growth Initiatives / Liquidity Events
For companies pursuing growth initiatives or liquidity events, such as building a new plant, acquiring another company, buying back the stock of absentee/inactive shareholders, facilitating an intergenerational wealth transfer or making a dividend distribution to all shareholders, Cyprium can provide the non-control capital needed to accomplish your strategy.
Scenario 4:
Management Buyouts & Employee Stock Ownership Plans
Management Buyouts and ESOPs certainly have their advantages within small communities where the company may be a cornerstone of the local economy. MBOs and ESOPs mitigate any uncertainty that comes with selling to a strategic or financial buyer and are generally found to improve employee retention, culture and morale. For owners who are interested in selling their company to the management team or to the employees without having to provide a significant amount of seller financing, junior capital is often used as a meaningful part of the overall capital structure.
Scenario 5:
Deleveraging & Refinancing
Some lenders can become impatient, particularly during periods of increasing economic uncertainty. In the event of a financial or covenant default, shareholders may be asked to pay down the company’s current loan balance or strengthen the balance sheet with a cash infusion or equity cure. Few families, founders, management teams and entrepreneurs have the personal liquidity needed to remedy such a breach without liquidating other holdings during what may be a suboptimal time in their lives. Subordinated debt and/or preferred equity can be effective remedies that when combined with senior debt promotes a stable capital structure at a reasonable blended after-tax cost of capital.
Unlike traditional senior lenders, Cyprium is motivated to be a true partner to each of the companies in our portfolio. Our team can help with your company’s acquisition strategy, assisting your buy-side efforts to help you identify and connect with potential acquisition candidates through our network of referral sources. Our firm has extensive commercial bank and non-bank lending relationships, and if you’re looking to identify a new lender, we’ll help you find the right provider in an effort to help you balance your blended cost of capital and the company’s cash flow for debt service.
Having made over 100 platform investments across a wide range of industries over our nearly three-decade history, the investment teams at Cyprium are called upon by their management teams to help with a variety of day-to-day and strategic initiatives. This includes and is certainly not limited to:
- Acquisition sources, negotiation, financing and integration
- Operational improvements and lean manufacturing
- Organizational changes, human resource recruiting and improvements
- Lean manufacturing, IT upgrades and ERP implementations
- Low-cost country manufacturing and sourcing alternatives
- Exit strategy optimization
Cyprium has a team of industry & multidisciplinary executive advisors who can help you with projects that may fall outside your core competencies or where you may be seeking additional resources. These advisors are experienced in various fields, including industrial manufacturing, distribution, healthcare, food & beverage, technology, media and telecommunications. With the cross-functional experience our advisors bring to the table, they can act as an invaluable, optional resource for your company.
As a specialist in non-control capital, our team has invested $2.0 plus billion in over 100 platform companies. Founded in 1998, we have experienced multiple economic cycles and helped our portfolio companies overcome a variety of issues, ranging from rare exogenous events to launching new products, key hires, operational improvements and geographic expansion. We want to leverage our experience as investors and advisors to help you realize your vision for your company. We hope to prove ourselves as an informed but unobtrusive minority investor that adds value over the course of our investment in your company.
Cyprium’s approach to investing offers flexibility in terms of our level of involvement. Prior to investing, we will do our best to build a comprehensive understanding of your business, but of course, we’ll never know it better than the people who are living it day-to-day. By forming this baseline, our involvement can vary from minimal to significant, depending on the shareholders, board members and executive leadership team’s preferences. Some of our current and former portfolio companies want minimal, quarterly involvement, which occurs at the board meetings. Other portfolio companies will initiate conversations with members of their deals teams at multiple points throughout the week, and we welcome the opportunity to be a sounding board to our management teams given the multiple industries and companies that we’ve invested in over our history.
At Cyprium, we like to begin with a phone call or video meeting to learn more about your company, the products or services it offers, the backgrounds and roles of the management team, its financial history and projections, an overview of your customer base and competitive landscape as well as the reason you’re interested in raising capital.
Following that call, a member of the Cyprium team will follow up with a short financial diligence list which typically includes a request for detailed historical annual or monthly financials, a couple of years of audited or reviewed financials, revenue by division/location and a projection for the end of the current fiscal year.
Next, the investment team will review the opportunity with the firm’s investment committee. If the committee agrees with the team’s recommendation, the investment team will reach out to you to discuss how an investment from our firm, and the funds we manage, would be structured given the unique characteristics of your company, industry and the use of proceeds.
After previewing the investment structure with a shareholder or representative of the company, an indication of interest will follow along with a request to visit the company and meet with the management team in person.
The length of this process mainly depends on the company’s promptness in responding to questions, fulfilling further diligence requests from both our team and a third-party accounting firm that will be doing the Quality of Earnings analysis and the speed at which our respective legal teams can review the necessary documents. Ultimately, for the well-prepared and organized management team, we advise that the process will take anywhere from 45 – 60 days. If you want us to find a third-party senior lender in conjunction with this process, we will also be happy to reach out to a handful of the many relationships we have in order to help lower your overall blended cost of capital. We are equally happy to work with the incumbent lender if that is your preference.
Cyprium traditionally exits its portfolio companies in two ways.
- Most companies that Cyprium has invested in experience some level of growth during the investment period, which generates cash flow. Over time, the company pays down senior debt and creates debt capacity, which can be used to refinance/recapitalize the balance sheet and replace junior capital with less-expensive senior debt.
- Cyprium may also exit if the majority shareholders ultimately decide to sell the company to a financial or strategic buyer. The new buyer typically replaces the entire capital structure with one suited for the new ownership group.