Frequently Asked Questions - FAQ's

U.S. Growth Funds

Established in 1992, USGF (formerly KBK Mezzanine Partners) is a Private Equity firm that originates, structures and invests in subordinated securities of middle market businesses.

We invest in management-led buy-outs, consolidations, recapitalizations and growth capital financings.

Frequently asked questions about U.S. Growth Funds and Private Equity:

[Printer Friendly Version]

The United States Growth Funds (USGF)

1. What is U.S. Growth Funds?
2. Who owns USGF?
3. Is USGF an affiliate or agency of the U.S. government?
4. How is the fund structured?
5. What is a Value Creation Hypothesis? 
6. How does USGF evaluate investment opportunities ?
7. How is each transaction structured?
8. What role does USGF play with portfolio companies after closing?
9. What is USGF's approach to Liquidity ?

The Private Equity Industry

1. What is Private Equity?
2. What is Mezzanine Financing?
3. What is Subordinated Debt?
4. What is Preferred Stock?
5. What is Venture Capital?
6. What is a Leveraged Buy-Out?
7. What is a "Going Private" Transaction?
8. What is a Turnaround?
9. What is a "Middle Market" Business?  

Answers

1. What is U.S. Growth Funds?
U.S. Growth Funds is a Private Equity firm founded in 1992. USGF is dedicated to employing a conservative and disciplined approach to investing in lower middle market businesses. Generally, we invest in privately placed securities and notes of private businesses not available in the public markets.

(back to top)

2. Who owns U.S. Growth Funds?
U.S. Growth Funds is a privately-owned corporation with approximately 200 individual and institutional shareholders. USGF officers and directors have squarely aligned their personal interest with other passive USGF shareholders through their ownership of more than 50 percent of all USGF common shares.

(back to top)

3. Is USGF an agency of the U.S. Government?
No. USGF is a private corporation and it is not affiliated with the U.S. Government in any way.

(back to top)

4. How is USGF structured?
USGF employees, Robert McGee, Jenna Benner and Kathleen Owens conduct day-to-day management of the organization. Robert McGee serves as chairman of the Investment Committee, which is comprised of Partners McGee and Benner, as well as Directors Feehan and Kaffie. The Investment Committee must approve all new investment commitments in advance. One of the reasons that USGF has such a small staff is that we rarely centralize any management function associated with portfolio companies. We believe that any potential scale advantages that might possibly be gained through consolidation would be lost to headquarters bureaucracy. The entrepreneurial businesses we invest in have a strong preference for control of all functions central to their business. We believe that decentralization also enhances clear accountability.

(back to top)

5. What is a Value Creation Hypothesis?
Prior to entering into any new investment, a Value Creation Hypothesis statement must be clearly articulated.  This statement must identify the specific drivers that USGF will manage to create value in any particular investment.  Those drivers may include:

The hypothesis should also describe how and when the identified drivers will be influenced under USGF ownership and control.

(back to top)

 6. How does USGF evaluate investment opportunities?
Before every acquisition, USGF assembles a deal team responsible for conducting a thorough business review of the opportunity with particular focus on industry dynamics, relative competitive position, management's skills, and plans for the future.  Rigorous due diligence during this period is crucial to the ultimate success of an investment and our early work helps us become well versed in the key issues and opportunities that confront management.  We believe this helps us become more effective partners when important decisions are debated later.

When considering investment opportunities, a USGF deal team undertakes a thorough investigation of a company including its operations, markets, management, history, and prospects.  Considerable time and effort is devoted to becoming closely acquainted with management and gaining a thorough understanding of their individual capabilities, goals and objectives. When appropriate, we supplement our efforts with outside resources in such areas as specific strategic consulting projects, quality of earnings determinations, and organizational assessments.  USGF's close relationships with these carefully selected advisory firms enable us to draw on their highest quality professionals and to work together in an effective and efficient manner throughout the due diligence process.

(back to top)

7. How is each transaction structured?
Generally, while evaluating a business, USGF's deal team is also engaged in structuring the transaction including; valuing the enterprise, negotiating with the seller, financing the transaction and arranging management's equity participation. Valuation is driven by our assessment of the company’s ability to produce superior rates of return on equity and target rates of return for each investments are adjusted to take into account both operating and financial risks.

U.S. Growth Funds usually arranges financing for its transactions by accessing its network of senior and subordinated lenders. Generally, these lenders have been involved with previous USGF transactions and are familiar with our personnel, track record, and the way we work with our portfolio companies.

Consistent with USGF's belief in the importance of properly aligning our goals with those of our portfolio company management's (Management Partners), the structuring of management's incentive package receives a significant amount of pre-closing attention. Generally, USGF Management Partners invests their own funds on the same terms as USGF with various option plans, typically including a performance element, augmenting this ownership.  In all cases, we work to address management issues in an equitable manner, with the goal of fostering a true sense of partnership between management owners and USGF.  In the early stage of partnership, we engage in a focused planning exercise which leads to a broad consensus regarding the company's strategic plan with crisp objectives and milestones (see “Value Creation Hypothesis”).

(back to top)

8. What role does USGF play with portfolio companies after closing?
USGF’s post-acquisition role varies considerably from company to company, but our goal is to always  be a resource to management, whether that means acting as an informed sounding board, assisting with add-on acquisitions, recruiting talent or actively participating in the analysis process.

Our involvement typically includes regular communication with management including, formal monthly management meetings, quarterly board meetings, budgeting sessions, executive performance reviews, participation in strategic planning sessions, and regular informal meetings and conversations.   From the outset of our involvement, we encourage our management partners to engage in a regular strategic planning processes and to think broadly about acquisitions that complement the company's competitive strengths. Mindful of the complexity of integrating operations effectively, USGF helps develop thorough integration plans with milestones, timelines, and responsibilities clearly articulated. Other examples of value-added activities include assessing management needs and assisting with the recruitment of key additions to the management team, improving retention of key talent, management of lender relationships, establishing effective compensation, and generally ensuring sound corporate governance.

USGF also assists companies in addressing strategic issues through the creation and use of an effective board of directors. USGF actively works with management to identify and recruit outside directors from USGF's broad network of contacts that bring important industry experience.  Lastly, we continue to build a community of operating executives across our companies who can serve as sounding boards and resources to each other.

(back to top)

9. What is USGF’s approach to Liquidity?
Our approach to liquidity is based on an open and collaborative discussion, driven by what is best for the company and its shareholders.  When we enter an investment, we have no fixed notion regarding our holding period; however, the milestones we establish with management at the outset of an investment typically include critical inflection points, which should drive exit considerations.  In most cases, we remain invested for three to five years.  In some cases, we have held investments for as short as two years, and in other cases, we have been involved with companies for over ten years.  USGF consistently exits with management’s full support.  Our exits have included sales to both strategic and financial buyers.  Some were taken public, while others were recapitalized by financial investors and/or management teams.  Partial realizations have been achieved through a combination of dividends, redemptions, secondary sales and sales to management.  We are quite flexible in considering exit scenarios and always work hard to balance management’s goals with our own obligations to investors.

(back to top)

The Private Equity Industry

1. What is Private Equity?
Private Equity is a form of investing in private companies; however, occasionally Private Equity firms make investments in public companies, generally referred to as PIPES (private investment in public equity securities). Private Equity is most typically structured as a combination of common stock, convertible preferred stock and mezzanine debt. The composition of a private equity investment (i.e. the proportional allocation among its common, preferred and mezzanine components) varies from company to company based on the cash flow, growth, and financial characteristics of the particular business. Private equity investments have limited liquidity during the investment period, but are typically structured with a defined exit strategy of less than five years. We often co-invest in business transactions where other Private Equity firms have provided common equity capital or mezzanine debt.

(back to top)

2. What is Mezzanine Financing?
Mezzanine financing typically refers to hybrid type securities which have a blend of both debt and equity characteristics. These securities fit in-between the liability section and the equity section on the balance sheet of the issuing business, hence the term "mezzanine". Mezzanine financings often take the form of subordinated notes or preferred stock, which may be converted into common stock by the holder.

(back to top)

3. What is Subordinated Debt?
Subordinated Debt typically takes the form of notes which pay regular interest but are subordinated, or junior, to a senior lender in the event of a default. Typically, the senior lender, usually a bank, has the right to freeze interest payments due on any subordinated debt in the event the issuing company experiences difficulty making payments on its debt. Additionally, subordinated debt typically is paid back only after the senior debt is paid in full. As a result, subordinated debt is viewed as being more risky than senior debt or bank debt, and usually carries a significant return premium including equity participation in the form of warrants or conversion rights. Because these notes are fully subordinated to senior debt, banks generally view these securities as a form of equity and not debt.

(back to top)

4. What is Preferred Stock?
Preferred Stock typically pays a regular dividend and has superior liquidation rights to common stock but subordinated to all creditors and lenders. In addition to their dividend requirement, preferred stock typically enjoys some participation in the equity gains in the form of conversion rights and warrants.

(back to top)

5. What is Venture Capital?
Venture capital is money invested in companies to help them get started or develop new unproven markets.

(back to top)

6. What is a Leveraged Buy-Out (LBO)?
USGF engages in management-led buy-outs, which are the purchase of businesses in partnership with the existing management team. A combination of equity and debt is required for most LBO's. The equity comes from USGF and other "co-investors" and the debt is provided by commercial banks.

(back to top)

7. What is a "Going Private" Transaction?
With the advent of Sarbanes-Oxley and other expanded regulatory constraints enacted in the wake of recent corporate abuses, the cost of "being a public company" has skyrocketed. Many estimate this cost to now be approaching $1 million annually. As a result of these increased costs and the reduction in coverage from analysts, the economic threshold for being a public company has increased. Most would say that public companies with a market capitalization of less than $100 million are below that economic threshold -- some estimate the threshold to be as high as $500 million.

Today, there are more than 2,000 public companies that fall below this economic threshold. When the management of a public company determines that the listing of its securities on a public exchange (i.e. NYSE, NASDAQ, AMEX):

1. no longer provides liquidity for their current shareholders, and
2. does not result in trading at a market price that would represent an attractive price to raise future capital, and
3. substantial cost savings can be achieved by jettisoning their listing on a public exchange, then as fiduciaries and responsible stewards for their shareholders, management may consider taking their company private.

The partners of USGF have significant experience with "Going Private" transactions and can help management explore the legal, financial, shareholder, employee and vendor issues that must be considered. USGF has assembled a team of experienced attorneys, advisors and public relations professionals, and we are most interested in investing in selected "Going Private" transactions.

(back to top)

8. What is a "Turnaround"?
Turnaround is the process of restoring a company that is in financial and/or organizational distress to its full potential.

(back to top)

9. What is a "Middle Market" business?
The term Middle Market business means different things to different people. At USGF, we generally use this term to refer to a business with annual revenues greater than $5 million and less than $500 million.

(back to top)