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Equus Capital
This Texas lender isn't kidding when it calls its clients 'partner'

The company: Equus is a Houston investment firm that makes its money from equity investments in small and medium-sized businesses and trades a portfolio of its holdings as a closed-end fund on the New York Stock Exchange. The company tends to stick close to its Texas base and the greater Southwest region. Still, it doesn't shy away from high-growth, acquisition-hungry companies in other parts of the country. Equus isn't currently a participant in SBA-sponsored programs, although the company says it is considering signing up.

The philosophy: Equus isn't your typical credit-scoring, fill-out-two-questionnaires lender. Management is looking for a 30% annual return on their money, particularly by taking some sort of equity stake--large or small--in your company. An Equus deal can take a variety of forms, and the rates it charges vary accordingly. In some cases the company will settle for common stock or convertible preferred shares. Most often, says President Nolan Lehmann, the company looks for some warrants attached to notes. Hand over more of the controls--a "bigger slug of equity," as Lehmann puts it--and you might be able to bag a 6% to 7% rate on money you borrow. Keep more for yourself, and financing can run as high as 15% to 16%.

Just how active a partner Equus is depends on you and your bottom line. Equus will sit on your board of directors and go so far as to step in and run things day by day if profits lag projections. In the case of one Houston company that cleaned and repaired petrochemical facilities, Lehmann found himself on site three to four days a week, logging long hours for six to eight months until Equus could arrange a merger with another company with a strong CEO. On the upside, Equus has such a strong reputation in the Lone Star State that its seal of approval alone often is enough to help applicants go on and secure additional loans.

Equus takes a flexible approach to reviewing deals--so much so, in fact, that it often ends up bending its own rules. Lehmann says the company looks for businesses earning $1 million before interest and taxes, but will shave that figure to a level as low as $300,000, provided you have a well-detailed plan to grow, particularly by gobbling up competitors. Another bias: Management loves to keep it simple, sticking to clear-cut businesses such as disposable diapers, garbage hauling, and o-rings and gaskets. "We want nothing to do with high tech," says Lehmann. "We're looking for day-to-day goods, mundane products that are reasonably predictable as far as usage goes."

The typical deal: Wally Klemp, Chairman and co-CEO of disposable diaper maker Drypers, approached Equus in 1991. At the time, a group of the company's investors who had helped do a management buyout wanted to cash out. Coincidentally, Drypers was scouting the market for a merger or two to boost its position and needed all the capital it could get. With only $30 million in revenues, Drypers was a little riskier than what most banks wanted to deal with. Equus chipped in $4.5 million, about half of which came in the form of subordinated notes. "Equus was the easiest to work with," recalls Klemp. "They weren't the cheapest, but we found they offered a balance of a reasonable rate and the right amount of autonomy." After Equus bought just over 30% of the company, Drypers used the cash to buy two diaper makers and tripled revenues by 1992.

More telling, Klemp says, is what Equus did when a coupon war with Pampers and Huggies pushed the company close to bankruptcy. Cash flow swooned, and soon a couple of lenders were calling in their loans. Equus stepped in with a $1.4 million infusion and an additional $1.1 million from investors it rounded up. What's more, with Equus backing Drypers, it was able to gather an additional $30 million from lenders at a critical time. Today, the company is squarely No. 4 in the business, has moved strongly into Latin American markets such as Mexico, Brazil, and Argentina, and boasts $300 million in yearly revenues.

The process: Equus shies from mechanical, cookie-cutter questoinnaires favored by many small-business lenders. Instead, Lehmann prefers detailed financial statements, three to five years of business projections, and a candid discussion about competition within your industry. Applicants should come armed with a list of references for all members of management, and get ready for guests, because Lehmann's team will be dropping by to give the place a hard look. Lehmann says he works from a gut feel, which is fed by a thorough background check and calls to vendors, competitors, and suppliers.

What works: A thorough business plan, in Lehmann's eyes, is one that includes historical, audited financial statements, three-to-five-year projections, and top-to-bottom description of competition within the industry and references for all members of management.

What doesn't: Avoid sugarcoating, says Lehmann. "I've seen guys come in here with no current sales who assume they are going to get $200 million and 10% of the national market in three years," he says. "Excessive optimism doesn't work with us; it's better to be realistic."

Parting advice: "Most applicants prefer to borrow at a higher rate than hand over their equity," says Lehmann, and that's fine with him. "To be honest, we really want folks who feel that strongly about what their company will be worth."

-- by James A. Anderson in New York


EQUUS Capital Partners, L.P.
2929 Allen Parkway Suite 2500
Houston TX 77019
800-856-0901 / 713-529-0900

Specialty: Retail, manufacturing, wholesale sectors and service companies
Region: Primarily the Southwest, although national in scope
Stage: Post-startup, later-stage
Typical deal: Loan plus equity stake from 10% to 90%
Loan size: $1.5 million to $8.5 million
Number of deals: 5 to 10 a year
Turnaround time: 30 to 45 days
Contact: Nolan Lehmann, President


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