Investments

Investment Criteria

Newcastle invests in the consolidation of entrepreneurial financial services businesses which are leaders in their niches with a history of strong growth, defensible margins and trailing EBITDA of $0.2 to $3.0 million. Our initial early stage investment funds the consolidation’s entire incubation process from inception through the merger closing event. During the incubation process, NCC funds formation of a Portfolio Company that becomes a holding company at consolidation with each entrepreneurial business becoming a wholly-owned subsidiary.

The consolidation is structured as a heavily loaded stock exchange – each entrepreneurial business receiving stock in the Portfolio Company in exchange for 100% of the stock in the entrepreneurial business. Sometimes the Portfolio Company, using Newcastle’s fund capital and/or co-investment partner LBO funds, purchases up to 30% of entrepreneurial businesses’ stock for cash with the balance of the roll-up transaction for stock and debt financing.

Post consolidation, NCC with co-investment partners provides the Portfolio Company with later stage growth capital. Our objective is to position the consolidated Portfolio Company for integration, infrastructure development, accelerated growth and expansion to create a higher value at liquidity.

What We Look for in a Small Business Candidate for Consolidation

We invest in well-managed, small businesses that are strategically positioned to maintain their status as regional industry leaders and take market share from competitors. Companies that meet our general consolidation and investment criteria possess the following attributes:

Business Characteristics

• Regional industry leaders
• Proven track record of success
• Superior growth prospects
• Excellent industry reputation
• Aligned product lines

Management Characteristics

• Growth focused
• Exceptional, hands-on CEO/President
• Management depth or suitable transition replacement beyond the CEO/President
• Desire to utilize the resources of a financial partner
• Desire to remain active, and committed over the long-term to create higher exit returns

Financial Characteristics

• Company revenue – $1 million to $10 million
• Company EBITDA – $0.2 million to $3.0 million
• Stable gross margins
• Steady revenue growth

Consolidation Characteristics

• Post-consolidation revenues >$35M
• Post-consolidation EBITDA >$6M

Pre-consolidation Investment

Newcastle invests approximately $500,000 to $1M over 12-18 months in each SEM project prior to consolidation. It owns 100% of the Portfolio Company prior to consolidation. At consolidation NCC is diluted to a 7-20% equity position in the Portfolio Company as the small businesses exchange their company’s stock for equity in the Portfolio Company. Newcastle is granted contractual controls and investor rights to protect its equity position and to retain certain control mechanisms in the Portfolio Company. Controls resulting from pre-consolidation investment include but are not limited to:

• Contractual management oversight and advisory fees
• Contractual board seat(s)
• Voting, registration & piggyback rights
• Right of first refusal on private debt and equity funding
• Performance based incentives/penalties built into constituent employment agreements including claw-back and buyout provisions

Post-consolidation Investment

Newcastle co-invests with one or more partners approximately $2M to $3M of later stage debt or equity-based growth capital over 2-4 years in each SEM project after consolidation. It is granted typical venture capital 3rd Stage terms and controls in the Portfolio Company for its post-consolidation investments.

Investment Liquidity and Returns

The investment holding period is:

• 12-18 months to reach consolidation (closing event)
• Additional 2-4 years to liquidity for a total investment time of 3-5 years

The target investment returns for Newcastle’s pre-consolidation and post-consolidation investments in SEM projects are:

• Return on pre-consolidation incubation investments of $500K to $1M each: >35% annual IRR
• Return on post-consolidation investments of up to $3M each: >35% annual IRR
• Overall targeted return of >35% IRR

The exit options for Newcastle’s pre-consolidation and post-consolidation investments are:

• Portfolio company liquidity event through sale or IPO
• Recapitalization of portfolio company to take out Newcastle’s holdings
• Leverage Portfolio Company holdings to make new investments

Investment Risk Profile

The perceived risk profiles for Newcastle’s pre-consolidation and post-consolidation investments are:

Pre-consolidation Investment Risk Profile:

• As risky as seed, start-up, and other early-stage funding

Post-consolidation Investment Risk Profile:

• Less risky than seed, start-up, R&D, other early-stage, second-stage funding, and turnarounds
• Equivalent in risk to third-stage or bridge financing
• More risky than leveraged buyouts and acquisitions of large companies