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September 2012
Show Me The Money!
By Jim Froneberger

     What does a profitable, high growth company do when it sees an exciting new opportunity—whether it be a major new product initiative, a geographic expansion, or a major acquisition—but lacks the capital required to move rapidly?

     It might approach Richard Maclean, Andrew Lindner and their experienced team at Charlotte-based Frontier Capital, a 13-year-old growth equity firm formed in 1999.

     Growth equity firms such as Frontier provide companies with the capital they need to seize such opportunities. Similar to venture capital firms, but focusing on established companies rather than startups, growth equity firms receive investments from high net worth individuals and institutional investors and then redeploy that capital in profitable, high growth companies. The equity firm and their investors share in the profits as those companies grow and prosper.


Institutional Grade

     Maclean and Lindner first met when both were working in investment banking for Bank of America predecessor NationsBank. As they became friends, they found their skill sets were complementary and determined they wanted to start a venture together at some point in their careers.

     Maclean left NationsBank in 1993, and after obtaining his MBA from the University of Virginia, worked in private equity for four years. Lindner left the bank in 1994, joining Stephens, Inc. in Atlanta, where he advised clients in executing corporate finance transactions and assisted the Stephens family with direct private equity investments. He headed west to Stanford University in 1997 for his MBA, and after graduating in 1999, came back to Charlotte and formed Frontier Capital.

     “There was a short window in time when guys like us could raise a private equity fund more easily than we could have historically and certainly much easier than it is now,” recalls Lindner. “We combined our professional chemistry with that market opportunity to go out and raise a small fund.”

     That first venture (Frontier Fund I) was a $45 million equity fund, with $15 million from private investors and $30 million of SBIC leverage from a government match program. They invested in 17 companies through Fund I, generating total returns to their investors that ranked in the top 10 percent of all peer group funds in the U.S. started in 1999.

     Maclean and Lindner wanted to build a sustainable firm to fill a void they saw in the marketplace for growth capital—that space between early-stage venture capital and buyouts of mature companies.

     “We wanted to build something that was institutional grade, not just raise a fund and manage it forever,” says Lindner. “We wanted to grow, add to our people and infrastructure, and constantly improve our processes to make this an institutional business.”

     Today, the 12-person firm boasts an average tenure of seven years. There are four partners—Maclean, Lindner, Michael Ramich, and Joel Lanik.

     “Even back in 2000, we knew we wanted to manage institutional capital,” adds Maclean. “We managed very little institutional capital when we first started, but today we manage money for leading pension funds and fund of funds from all over the world. We knew if we wanted to be positioned to do that, we had to invest in the business and the team early on.”

     Their second fund (Frontier Fund II) raised $115 million in 2006, and their newest fund (Frontier Fund III) closed in June 2012 with $250 million in capital commitments. Both of these funds were fully funded by private and institutional investments.

     Frontier’s funds are each separate 10-year partnerships to which investors commit for the full 10 years on the basis of a prospectus and presentations by the Frontier team. The typical investment is between $5 million and $25 million and the commitments are blind, meaning that Frontier retains full discretion on how the money is invested.

     “What we do is long term because it takes us about five years to invest the money we raise and then about five more years to actually exit those businesses and return the capital to our investors,” explains Lindner.

     Frontier Capital is one of the three largest equity capital firms in North Carolina, but their $250 million fund is still a small niche player compared to larger billion-dollar-plus funds around the country. But according to Lindner, their size is often an advantage.

     “Many institutional investors feel that some funds have grown so big that they are no longer able to generate the returns they want,” offers Lindner. “We are big enough to have the resources of a larger firm, but we are still small enough to generate the out-sized returns our investors are looking for.”

     “In the $500 million to over $1 billion and up segment of funds, you may have to chase big deals that are inherently more competitive,” adds Maclean. “Because of that, outsized returns are harder to come by.”


Putting Capital to Work

     After Frontier raises capital, they must put it to work to generate the returns their investors are looking for. To accomplish that goal, they have chosen to focus on technology enabled business services companies with annual revenues between $5 million and $30 million.

     A typical target company has around $10 million in annual revenue and is growing rapidly. Frontier will take a large minority or even a majority stake by investing between $5 million and $25 million in each transaction. Lindner says the ideal “sweet spot” is an investment in the $10 to $15 million range.

     “Our typical investment is in a profitable company that is growing at over 20 percent per year,” explains Maclean. “It will generally be a company that is less than 10 years old in technology enabled business services.”

     Frontier’s investment may be used to buy out early shareholders or provide the founders some partial liquidity so they can diversify their personal financial profile. But much of the invested capital goes onto the balance sheet and is used to fuel growth.

     The Frontier team takes what Lindner calls an “active support role” rather than a day-to-day management role. They generally take multiple board seats and assist the management team with strategic decision making.

     “We’re not making the day-to-day management decisions; we’re backing good teams to do that,” says Lindner. “We help prioritize and figure out what we’re going to stop doing and what we’re going to do more of.”

     “Our real expertise is taking a company that is in the $10 to $20 million revenue range and growing it to $30 million, $50 million, or $60 million,” adds Maclean.

     Frontier began Fund I with a southeastern regional focus, but over the years the principals have expanded their footprint to include markets in the mid-Atlantic, Texas and the Midwest. They look at markets like Atlanta, Indianapolis or Charlotte—areas that are a little underserved and where their message resonates best. They avoid places like Silicon Valley, New York and Boston where a lot of capital is already chasing opportunities.

     “If we find the right company in Indianapolis, we’re going to invest there because we’re trying to find the best companies to match our profile,” explains Maclean. “We love it when we find great companies in our own backyard, but there are great opportunities in all the markets we cover. Charlotte is still a great jumping off point to cover the regions we cover, and it would be a lot harder to do what we do from somewhere without this kind of airport and transportation infrastructure.”


A Growth Portfolio

     Frontier classifies the companies they target for investment into four categories: high-value niche outsourcing services, managed services/information services, software as a service (SaaS), and health care IT.

     The outsourcing category includes companies like Greenville-based Perceptis, a call center outsourcer serving the higher education market; Viverae of Dallas, a provider of outsourced corporate wellness services; and Atlanta-based Ryla, a provider of call center outsourcing services. Ryla is one of the recent Frontier success stories, as they helped Ryla grow their annual revenue from $13 million to $100 million in just three years.

     In managed services, Frontier has invested in LURHQ of Myrtle Beach, a network security monitoring and management service; Azaleos, a managed email and messaging provider with major operations in Charlotte and Seattle; and Peak 10, a very successful Charlotte-based operator of data centers.

     The third category, SaaS, includes companies like Daxko of Birmingham that operates software for member-based nonprofits; Dallas-based Lanyon which offers travel and spend-management software; and Social Solutions of Baltimore, a company that markets performance management software for human services nonprofits.

     Health care IT is really a blend of two of the other categories—SaaS and managed services—but it is focused on the health care industry. Two examples are Anodyne Health of Atlanta that sells revenue cycle management software, and Healthx of Indianapolis, a seller of online portals to health insurance plans.

     These are just a few of the companies in which Frontier Capital has invested since its inception in 1999. Fund I invested in 17 firms and Fund II invested in 11. With Fund III now in place, Frontier will be very active investors over the next few years as they work to deploy the new fund. Eventually, Fund III will likely make around 14 individual investments.

     The new fund has already deployed capital in four companies: Healthx; iMapData, a Northern Virginia-based mapping firm that analyzes data for government and large companies; Celergo, an international payroll services provider based in Chicago; and eVerifile, an Atlanta-based employee background check service provider.


A Bright Future

     Historically, technology and growth companies have taken a back seat in Charlotte because the Queen City was known as a banking and finance town. But Maclean and Lindner are seeing a renewed interest in entrepreneurship and growth-stage companies in the Charlotte region.

     “During the dot-com boom it was get rich quick,” says Lindner. “But now, after the financial crisis, it feels like people just want to control their own destiny and not be at the whim of the shifting sands in these big corporate organizations.”

     “We went through the dot-com bubble bursting in 2000, the 2001-2002 recession, and now the financial crisis,” says Maclean. “During the 2001-2002 downturn we made some really good investments, and in this latest crisis, we have been very fortunate because our companies didn’t have any leverage. Since they were generally trying to help their clients become more efficient and lower costs, our companies sort of sailed through it all very nicely.”

     Looking toward the future, both Maclean and Lindner see great growth opportunities ahead for Frontier Capital. But there are limits to how much they want to grow.

     “I think we have as good an opportunity in front of us as we have ever had,” says Lindner. “We have the confidence of our investors on the back end and we’ve identified our real niche on the front end for companies to invest in.

     “I do think there is a limit to the size of fund that makes sense for us to deliver returns the way that we do,” he continues. “But all growth opportunities that don’t dilute our commitment to what we do well are on the table, including considering additional product lines that we can offer to our institutional investor base.

     “But first and foremost, our future is to continue to deliver industry-leading returns to our investors, while creating growth opportunities within our organization for our people.”

Jim Froneberger is a Greater Charlotte Biz freelance writer.
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