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The Surge of Creative Capital

To keep Alberta’s economy growing, borrowers and lenders are creating financial layer cakes

Feb 18, 2014

by Tim Querengesser

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Earlier this year, a pump-systems company based in Strathcona County was growing fast but had come upon a roadblock. The company’s founder had re-entered the industry after selling his first successful pumps business and waiting out a five-year non-compete clause. But when it came time to finance his new company, he faced an increasingly typical problem for small Alberta companies despite his successful track record: He couldn’t find the money to do it.

That’s where Kristi Miller, the vice-president of First West Capital, a boutique lending arm of First West Credit Union in B.C. that increasingly completes finance deals in Alberta, came into the picture. “The challenge is that this kind of business is fairly capital intensive,” Miller says. And this is a trend that she notes is happening throughout Alberta. “We’re seeing working capital in rapidly growing, capital-intensive industries as a real issue.”

To get around this challenge, First West and others are trying to help fuel continued growth in Alberta by offering more creative forms of lending. And as Miller and others in the corporate finance world point out, Alberta companies and their many lenders are using creativity and multiple layers of lending to find ways to keep growing the economy while other parts of Canada are to a much smaller degree.

“There’s been a lot of capital for equity, but it hasn’t been as robust in previous years so there’s been a need to get more creative.” – Sonny Mottahed, Black Spruce Merchant Capital

And so it is with that Strathcona-based company. First West is part of a three-layered capital structure that’s continuing to fuel the company’s growth. Royal Bank has extended the company’s credit limit to pay for operations and equipment purchases. The founder has invested what Miller describes as “significant” founder equity. And to this mix First West has added a layer of the increasingly common loan instrument of subordinated debt. “So you’ve got three fairly distinct strata within the capital structure, all of which work together to support growth,” Miller says.

But to put Alberta in perspective, it helps to have a look at the Canadian picture. Ted Mallett, chief economist with the CFIB, says the survey data show that about 61 per cent of its members use outside forms of financing, like a loan or a line of credit, while the rest are self-financing. “That hasn’t changed much over the past five years, since we started asking this question,” Mallett says. “In fact it’s even come down by a hair, by about a percentage point.” Of those that are seeking external funding, the organization also asks where they’re getting it. Again, following the trend of stability, the results haven’t changed much over time, Mallett says. Between 65 and 66 per cent of companies that seek external funding say they’re using chartered banks, while about 16 per cent are using credit unions. For companies not using banks or credit unions, the CFIB data shows that about two per cent find funding through family and friends, one per cent through vendor financing, a miniscule amount using specialty asset finance companies and between eight and nine per cent through government-backed institutions. “All of these trends are very stable over the past four years,” Mallett says. “So we’re not seeing any significant shakeup in those kinds of patterns.”

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But then there’s the outlier of Alberta. Sonny Mottahed, CEO and managing partner with Black Spruce Merchant Capital, a boutique investment bank in Calgary that provides advisory services for companies on mergers and acquisitions, says the Canadian market for corporate financing has been equity-driven. “There’s been a lot of capital for equity, but it hasn’t been as robust in previous years so there’s been a need to get more creative,” Mottahed says of security for loans. “And what does that typically mean if equity is not available? Guys are trying to move further up the capital structure – more equity-linked type products, like convertible debentures. Or different types of debt.” As Mottahed says, corporate finance for Alberta’s nano, micro and small cap companies “doesn’t fit in any one box.”

That is certainly the case with Miller’s experience at First West Capital. Fully one-third of her deal flow is in Alberta, which for a B.C.-based lender exploring corporate financing for only the past three years, is telling in itself (indeed, Miller says she expects Alberta to form half her business in just a few more years). First West is rarely the sole provider of capital, Miller says, but is instead a layer in a lending cake. That layer is often either subordinated debt (which stands second in line on a default to a primary lender) or the increasingly common mezzanine debt, which is similar to sub-debt but usually an interim source of capital, as it comes with high interest rates. First Capital is deliberately targeting the mid-market business environment because it sees this as a relatively underserviced niche for financing, Miller says. “There’s a lot going on [there] and there’s a huge demand for capital in that space.”

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The demand for capital has seen providers get creative. Perhaps that’s best illustrated by SeedUps Canada, a just-launched crowdfunding service for corporations and lenders in Alberta. Sandi Gilbert, the company’s founder, says SeedUps, based in Calgary, is a service for companies seeking between $250,000 and $2 million in financing. The company should be functioning, she says, but can be pre-revenue. On the investor side, SeedUps is targeted at those who want to put between $1,000 and $10,000 into a promising company (the average, Gilbert says, is expected to be about $4,000 per shareholder). But perhaps the most interesting thing about SeedUps and the idea of crowdfunding itself is how knowledgeable that crowd tends to be when talking about corporate finance.

“Let’s be clear – I don’t think a mining company’s going to be that successful raising capital on a crowdfunding platform,” Gilbert says. “Our first company we’ll be launching has a good consumer following … and people excited about the company that want to invest.” That passion, Gilbert says, brings value. “Often times 30 per cent of the raise [with crowdfunding finance deals] is done within their own network,” Gilbert says.

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One Response to The Surge of Creative Capital

  1. JMI says:

    Really interesting Tim, thanks​!​

    I think that you would be really interested in some of the most cutting-edge research that I have come across explaining crowds, open innovation, and citizen science.​

    http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=1919614

    And you may also enjoy this blog about the same too:
    https://thecrowdsociety.jux.com/

    Powerful stuff, no?

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