In a candid discussion, CAPX CEO Rocky Gor sits down with Michael Kane, co-founder of Caltius Structured Capital, to explore how alternative lenders are filling critical gaps in the middle market. Kane outlines how agile due diligence processes and adaptable deal structures have enabled his firm to back growth capital initiatives, management buyouts, and ownership transitions without forcing a loss of control—a vital consideration for family-owned and non-sponsored enterprises.
For CFOs considering non-bank financing options, understanding core differentiators for a firm like Caltius—from due diligence approaches to ongoing partnership expectations—has become increasingly crucial in today’s market.
Watch the full discussion below to learn how Caltius looks at companies seeking capital, and just how important effective communication on both business resilience and strategic vision are to a company’s capital raise process.
An edited transcript is below.
Interested in learning how CAPX can help your company engage with firms like Caltius? Get in touch with us here.
Edited Transcript
Rocky Gor: Can you tell us about yourself and your firm?
Michael Kane: The firm goes back 28 years, starting with our first fund of $41 million. We’re currently investing out of our sixth fund, which is about $400 million. The last four funds have been about the same size, so we’re leveling out. My background includes education at Rice University in Houston and six years with GE Capital, which moved me from Texas to Los Angeles 35 years ago. The three of us co-founders got together almost 28 years ago with that first fund, and we’ve been doing structured finance and lower-middle-market mezzanine debt since then.
Gor: What differentiates you from other firms in this space?
Kane: Going back to our early days with that $40 million first fund, where our average deal size was about $3.5 million, none of our transactions involved private equity groups because they weren’t doing deals that small. We became proficient at conducting our own due diligence to work directly with management teams and family offices. While we now do about 20% of our deals with private equity funds and appreciate their thorough diligence process, our core strength remains in conducting our own diligence for lower-middle-market deals. We might use smaller accounting firms for efficiency, but we’ve developed comfort with this approach over the years…. We also almost never take a board seat—typically just a board observation seat, which sets us apart from others.
Gor: Based on my GE Capital experience, the difference between working with middle-market or family-based companies versus PE firms is really how much more collaboration with management is required. It’s more of an in-the-trenches approach versus getting a prepared package (with private equity). It’s a different process, mentality, and requires different levels of patience.
Kane: Exactly, and these deals are harder to find and structure. If you wanted to be a large SBIC debt fund or structured capital fund and grow quickly, you’d focus on PE firms because of their larger check sizes. Non-sponsored deals are harder to find. We really try to partner with management. Sometimes people question our approach because we don’t have control or a control investor. Once we do a deal, we’re effectively partnered with that entrepreneur, which is something we have to carefully diligence as part of our core underwriting strategy.
Gor: What’s your current fund size and typical deal size?
Kane: Our current fund includes both an SBIC fund with government leverage and a non-SBIC fund. Some of our long-term institutional investors prefer investing without the SBIC leverage for more flexibility. Together, they total $400 million. Across our six funds over 28 years, we’ve managed about $1.8 billion, with Fund Six currently about 50% invested (plenty of dry powder). Our deal size typically ranges from $10 to $45 million per transaction.
Gor: Can you describe your ideal deal?
Kane: Looking at our history, which is available on our website, we focus heavily on business services and asset-light companies. We don’t do many big industrial deals because we prefer the cash flow dynamics and enterprise values. We’re clearly an enterprise value cash flow lender/investor, not asset-based. Most of our portfolio companies are asset-light businesses “where the assets go home at night.” We typically focus on non-change-of-control deals: growth capital, management buyouts, or one partner buying out another. We’ve had great success with deals where insiders leverage the company and roll their equity, and with employee-owned companies.
Gor: How do you address concerns from entrepreneurs and family-owned companies who might be hesitant to work with a lender they don’t have an existing relationship with? How do you handle situations where companies face challenges?
Kane: Over our 28-year history working with employees and management teams, we’ve built a strong track record. While not every deal has been perfect, we’ve managed to minimize losses. We’ve developed deep relationships—I’ve attended weddings and bar mitzvahs of our CEOs’ children. Perhaps most telling is that in our sixth fund, we have about 40 individual investors who are predominantly managers or former managers of our portfolio companies. We started this in Fund Four, offering them lower minimums than other investors. Across Funds Four, Five, and Six, we’ve had well over 100 portfolio company managers invest with us, some multiple times.
We encourage potential borrowers to review our portfolio and connect with our management teams, particularly those in related industries. We always provide references to companies that have experienced challenges because it’s easy to be a good partner when everything’s going well—but most companies will go through bumps in the road.
For example, we currently have a company facing challenges where their senior lender wants to exit. We’ve offered a fund guarantee to provide comfort to the bank because we believe in the management team’s efforts despite headwinds in the industry (which we recognize). This is a vote of confidence for the company when it needs it, and provides a solution to all parties involved.
Gor: How do you source these opportunities (besides getting them from CAPX)?
Kane: Our 28-year track record helps people find us when they have deals in our size range. We see the majority of deals west of the Rockies, and we now have two full-time business development people—one in LA and one in Boston. They focus on networking and bringing in team members like myself when needed. I still maintain my network, particularly in Texas where I started my career.
Gor: What’s your process when you receive a deal, and how reliable are your term sheets because of the process?
Kane: We don’t issue term sheets without substantial preliminary diligence. While this might cost us some deals due to timing, we want to speak with management and the banker first. We meet every Monday morning to review potential deals, and we don’t issue term sheets until we’ve developed a two-page “teaser” analysis outlining our core underwriting approach. This includes proposed pricing, debt versus equity structure, and allowed senior debt levels. Once the team approves, we issue the proposal. In our history, we’ve never failed to perform on a proposal where the company delivered what was represented, though we have walked away from deals during diligence when we’ve uncovered issues.
Gor: What deal type trends are you seeing in the market these days?
Kane: It’s definitely gotten harder to close deals and the process takes longer. COVID’s impact varies by company—some benefited while others were crushed—and we need to understand if these effects are temporary. Current challenges include understanding the impact of tariffs on various industries and products. For certain businesses, this creates additional complexity in underwriting, but that’s what groups like ours get paid to do: find deals, underwrite them properly, and perhaps structure them with less initial capital until uncertainties resolve.
Gor: What advice would you give to CFOs and CEOs preparing to pitch to you?
Kane: For a first call, we want to understand the use of proceeds (how much do you need and for what)—whether it’s for an acquisition, owner dividend, or management buyout. We want to hear what excites you about the business going forward and what risks you see in your business plan. With non-PE companies, we often help them develop institutional-quality reporting that would appeal to PE firms, preparing them for potential future transactions. The first call is about getting to know each other and determining if there’s a mutual fit.
Gor: In terms of introducing something like CAPX to this process: as you know, when you use CAPX, the teaser deck comes to you capturing the information you are looking for from that first call. The CFO and/or CEO inputs that information, and we work with them to create that teaser deck.
Kane: That certainly represents our experience with CAPX, and it’s a process that makes it easier for us to decide whether a given deal is something we want to spend time on. It does help to have CAPX sifting through the information coming from the company and putting it into an easily-digestible format.
Gor: What distinguishes you from traditional banks?
Kane: The first thing borrowers notice is that we’re more expensive than banks, but we offer greater flexibility in terms of capital amount, looser covenants, and no amortization for five years. We never require personal guarantees, which many commercial banks do even for larger companies. We work well with commercial banks—our SBIC fund has about 25 bank investors. We don’t compete for working capital lines or cash management services; we’re just taking some credit risk off their plate. When talking to CFOs who have long-term banking relationships, we position our cost against equity—helping them understand the trade-offs there.
Gor: What’s your key advice for companies starting their capital raise process?
Kane: It’s crucial to have a thorough understanding of your own business information and be honest about both positives and negatives. Many entrepreneurs understand their business well but might not grasp what’s important to outside investors or lenders. Having a good handle on both the numbers and your business’s position in the broader environment is vital. We can usually assess how comfortable we’ll be within a call or two, and having well-organized information from the start makes the process much smoother. Again, this is something where CAPX is a great asset for us: if CAPX can’t glean that information from a company, that’s a problem.
Gor: Typically, when we find that a company is missing critical information, we go back and ask for it and help management get the right information in there to go out to lenders.
This version of the transcript has been edited for style and clarity.
