A new $175 million fund whose backers include six regional banks is targeting small Western Pennsylvania businesses that have trouble getting financing from banks.
"We don't see the banks getting aggressive, and that gives us a great opportunity," said Stephen J. Gurgovits Jr., managing partner of F.N.B. Capital Partners. "Our average customer is going to be between $20 million and $40 million in revenue."
The group raised $60 million from investors and has obtained a license from the U.S. Small Business Administration to operate a small business investment company, or SBIC. Those raise their own capital and qualify for up to $2 in SBA funding for every dollar they raise. The SBA then loans the funds based on the 10-year U.S. Treasury rate, currently around 3 percent.
Traditional banks frequently are reluctant to finance small businesses unless they can offer real estate or other hard assets as collateral.
"Nobody has been there to support them from a capital perspective," said Mr. Gurgovits, who is the son of F.N.B. Corp. chairman Stephen J. Gurgovits.
Mercer County-based F.N.B., the region's third-largest retail bank, is one of the investors in the new venture, which is independent from the bank. The other bank investors include ESB Financial of Ellwood City; First Niagara; Farmers & Merchants Bank of Kittanning, Armstrong County; Farmers National Banc of Canfield, Ohio; and BankFirst of Orlando, Fla. A pension fund and high net-worth individuals also have invested in F.N.B. Capital Partners.
"We are very community oriented and this is just another way for us to meet the credit and financial needs of our communities," said Kristin Robertucci, Farmers & Merchants chief financial officer.
The younger Mr. Gurgovits previously ran F.N.B.'s merchant banking unit, which had invested more than $65 million since 2006. Because there were limits on how much financing the bank's commercial lending operation could provide, having a merchant bank enabled F.N.B. to keep customers who otherwise could have pursued financing from other sources.
But regulatory changes in the wake of the 2008 financial crisis affected that strategy. Among other things, regulators prohibited banks from sponsoring private equity funding or managing separate pools of investor funds to make equity investments in businesses.
The Dodd-Frank overhaul legislation exempted SBICs from that restriction and allows banks to invest in those ventures, Mr. Gurgovits said.
SBICs have provided more than $58 billion to more than 100,000 small businesses since the federal program was launched in 1958. In the government fiscal year that ended Sept. 30, SBICs provided $3.1 billion in financing to more than 1,000 small businesses, up 17 percent from the previous year. The agency licensed 30 new SBICs in its most recent fiscal year, raising the number to 301.
The SBA runs the program with no taxpayer support, meeting its expenses through income derived in part from fees charged to SBICs.
F.N.B. Capital Partners will provide debt and equity financing to small businesses in the services, health care, technology and manufacturing sectors.
One of the fund's biggest targets is family-owned businesses whose owners are nearing retirement. Mr. Gurgovits said the inability to finance the sale of their business often leads owners to sell to buyers from outside the region. That can result in the company being moved and the loss of jobs.
F.N.B.'s investors will make money two ways. They'll benefit from the spread between the funds SBA provides and the rate charged to small businesses, which Mr. Gurgovits estimated at 12 to 14 percent. They also could make money if the businesses in which they take an equity position increase in value.
A small business expert at the University of Pittsburgh said the new fund fills a gap by providing the financing small businesses need but often cannot obtain.
"If we don't have something like this, business could go elsewhere to get the capital they need to grow their business," said Ray Vargo, head of the university's Small Business Development Center.
Mr. Vargo said the banks investing could be a good source of business for the new fund by referring customers that they cannot take care of on their own. That also will help keep business in the region, he said.
Len Boselovic: firstname.lastname@example.org or 412-263-1941.