McLarty Capital Partners Makes Loans, Invests Equity

Beau Blair, left, managing partner of McLarty Capital Partners, and Franklin McLarty, co-founder of the $225 million small business fund.
Beau Blair, left, managing partner of McLarty Capital Partners, and Franklin McLarty, co-founder of the $225 million small business fund. (Michael Pirnique)
Franklin McLarty, left, talks with Beau Blair, managing partner of McLarty Capital Partners.
Franklin McLarty, left, talks with Beau Blair, managing partner of McLarty Capital Partners. (Michael Pirnique)

McLarty Capital Partners has deployed about $100 million during its first two years as a small business lender-investor.

The venture that bears a prominent Arkansas family name has helped fund private firms in-state and public companies elsewhere.

The deals have included Denali Water Solutions of Russellville, AXPM of Little Rock, ARC Group Worldwide Inc. of Miami, RLJ Entertainment Inc. of Silver Springs, Maryland, and HII Technologies Inc. of Houston.

“We’re very proud of the team and that we are able to put some investments to work in Arkansas,” said Franklin McLarty, co-founder of McLarty Capital.

McLarty works out of the Little Rock office along with two Stephens Inc. alumni: Beau Blair, managing partner of the small business fund; and Lauren Steel.

Christopher Smith, president and co-founder of McLarty Capital Partners, works out of the New York office. The enterprise also operates offices in Dallas and Washington.

The formation of McLarty Capital’s $225 million small business fund began about three years ago. That financial cache is administered through its small business investment company licensed by the U.S. Small Business Administration.

McLarty Capital Partners SBIC Ltd. launched in 2013 with a $75 million private offering plus $150 million raised through the sale of SBA-guaranteed securities.

As an SBIC, McLarty Capital has the flexibility of working with a business as a lender or as an equity partner with a minority or majority position. The seven deals it has closed to date represent a mix of each kind.

Smith said the post-2008 dislocation of financial channels cut access to capital for companies with $5 million-$100 million in annual sales.

“We organized our fund to step into that breach,” Smith said. “We focus on operating cash flow. A company can have a ton of revenue but not have much cash left over because of low margins.”

Smith joined the McLarty Capital start-up effort after 13 years at GarMark Partners of Stamford, Connecticut, touted as one of the longest tenured managers of private junior debt and structured equity capital in North America.

McLarty and Smith met while serving on the board of directors at Tire Group International LLC of Miami, a tire and tube trader with a global reach that extends to more than 70 companies.

Smith interned at the White House while Franklin McLarty’s dad, Mack McLarty, was working for the Clinton Administration. The elder McLarty is chairman of McLarty Capital Partners.

“We found out we had some overlapping history,” said Franklin McLarty, a member of the Arkansas Economic Development Commission from 2007-11.

“It came together very organically. Philosophically and culturally, we are very much aligned. Our focus is investing in small and mid-sized companies, which is analogous with the McLarty family business.”

His family’s auto dealership holdings blossomed into RML Automotive, an umbrella for 35 automotive franchises and three Harley-Davidson motorcycle dealerships in eight states.

Franklin McLarty is CEO of RML Automotive, which represents the partnership of McLarty Cos. and The RLJ Cos., led by Robert L. Johnson.

Another Johnson venture, RLJ Entertainment, is among the McLarty Capital Partners roster of clients. McLarty Capital is the administrative agent for a syndication of lenders that put together a $70 million credit agreement used to restructure the public company’s debt.

The five-year deal, which closed on Sept. 11, 2014, allowed RLJ to shed $56 million of debt and save $11.2 million over the following three years. The company has struggled financially, with shares trading in the range of 40 cents recently.

RLJ manages the intellectual property and publishing rights to 5,300 exclusive titles. Its stake in the Agatha Christie stories of Jane Marple and Hercule Poirot perhaps is its most well-known.

McLarty Capital’s deal with ARC Group Worldwide was struck in November 2014. The five-year loan of $20 million allowed the advanced manufacturing and 3D printing service provider to pay down a chunk of senior debt and free up cash.

Financial details are sketchy for the deals with AXPM, an orthodontics and dental practice service network, and Denali Water Solutions, a wastewater residuals management and services firm.

Last year, McLarty Capital established a lending and equity relationship with Denali, helping buy the assets of Terra Renewal from Saw Mill Capital to start a free-standing enterprise.

“They bring all the positives of a big New York firm with a Southern bent to it, which was attractive to me, plus they understood our business,” said Andy McNeill, Denali CEO.

“It’s more than just who has the best rates. You’re looking for a good partner who will help drive growth. They check the box on smart business acumen.

“There are lots of sources of capital out there. But where they differentiate themselves is they are nice and easy to get along with. You can’t say that about a lot of money guys.”