5 questions with Scott Potter

San Francisco Equity Partners is a mezzanine and growth stage investor with a diverse portfolio. Investments include Method Products Inc., a maker of household cleaners, and Penguin Computing, a provider of Linux-based software and services.

, who founded the firm in 2005, recently told PE Week that he will likely try to raise a second fund in the range of $200 million to $300 million next year. Potter raised $80 million for his firm’s first fund three years ago when he spun it out of London-based LMS Capital, which remains a primary limited partner. Potter later expanded the fund to $100 million by taking on another, undisclosed LP in October 2007.

Senior Writer Alexander Haislip recently caught up with Potter to ask him five questions.

Q: How has the downturn affected deal flow?

We’re seeing a lot more companies than deals we can do. The softening of the credit market is showing us a lot more companies because funding their growth through leverage just isn’t an option right now.

The businesses we get involved with typically could finance their growth with debt leveraged on EBITDA, but that’s not as available for them as it used to be, or it’s a lot more expensive.

Q: How has the downturn affected your portfolio?

A: You have to look company by company. We have a company [Guild.com] that sells artwork in the range of $500 to $700, and we’ve seen softness in that. Nobody needs a $700 glass vase in this market.

Q: If that‘s the case, then why did you recently participate in the $14 million expansion round for Israel-based face-cream maker Yes To Inc.?

It’s a spa quality product targeted at mass-consumption. People are calling this type of thing “masstige” [a mashup of mass and prestige], and it’s about getting consumers to trade up. What we see happening is that you can bring that affordable luxury to consumers, they’ll spend money for it since they’re probably not looking to buy another house or get a BMW. We’ve had a lot of luck with that model.

Q: What’s made it lucky for you?

Trading up resonates with the consumer and it allows the distributor to sell at a premium. Plus, it’s capturing a trend. Retailers have embraced the green trend. We’ve seen this happen in stores which have created a dedicated green isle. The natural and organic personal care system is gaining a lot of traction.

We’ll definitely increase the team, but we won’t change the strategy. We want the deals to look like what we’ve been doing because we’ve had a lot of success. It allows us to be collaborative with the public equity players around us. We get a lot of referrals from private equity firms that can’t figure out how to put $30 million or $40 million to work and we don’t want to lose that.