The principals at New York Community Investment Co. (NYCIC) must have let the expansive view from their new Manhattan offices get to their heads, because last fall, the firm began actively courting upstate New York-based companies.
Currently, most of NYCIC’s portfolio companies hail from New York City and the surrounding counties, but the firm plans to invest one-third of its capital upstate going forward.
NYCIC should soon add more fuel to the fire by raising a third $10 million to $20 million fund next quarter from the investors in its first investment vehicle.
Following NYCIC’s founding philosophy, the new fund, New York Community Investment Co. II, will keep an eye out for women- or minority-owned growth companies and for small businesses that may fall outside of the typical scope of venture financing – companies in non-technology sectors with small capital needs or in low-income locations.
In 1995, 11 banks founded the $20 million NYCIC fund to satisfy provisions of the Community Reinvestment Act and limited its investment focus to the New York City area. Formed as a community development VC fund, NYCIC takes the benefits of VC down the food chain but still hopes to profit as the portfolio companies mature.
NYCIC investors like JPMorgan, Citigroup and Merrill Lynch have large private equity operations of their own. However, NYCIC hasn’t syndicated many deals with them.
“By and large, they’re dealing in a different stratum, but we often bring them in as bank [lenders],” says NYCIC President Howard Sommer.
In other words, a few rounds down the road, those NYCIC portfolio companies may grow to the size where the equity interests the JPMorgans of the world.
Sommer says he also invites syndication and referrals from other VCs.
“Larger funds are often approached by a company whose need is too small or the returns are not high enough. Instead of being rejected, those should be referred,” he adds, also suggesting that those larger funds might be inclined to invest in a referred company when it is ready for its next round.
With limited geography and a disposition for smaller companies, NYCIC takes on additional risks to achieve its private-sector economic development mandate. However, the fund tempers its risk by investing with a range of investment products from typical venture equity transactions to subordinated debt with a revenue-royalty kicker.
Expanding Its Horizons
Three years ago, NYCIC’s board technically opened the door for upstate investing when it closed its second $20 million fund with all new investors. However, without the active effort, the upstate portion of its portfolio is rather small.
The New York State government seeded NYCIC’s second fund, the New York Small Business Venture Fund, with tax credits the fund sold to nine insurance companies in return for investment capital. NYCIC continues to invest from this fund, which is administered in partnership with the New York City Investment Fund – another private-sector community development group. The two groups make independent decisions, and each separately manages its half of the portfolio.
For its part, NYCIC’s portfolio has benefited from the firm’s penchant to invest early. Two years ago, NYCIC invested $500,000 in Westchester County-based HDS Labs, a 10-year-old over-the-counter skin-care product manufacturer. Since then, the company has grown about 50% per year and has added at least 60 jobs to the local community. In November, HDS closed a $2 million round with new investors.
NYCIC realized its biggest purely financial success to date in April 1999’s $13.3 million public offering of online-trader A.B. Watley Group.
Through its two investment vehicles, NYCIC has invested in 65 companies. Three of those companies have gone public, six have been acquired, four have cashed out even and 12 others have gone out of business.
Since the banks established NYCIC to support small business, Sommer said the fund can compromise some financial return for social benefit, but all is not lost, because the tax credits themselves produce a double-digit return.
The firm can’t rest on those laurels, however, and its partners can’t let the beautiful view make them forget the harsh realities of Wall Street below. The firm’s investors still expect its portfolio companies to make money. “If we don’t produce in the neighborhood of 12% [from our investments], we won’t be in business,” he said.
Charles Fellers can be contacted at: Charles.Fellers@tfn.com