Falfurrias Management Partners, a private equity firm that targets the lower middle market, has struck a deal with a bootstrapped municipal tech company.
The transaction is the latest example of the middle market’s keen interest in founder-owned businesses.
Charlotte-based Falfurrias said Tuesday it made a significant growth investment in Atlanta-based Neighborly Software, which offers a platform to manage the enrollment, administration and reporting of government-funded programs. Financial terms weren’t disclosed.
The transaction is the fifth founder-owned deal for Falfurrias Growth Partners I, a $400 million fund that closed in December.
All four previous investments—capSpire, Gravitate, NPI and O2X Human Performanceshare a common thread: founder ownership, according to Falfurrias partner Michael Clifton.
The string of transactions underscores middle-market GPs’ robust appetite for founder-owned businesses when the market for sponsor-backed companies has softened.
These companies, which often operate at the lower end of their respective market without financial backing from external investors, are typically characterized by lower debt levels and more compelling purchase-price multiples compared to larger, sponsor-backed companies. They have proven to be a popular investment opportunity for GPs.
In Q2 2024, PE-backed acquisitions of non-backed companies—the vast majority of which are founder-owned businesses—accounted for 54.2% of the overall PE deal count in the middle market, according to PitchBook’s latest US PE Middle Market Report. That’s higher than both the 49.4% recorded in Q1 and the five-year average of 53.5%.
Falfurrias will name David Evans, an operating advisor at Falfurrias, as chairman of the Neighborly. Neighborly’s co-founders, Jason Rusnak and Chris Behm, will continue to lead the company.
Notably, Neighborly has no debt in its capital structure, according to Clifton.. Falfurrias Growth Partners I doesn’t use leverage. The GP looks to reinvest cash flow in its businesses to drive growth.
“We have focused on generating returns through growth, not leverage,” said Clifton.
“For all five of our portfolio companies, we have not put third-party debt on any of them because we’re focused on not doing anything to constrain the resources in the company that would otherwise be going to drive higher growth.”
As the businesses continue to grow and if they pursue M&A deals, he added that Falfurrias may consider adding debt over time.
Falfurrias Growth Partners I typically invests $20 million to $50 million in companies generating up to $7 million in EBITDA. It focuses on controlled equity investments and selectively makes growth equity deals. The revenue growth rates for its five portfolio companies are in the range of 25% to 50%.
Featured image by Sky Noir Photography by Bill Dic/Getty Images
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