Metro Nashville's pension administrators are staring at a possible $3.3 million loss after the U.S. Small Business Administration took legal action this week to place a Franklin-based investment fund in receivership — although the fund's manager says Metro still has a good chance to get its money back.
Meanwhile, the SBA's move is expected to result in a forced sale of the fund's equity stakes in Nashville healthcare companies Haven Behavioral Healthcare and HCCA International, as well as ProfitPoint Inc., a payment services company with offices in Franklin.
The agency filed suit in Nashville's U.S. District Court to take control of FCA Venture Partners III SBIC L.P., a fund operated by Clayton Associates LLC. Stuart McWhorter is president of Clayton Associates, and his father, well-known venture capitalist Clayton McWhorter, is chairman.
The fund is a Small Business Investment Company, an entity licensed to borrow money from the SBA for equity investment in qualified entrepreneurial ventures. It raised some $12 million from limited partners including the Metro pension fund, and it borrowed about $21.5 million from the government agency.
According to court filings, FCA III SBIC has been in "wind-down" mode since June 2009 after losses from its portfolio companies placed it in a "capital impairment" status. The legal complaint says Clayton Associates consented last year to having a receiver take over the fund if necessary, but there is no indication of why the SBA chose to take action at this time.
Stuart McWhorter told NashvillePost.com that some of the approximately 15 companies the fund invested in "didn't do well." But he said Clayton Associates as a whole remains robustly profitable.
"For every dollar invested" in its four FCA funds over the past 15 years, McWhorter stated, "we're returning two." He said most of the roughly 60 companies he and his father have invested in have been success stories.
The SBIC was a subsidiary fund within the broader FCA Venture Partners III, McWhorter explained. He said Metro's investment included both the SBIC and non-SBIC sub-funds of FCA III, with about 40 percent of it invested in the SBIC.
According to annual reports issued by administrators, the city initially invested $2.85 million in FCA III sometime prior to June 30, 2005, by which date the stake had gained almost $800,000 in value. Its cost basis had risen to about $3.3 million by mid-2008, apparently through reinvestment of earnings. This year's June 30 pension review showed the FCA III holding with a negative value, -$322,000. But McWhorter said the partnership did not require the city to contribute capital in the event of a shortfall, so the effective maximum potential loss appears to be $3.3 million.
"We're pretty confident that we're going to be able to perform well enough on the parent" — the non-SBIC portion of the fund — "that we're going to make all of our limited partners at least whole on their initial investments, and perhaps even more," McWhorter said.
He also noted that Metro invested another FCA fund that has yielded generous distributions to its partners. "When you put those two together, they're still ahead of the game," he argued.
This week's lawsuit asks the court to "appoint SBA as permanent receiver of FCA for the purpose of liquidating all of FCA's assets" and "pursuing causes of action available to FCA, as appropriate."
In a letter from the agency filed as an exhibit to the complaint, an official lists Haven, HCCA and ProfitPoint, along with CelaNova BioSciences of Atlanta, as the SBIC’s "core assets."
"Those four companies are all in a position to have good returns," McWhorter said.
Officials of Haven, HCCA and ProfitPoint could not be reached for comment on Friday.
Filings with the Securities and Exchange Commission indicate that other current or former portfolio companies of FCA III SBIC have included Alveolus Inc. of Charlotte, N.C. (sold last year in a $19 million transaction); DARA BioSciences Inc. of Raleigh, N.C.; and MiMedx Group Inc. of Marietta, Ga.
The SBA has been making loans to SBICs since 1958. It began lending money for equity investments in the 1990s, but amid heavy losses, it stopped approving new stock-oriented SBICs in 2005, a year after it granted a license to FCA III SBIC. Several funds operated by other Nashville venture firms are more traditional debt-oriented SBICs, which make loans to small businesses instead of buying shares in them.