Star Mountain Raises $820 Million to Loan to U.S. Small Businesses

The private-credit shop focuses on lending to founder-owned businesses that need help financing succession plans.

Star Mountain Capital wrapped up fundraising for its fourth vehicle to extend loans to North American small businesses, with most of the money going to companies wrestling with succession planning as their owners approach retirement.

The New York investment firm said it has collected $820 million from investors for Star Mountain Strategic Credit Income Fund IV, which makes debt commitments of $15 million to $150 million mainly to founder-owned businesses. Including a credit facility to boost returns, the strategy has $1.2 billion of investible capital and all of it has already been deployed.

Star Mountain said it had a $750 million target for the vehicle. The firm said it closed a predecessor fund, Star Mountain Diversified Credit Income Fund III, in 2020 with $454 million of investor commitments.

Private-credit strategies have boomed in recent years as a major traditional source of funding, bank loans, has dried up. One of the largest players in the market, Ares Management, said it had raised $21.9 billion in the three months through September, including $19.1 billion for its credit strategies.

Capital from the new Star Mountain fund has largely been used to finance and integrate transactions carried out to help resolve succession issues, according to Brett Hickey, the firm’s founder and chief executive. Many children of entrepreneurs don’t want to take on the family business, making it more practical to combine the founder’s business with a similar-sized entity in the same market.

Star Mountain “provides the capital but also the willingness to roll up our sleeves and help them build the business,” Hickey said, adding the firm typically works with the management of the combined entity to hone relevant skills.

The firm also lends from the fund to younger, fast-growing businesses that need financing but are unwilling or unable to go to a bank or a larger non-bank lender.

Star Mountain typically structures its deals to include warrants that give the firm the option to acquire an equity stake in the loan recipient, providing a potential additional return along with income from the loan, Hickey said.

Hickey views the private-credit market targeting smaller companies as less competitive and less correlated to geopolitical risk and the fortunes of much larger companies, in particular the Magnificent Seven technology stocks. The Magnificent Seven stocks include Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. Star Mountain has invested in sectors as varied as industrial equipment, executive search and agricultural transportation, according to its website.

“If the stock market drops 50%…am I still going to eat peanuts?” said Hickey, whose firm has financed a peanut-hauling business. “Our view is yes.”

According to the U.S. Chamber of Commerce, small businesses have accounted for roughly 40% of U.S. gross domestic product over the past 20 years and employ around 46% of the working population, equivalent to roughly 62 million people.

Star Mountain now has $3.75 billion in assets under management across direct lending and secondary funds. It has 11 offices nationwide, including in Chicago, Atlanta and Cleveland.

Read the full article on Wall Street Journal here.