Ticket to U.S. from LCR Capital
Suresh Rajan was finalizing a deal to buy Dunkin’ Donuts units in 2008 when the financing world collapsed. “My lender filed for bankruptcy,” he said.
That put Rajan in limbo. He’d been developing Dunkin’ locations, starting in 2006, but he and his business partners hoped the acquisition would quickly give their company scale. The loss of that financing derailed those plans.
“We were in limbo for a couple of years, trying to figure out what to do,” he said. “But even when the capital markets started to rebound, the franchise financing markets weren’t.”
That led to the genesis of an idea: How could Rajan and his partners find ways to keep others from getting into this same predicament? And then that idea evolved into what would become LCR Capital Partners, which some believe could be a game-changer in the franchise finance world.
LCR uses funds from immigrant investors to loan money to franchisees who build new units.
The company is using a little-known program through the U.S. Department of Homeland Security known as EB-5 Immigrant Investor. The federal government started the program in 1990 as a way to create jobs and spur investment.
The program has stringent requirements. The investor must invest at least $500,000 in what is considered a target employment area—generally a rural area or an urban area with high unemployment. Otherwise, the investor must invest $1 million.
This investment must create at least 10 full-time jobs within two years. Over five years, the immigrant investor can earn permanent residency in the U.S.
EB-5 hasn’t exactly been a raging success. A 2011 Government Accountability Office study found the program has few participants. And only a small fraction of the 10,000 EB-5 visas that the law allows every year are issued. The program peaked in 1997 at 1,570 visas. In 2003, for instance, only 71 such visas were issued. The report blamed the rigorous application process and uncertainty of meeting the requirements for the lack of interest.
But Rajan believes franchising could be the perfect business model for this source of funds. There are a lot of good operators who can’t get financing, even though they operate strong brands with good track records. And the investors could use safe investments to place their money, to give them an opportunity to move to the United States.
“It’s a good converter of capital to jobs,” Rajan said of franchising. In addition, “there is a market for capital that the franchise community needs.”
Indeed, franchises generally have been strong users of programs that use immigrants as investors. Many franchisees have come here, for instance, through the E-2 Treaty Investors program. That program enables immigrants from certain countries to come to the U.S. when they invest a substantial amount in a business.
And in the EB-5 program, roughly 19 percent of immigrants who have come to the U.S. using that method have done so by investing in hotels—a franchise-heavy industry. That’s the most of any other industry, according to the GAO report.
Job creation is critical
In Rajan’s model, use of the funds in franchise-heavy businesses could become even more common, because he’d be connecting the investor to the businesses.
Immigrants invest in LCR, and Rajan’s company loans the money to franchisees. The business actually can structure the investment in many different ways, including equity, senior debt and other loans or investments. “It’s not a one-size-fits-all,” he said, but he noted much of the initial business will be loans.
LCR, based in Westport, Connecticut, will provide growth capital to ongoing businesses. It will evaluate the businesses, their financial results and key management to determine which franchisees meet its investment criteria.
Rajan has lured several franchise veterans to the company’s executive ranks and its advisory board. Terminix President Bill Derwin, Monroe Moxness Berg attorney Dennis Monroe and Fish Consulting Founder Lorne Fisher are members of the advisory board. His chief development officer is franchising veteran Lynette McKee.
LCR’s emphasis will be somewhat different than a typical lender or investor. That’s because EB-5 investors have a goal other than simply making money. They want to stay in the U.S., so the franchises must build new units and create jobs.
“Creating new jobs is mission critical for EB-5 capital providers,” Rajan said. “It’s much higher than return on capital. No other lender has such a favorable perspective on labor costs.”
This puts immense pressure on LCR to ensure the financing goes to the right franchisee. “Without question,” Rajan said. “But to be clear, I think the risk of aligning myself with top brands and top operators is a risk I’d take any day. I’ve studied them and their brands and plans. I can do this better than most.”
While LCR would be protected the same way another lender would, failure is just not an option, according to Rajan.
A failure, Rajan said, “is a disaster of epic proportions for us. It means my company has failed to deliver.” And investors don’t just lose their principal. “They get deported back to their home country. This is a horrific outcome if I fail to meet the needs of my investors.
“Anything we can do to make their business more profitable, that’s in our interest to do,” he said.