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Friday, 04 September 2015 09:44

HopCat secures $25 million in mezzanine funding, plans 30 new locations

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BarFly founder Mark Sellers BarFly founder Mark Sellers PHOTO: Jeff Hage

Armed with $25 million in new mezzanine financing, Grand Rapids-based BarFly Ventures LLC plans to take its popular HopCat craft beer and restaurant concept to even more markets.

The funding from two Texas companies, Congruent Investment Partners and Main Street Capital Corporation, allows the company to open six new HopCat locations per year for the next six years, said Barfly founder Mark Sellers.

The reason for going with an alternative lender: Traditional bank debt would not have allowed for the kind of growth the brand is capable of, Sellers said.

Each of the six existing HopCat locations — a seventh opens this fall in Lexington, Ky. — have cost the company about $3 million to launch, he said.

“Craft beer bars are cash-intensive but they generate a ton of cash,” Sellers said. “People say the restaurant business is the worst, but they don’t understand the economics."

To secure the necessary financing, Sellers, a former Chicago hedge fund manager, tapped Southfield-based Cascade Partners LLC, an investment banking firm.

Cascade sent out approximately 200 proposals to funds all around the country. Those proposals yielded 15 letters of intent, which Sellers and his investment bankers — Mac Gerlach and Gary Lewis, both managing directors at Cascade Partners — narrowed down to three, and then eventually to the joint venture BarFly ultimately selected.

A contributing factor in the selection: A principal at one of the lenders also owns a bar and restaurant, which means the person is in a position to understand the “idiosyncrasies” of the industry, Sellers said.

The transaction marks at least the second occasion in which BarFly has worked with a mezzanine funding, a form of capital that typically allows for quicker access to higher amounts of money at higher interest rates than traditional bank debt.

As MiBiz reported last July, Sellers previously worked with the Plymouth-based Grow Michigan LLC mezzanine lender to fund the launch of HopCat locations in East Lansing, Ann Arbor and Detroit.

“Grow Michigan was awesome and got us to the point where we could attract larger lenders,” Sellers said. “The need came because we have been growing quickly, and we are doing three HopCats this year.”

Beyond the already announced Lexington location, Sellers declined to name future HopCat sites, noting the company was considering college towns from Michigan to Tennessee, as well as from the East Coast to Nebraska.

According to state records, Sellers set up HopCat LLCs with the cities of Cincinnati, Columbia, Columbus, Kansas City, Lincoln, Louisville, Milwaukee, Nashville, Omaha, and Pittsburgh in their names.

“You’ll find them in a great area of town, maybe a historic area. They want to become part of the neighborhood,” Gerlach said. “The way they stay out of the classic restaurant world is you’ll never find a HopCat in a strip mall.”

The vast majority of the capital injection came via mezzanine debt as opposed to equity, which Sellers said was very important to him. In the deal, only $1.3 million was structured as equity in the growing restaurant chain.

Sellers said that he didn’t want to give up control of the brand, which opened its first location in downtown Grand Rapids in 2008. He also said he has no plans to franchise the HopCat brand.

In Grand Rapids, BarFly also operates Stella’s Lounge, McFadden’s and Grand Rapids Brewing Co.

“(Sellers) got the funds needed and a lot of the expertise they would get from a private equity firm without selling the company,” Gerlach said.

The HopCat locations have consistently received accolades as among the best craft beer bars in the country.

This new round of funding plays into a larger trend of institutional capital coming into craft beer and related industries, sources said. In March, Comstock Park-based Perrin Brewing Co. was acquired by Longmont, Colo.-based Oskar Blues Brewing Co. in a deal that included capital from Boston-based private equity firm Fireman Capital.

Sellers said he’s not surprised that private equity is flowing into the $19.6 billion craft beer industry. And while a form of private equity may have acquired a portion of his company, he said he doesn’t see the institutional capital as diluting the experience.

“We don’t serve Bud, Miller or Coors — we provide a pure craft beer experience,” Sellers said. “That’s the centerpiece of the whole model. Because of our food menu, we’ve been able to attract (craft beer) newbies as well.”

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EDITOR'S NOTE: The names of Congruent Investment Partners and Main Street Capital Corporation were added to this story on Sept. 9, 2015

Read 11371 times Last modified on Monday, 28 September 2015 11:09

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