Joseph Alala, Founder & CEO, Capitala Group
In an interview with Invest:, Joseph Alala, founder & CEO of Capitala Group, discussed the company’s recent milestones, including its 25th Anniversary, overcoming capital raising challenges, evolving investment strategies, and the significant social impact of its investments, particularly within the vibrant Charlotte community.
What have been the most significant milestones and achievements for Capitala Group over the last year?
We’ve been part of the Charlotte community since 1998 — so, almost 26 years now. Over the years, we’ve invested several billion dollars into small businesses and remain as active as ever in serving this community. One notable success was selling a local company in Charlotte, which grew significantly under our investment and brought many jobs to the area. The company was sold to a larger strategic buyer, and it was a win for everyone involved. Overall, it’s been a great year.
What key challenges and opportunities are small businesses facing today, and how can your investments help them navigate these challenges?
Small companies often struggle to raise capital. Unlike large, investment-grade institutions, they can’t easily access capital markets on Wall Street. This gap is why I started Capitala in 1998.
American small businesses are the backbone of our economy, driving 44% of economic activity and playing a crucial role in sustaining our economy. Over the last 30 years, these companies are responsible for generating over 60% of new jobs, further solidifying their role as a cornerstone of American economic growth and stability.
Even major companies like Amazon and NVIDIA started small. Our role is to provide capital solutions to these businesses, offering cash flow products, lending products, and pure equity investments. We work closely with banks — most of our investors are banks. Banks typically don’t make high cash flow loans or invest equity in small companies, so we complement their services. Our portfolio companies generally have earnings under $15 million EBITDA. We have around 70 banks investing with us, and together we address the capital needs of small companies by creating tailored debt and equity solutions. Since the Silicon Valley Bank issue in March 2023, liquidity for small businesses has tightened, making our capital even more crucial for their growth and acquisitions.
How has your investment strategy adapted to changes in the markets?
Adapting is essential for long-term effectiveness. We started in the Small Business Investment Company (SBIC) world, primarily providing mezzanine loans with some equity or warrants. Over time, we’ve evolved, raising funds through both SBIC and non-SBIC structures, with investors worldwide, including many banks. About 10 years ago, we decided that the best way to serve small companies and our investors was to focus on cash flow first, then senior loans along with equity. This allows us to support banks in providing cash flow while we handle the equity, usually as a minority shareholder with less than 50% ownership. This approach has created a niche for us, enabling us to creatively solve financing needs, complement banks, and provide the necessary capital to help small businesses grow.
What is the importance of social impact and how does it align with your overall investment strategy?
Our primary focus is on small businesses, many of which are led by diverse leaders. We’ve invested over a billion dollars in social impact investments, defined by the SBA as women-owned, minority-owned, veteran-owned companies, and businesses in low to moderate-income areas. These investments have not only met but often exceeded the overall returns of our portfolio. We don’t sacrifice returns for social impact; instead, we’ve found that diverse leadership often drives better performance. Approximately 40% of our current portfolio qualifies as social impact investments.
We’ve also expanded our advisory boards and relationships to actively seek out minority, women, and veteran-owned businesses. For example, I recently attended a veteran conference in Texas to explore potential deals. These investments are both impactful and profitable, aligning perfectly with our strategy.
What are some unique characteristics that Charlotte provides for a company like yours to succeed?
Charlotte is the second-largest banking city in the United States behind New York. It’s an attractive place to live, which has led to significant migration into the city and state. The banking industry here has been strong since the 1980s, with institutions like NationsBank, First Union, and Wachovia evolving into today’s Bank of America and Wells Fargo. This history has created a deep pool of talent in the financial services sector.
For finance companies, Charlotte offers access to skilled professionals, robust infrastructure, and strong leadership. The city attracts talent from all over the world, and many professionals love living here. This talent pool is essential for our company and others in finance, providing the expertise needed to thrive. Additionally, we sometimes find professionals from the finance industry willing to join and invest in small businesses, further supporting our growth.
What are some of your key priorities and goals for Capitala over the next few years?
Our primary goal is to continue investing in small businesses, meeting the significant demand for capital from these enterprises. We aim to expand our investments across all 50 states; we’ve already invested in 34 states and recently closed our first deal in North Dakota. Achieving nationwide coverage would be a significant milestone. Another key priority is to recruit more banks as investors. When banks join our ecosystem, we can better help their customers solve financing needs. We want to continue growing our team and improving our strategy, focusing on providing both debt and equity products to small businesses.
