february 20, 2019

kansas city business journal

New York mezzanine fund sets up shop in KC

Freedom 3 Capital, a New York-based mezzanine fund, chose Kansas City as the location for its first satellite office.

Founded in 2013 by a group of finance experts, Freedom 3 Capital hired Aaron Blazar and Brian Block to set up a new office at 4801 Main St. in Kansas City.

Blazar spent 12 years working for Atlantic ACM, providing strategic consulting with specialties in telecom and technology. He’s been providing consulting for News Press & Gazette Corp. on the investments it’s been making through its family office, the BERKS Group, which has been looking to diversify its holdings and has made several acquisitions in the past year.

Block spent eight years at WireCo WorldGroup Inc., including a year as COO in 2017. He has financial services experience at Fox Paine and CIBC World Markets.

“We were both looking for opportunities and knew the team at Freedom 3, and we ended up partnering with them,” Blazar said. “My wife grew up in Kansas City and has deep roots here, so I was looking for a way to stick around and put my skills to work. Freedom 3 has a history of investing in and supporting a number of businesses in the Midwest. So it’s not foreign to the area — it’s just never had a physical Midwestern presence. We partner with management teams, founders and families, and knew having a local presence here would be an asset.”

Jason Block, founder and CIO of Freedom 3, said the company initially was looking at Chicago. However, the chance to land an experienced team in Kansas City was too good to pass up. The more he looked at Kansas City, the more it made sense to locate there. Jason and Brian Block are brothers.

“As we did an analysis of where to be, Kansas City is centrally located to all the places we travel to,” Jason Block said. “It has such a vibrant business community that there are a lot of good-sized companies and a lot of family-owned companies. Even if we only find one investment a year in the market, that would be more than enough. Really though, in the short time we’ve been in Kansas City, we’re already working on half a dozen things that have literally come directly out of that market. So I think the assessment was right that being in a place that is a little less competitive is helpful, and the amount of business opportunity here is really plentiful.”

Freedom 3 joins a mezzanine capital market in Kansas City that includes players such as C3 Capital, Leawood Capital, TGP Investments, Midwest Capital Funding, Worchester Fund and others.

Mezzanine capital operates in the middle ground between debt and equity, covering the vacant space between the amount of money a bank is willing to lend and how much equity a business owner is willing to give up to raise capital. Mezzanine investment could consist of senior debt, subordinated debt or preferred stock.

It’s typically considered expensive debt, with investors seeking 1.5 to 2 times return on their investment. But it allows a business owner to get more money than a bank typically would offer and also to maintain control, something private equity providers aren’t always willing to do. That makes it particularly attractive to families going through a generational transition.

“We see a lot of family business transitions where the active family members want to invest in a giant growth step for the company, but there is some element of the family that just wants to milk dividends,” Jason Block said. “Often we’ll come in to help finance the takeout of family members who want to exit. When they take us on as a partner, then they can use free cash flow in the business to invest in growth, rather than pay family members who aren’t involved in the business.”

Freedom 3 likes to be more of a partner than merely a lender, he said. It typically looks to have some sort of equity stake as part of the transaction. Then when growth opportunities arise, Freedom 3 can help consult, advise or finance the move, with the management team knowing everyone’s interests are aligned.

“We like to be in the investment businesses,” Jason Block said. “It’s not about building assets under management and making 12 to 20 investments per year. For us, it’s about people. When we think back over our careers, we’ve generated better returns and we’ve had a lot more fun when we build strong relationships with the owners and management teams of the businesses. It’s just much more rewarding for us and our investors, and that’s the foundation of Freedom 3 Capital.”

James Dornbrook
Staff Writer, Kansas City Business Journal