GRAND RAPIDS — The “buy local” message has been working well for Blackford Capital.
The Grand Rapids-based private equity firm so far has netted investor commitments of more than $5 million for a new fund that invests in Michigan companies.
Founder and Managing Director Martin Stein expects to reach $7 million in investor commitments by year’s end and to hit his goal of $20 million for the Michigan Prosperity Fund, formerly known as the Michigan Equity Investment Fund, by this time in 2013.
“We’re moving in the right direction and it’s very favorable so far,” Stein said. “We’ve had tremendous success.”
Stein began soliciting investors for the new equity fund earlier this year. Commitments to the new equity fund have come from more than three-dozen investors, Stein said.
Playing into his favor is Blackford Capital’s successful track record, an improved economy and the focus of the Michigan Prosperity Fund, which invests in mature, profitable Michigan-based manufacturing companies that have revenue of $20 million to $100 million, are profitable, have growth potential and whose owners wish to sell.
Investors have tended to like that their money is going into nearby companies, Stein said.
“We are not a group that’s far away investing in companies that are far away. It’s all right here,” Stein said. “It’s not something far away and invisible to them. They can see the investment that they are making. It’s not something that is removed from them. They can come out and see the company.”
Also working in Stein’s favor: High net worth individuals are showing increased interest in private equity investing.
The financial storm that hit in 2008 and the resulting recession put many investors on the sidelines, said Jason Brinks, managing director of the Grand Rapids office of Oxford Financial Group.
Brinks, who works with family offices, said in the last year and a half, clients who were previously involved in private equity have been returning to the market as an investment option as they seek higher returns.
“2008 hit and everybody said, ‘It’s time to hold on to our money,’” Brinks said. “We have seen much more interest in private equity. It’s still not back to where it was, but there’s much more interest.
“The more sophisticated investor, they see where there are opportunities in the private market that are not available in the public market.”
Even so, as Stein raised capital for the Michigan Prosperity Fund, he has had to go through an education process with some prospective investors and explain how private equity works and “why it’s a great asset class.”
“Generally, Michigan has not had as much exposure to private equity as other states — California, New York, Illinois, Massachusetts. So there’s a ways (to go) to catch up,” Stein said. “There’s a learning curve associated with it.”
As Blackford Capital raises capital, the new equity fund has worked on transactions and made its first acquisition in September with Custom Profile Inc., a Grand Rapids producer of plastic components for the office furniture and appliance industries.
Custom Profile is having a record year for sales and earnings, and Stein expects 2013 to “be even better” for Custom Profile.
The equity firm also has signed letters of intent for two more companies. One deal should close by the end of the year and the other in the first quarter of 2013, Stein said. Both companies are non-automotive, family-owned manufacturers “with long histories behind them,” he said.
All three companies — Custom Profile and the two pending acquisitions — have aggregate revenues of about $120 million, Stein said.
Blackford Capital’s own market research shows that Michigan has 15,000 to 20,000 manufacturing companies, some 1,500 to 2,000 of which fit into the firm’s investment criteria. Stein believes 30 percent to 40 percent of those companies will transition ownership over the next 10 years, generating plenty of opportunity for investors.
“It’s a really fertile area with a lot of great businesses and business owners,” he said.
Jeff Helminski, a managing director at Blackford who focuses on transactions in Michigan, called the transaction pipeline “very active” right now. Among the drivers: pent-up demand coming out of the recession and the potential increase in the federal capital gains tax on Jan. 1.
Business owners who want to sell and have a willing buyer are pushing to complete the deal by Dec. 31 to avoid the higher tax burden, he said.
“There’s a sense of urgency on the part of sellers to complete deals,” he said.
Business owners who had wanted to sell their businesses but ran into less than favorable economic conditions that resulted in lower valuations and a lack of credit for buyers are now looking to cut deals given the improved economic conditions, Helminski said. That pent-up demand should drive potential deals into 2013, he said.
“It wasn’t the best time to sell a business, so a lot of these guys were on the sidelines and now they’re getting back in,” Helminski said. “We are expecting it to be a very active year.”
Blackford Capital typically holds companies for five to seven years before selling. Given the nature of its investment targets, the Michigan Equity Investment Fund will hold companies for up to 10 years, Stein said.
“We feel very comfortable working with the companies on a longer-term basis,” he said. “They’re good businesses. They’re still generating growth, and if there is opportunity for us to continue to be involved in the businesses, we’re interested in doing that. We’re in it for the long term and building long-term value.”