The creation of a new mezzanine fund gives small businesses across Michigan one more option to consider when they’re pursuing growth capital.
Funded by the state and nine banks, the Plymouth, Mich.-based Grow Michigan LLC secured commitments of a little more than $30 million in its first round that closed in mid-February. The fund aims to grow the capital pool to $60 million in the months ahead.
The Michigan Strategic Fund provided $10 million of the committed amount and the rest came from banks – including several based in West Michigan – that view the mezzanine fund as an alternative tool for underwriting loans to growing small businesses that otherwise don’t qualify for a conventional loan.
Traditionally, small businesses have struggled to access subordinated debt offered through mezzanine funding, said Russ Youngdahl, CEO of Grow Michigan and founding partner and managing member at the Jackson, Mich.-based Northstar Capital LLC. Youngdahl spoke at a recent event sponsored by the West Michigan chapter of the Association for Corporate Growth.
“For post-revenue companies, (what’s missing) is mezzanine debt for $1-3 million transactions that allow for existing companies here in West Michigan to accelerate their growth plan, whether it’s a management turnover or it’s a growth plan,” Youngdahl said.
Bankers involved in the venture say they often see growing small businesses seeking credit to expand that are unable to secure what they need. The owner lacks adequate equity or collateral in a post-recession era where real estate valuations, despite recent upward movements, remain somewhat depressed, bankers said.
Through their participation, bankers now have another place to refer those clients.
“It allows us to provide a level of financing for some of those small businesses that are in a growth stage that they can’t get elsewhere,” said Rich Lievense, CEO of Lake Michigan Financial Corp., the parent company of The Bank of Holland and The Bank of Northern Michigan in Petoskey. “We think it makes a lot of sense.”
Lake Michigan Financial’s two banks combined committed more than $1 million to Grow Michigan.
To secure the kind of credit that Grow Michigan provides, borrowers typically have to go out of state and will find “onerous terms” from lenders who “only look at it as a financial investment,” Lievense said.
Grow Michigan attracted a combination of large and small community banks. Beyond the Lake Michigan Financial investment, other banks investing in Grow Michigan are Fifth Third Bank, PNC Bank, Huntington Bank, Grand Rapids-based Mercantile Bank Corp., Chicago-based The Private Bank that has three offices in suburban Detroit, Crestmark Bank in Troy and Seaway Community Bank in St. Clair.
The mezzanine fund will offer credit of $500,000 to $3 million for three to five years in conjunction with senior loans.
Securing a loan through Grow Michigan would alleviate the need for companies to go to the private equity market for capital, an option that many entrepreneurs would prefer not to do after nurturing the business from startup to a stage where it’s poised to take off, Mercantile Bank COO Bob Kaminski said.
“They’re not willing to give up a piece of the company they’ve built up through some challenging times and through blood, sweat and tears,” Kaminski said. “This can really give them the best of both worlds.”
Deal flow for Grow Michigan will come via banks’ referring their clients, said David Treadwell, Grow Michigan’s chairman. Participating banks will handle the underwriting for the fund.
Treadwell expects Grow Michigan to approve 10 to 15 loans in its first year and said prospective borrowers should expect “to go through the normal credit process.”
Increased regulation and scrutiny of the industry following the financial collapse of 2008 curtailed the lending ability of banks and forced them to cut back on so-called “air ball” loans where they approved more for a borrower than its asset base could support. That created “a hole in the market that’s even greater now,” Treadwell said.
The fund’s credit committee will approve loans for “the best companies and the most deserving and (those that have) the best chances of success, otherwise they won’t get funded,” Treadwell said. “We intend to be pretty selective.”
Grow Michigan hopes to eventually attract more banks and additional capital, but first it needs to get some deals done and put maturing loans on the books before it begins to look to do a second fundraising round, Treadwell said.
“We want to get this thing up and running, show some success and we can go from there,” he said. “Our main focus right now is to get deal flow started, looking at loans and dealing with business. If there are other banks that want to come in, we’re not going to turn them away at this point.”
The primary motivation for the founders of the mezzanine fund, all of whom are finance and banking veterans, is driving job creation in the state, Treadwell said.
Although they clearly want to generate a return on investment, participating banks see Grow Michigan the same way.
“It’s in our best interests,” said Mercantile Bank’s Kaminski. “We’re all in the state of Michigan. We all see this as a tool of making the economy successful.”
Mercantile Bank committed $500,000 to Grow Michigan.
To adequately serve clients today, banks need to look at tools that allow them to lend across the capital continuum, Lake Michigan Financial’s Lievense said. Providing traditional commercial loans is “just not enough anymore,” he said.
“You have to do more than just provide traditional financing if you want to serve this market and help small businesses grow,” Lievense said. “It’s one of those instances where it’s not only the right thing to do but the smart thing to do.”