Since launching in July 2019, the Charter Growth Capital Fund has made five investments and raised $31 million to make minority investments in growing, middle-market companies that need growth capital.
The investments and activity to date validates John Kerschen’s view that there was an existing market gap and need for a new mezzanine fund in Michigan that targets the lower end of the middle market. Mezzanine funds typically serve a market upstream from the segment the Charter Growth Capital Fund intended to target.
“We really found a good, underserved niche in the market. That was our belief before we started, but deal flow has been really good,” said Kerschen, president and managing partner at Grand Rapids-based Charter Capital Partners. Kerschen runs the capital fund with two partners, Managing Director Hector Bultynck and Director Mike Palm.
“In the low end of the market here there just aren’t that many choices for a business that might be doing $1 million, $2 million, $3 million of EBITDA and they need that incremental capital to buy out a shareholder or expand to take on a new line of business, or to recapitalize their balance sheet. It’s beyond conventional lenders, and up-market there are other capital providers that will do this stuff, but they try not to come below $10 million,” he said. “Deal flow and just the need for capital in this segment of the market has exceeded our expectations.”
Charter Capital Partners created the mezzanine fund to make debt or equity investments — or a combination of both — in lower middle-market companies in the Great Lakes region that need $1 million to $5 million in capital to grow, recapitalize the business, or make an acquisition. The fund targets profitable companies with annual revenues of $10 million to $50 million.
In addition to the $31 million raised from more than 40 investors, predominantly from Michigan and the Midwest, the fund has secured another $10 million in available debt financing to support deals.
The Charter Growth Capital Fund’s formation earned Kerschen the 2021 MiBiz Dealmaker of the Year Awards as an investor.
Investments through the five deals collectively total about $15.5 million in subordinate debt and minority equity, Kerschen said. Focusing on the lower end of the middle market where there’s demand for capital and less competition for deals has enabled the fund to “pick our spots where it fits our criteria and we connect well with the entrepreneur,” he said.
Kerschen expects the fund to invest in 12 companies by late 2022, and “then we’d have to think about what’s next.”
Four of Charter Growth Capital Fund’s five investments were in companies based in Michigan. Among them are Keystone Solutions Group in Kalamazoo, which provides product design for the medical device, aerospace and automotive industries, and contract manufacturing for medical devices.
Keystone Solutions President Jim Medsker told MiBiz in October 2019 that the company had grown revenues “in the 40-percent range” and that the next few years “could be similar,” with growth rates of 30 percent to 50 percent.
“We’re growing like crazy,” Medsker said. “This helps us to stay on that path.”
The fund has also backed Ann Arbor-based driving school All Star Driver Education that operates in 16 states; Envirolite LLC in Coldwater that produces specialized foam products; and Traverse City Products, a producer of custom roll formed and stamped products.
The fifth investment, which closed in January, was for die-casting company Premier Engineered Products in Abingdon, Va.
Beyond the financing, the Charter Growth Capital Fund provides portfolio companies advice, guidance and other support. During the COVID-19 pandemic, Charter Capital Partners also worked with portfolio companies on plans for safe operations, developing contingency plans and projections, and helping them secure federal Paycheck Protection Program loans.
“That was a big undertaking in the first year of the fund, getting through a major disruption in the economy and the manner of doing business,” Kerschen said. “We were able to retain their employees and help everybody just get through this challenging time. We had to hunker down in some cases, and in some cases we’re not back all of the way.”
Meanwhile, Keystone Solutions transitioned in the pandemic to packaging and selling swabs, test kits, and various COVID-related products.
Running the Charter Growth Capital Fund through the pandemic reinforced to Kerschen and his partners the need for business owners to guard against overleveraging their companies and “not to push your resources right to the edge.”
“That’s ultimately what got our portfolio companies through the pandemic,” Kerschen said. “They had flexibility on their balance sheets and they had access to cash resources, so when business stopped or got disrupted, we had the flexibility.”