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Published in Finance

Grow Michigan Fund II eyes $100M with increased focus on minority-owned businesses

BY Friday, April 09, 2021 04:21pm

statewide loan fund to provide growth capital to Michigan small businesses expects to start closing deals by the end of the month after securing state support.

Grow Michigan Fund II has landed commitments of nearly $40 million from investors, including $9.6 million approved in late March by the Michigan Strategic Fund board.

The state commitment to the mezzanine fund “allows us to leverage some more investment” for Grow Michigan Fund II, which had temporarily put fundraising to prospective investors on hold as the Michigan Strategic Fund Board weighed support.

“Now that we’ve gotten the green light, we’re full speed ahead,” Grow Michigan CEO Patrick O’Keefe said.

Grow Michigan Fund II succeeds a prior fund and has a lofty goal of ultimately raising $200 million from investors, half of which will be targeted at minority-owned small businesses that need growth capital.

O’Keefe expects the fund can reach $100 million by the end of 2021. Backers so far include large banks in the state, some of which have committed $5 million with a promise to go as high as $30 million “if we meet some of the aspirational goals of the fund in terms of seeding minority businesses,” he said.

“We’re open to all Michigan businesses, but to the extent that we make a dent, they’re willing to commit more capital,” O’Keefe said.

Grow Michigan Fund II — the successor to a mezzanine fund formed in 2012 with the backing of state funding and investments from several banks — will target small businesses in an array of sectors including manufacturing, distribution, transportation, life sciences and enabling technologies.

Eight banks so far have committed to Grow Michigan Fund II, and O’Keefe expects 16 to 20  overall to invest. Eight banks invested in the first Grow Michigan fund.

Grow Michigan is also seeking investments from foundations in the state, O’Keefe said.

Filling a demand, overcoming delays

By targeting half of the capital the fund raises toward minority-owned businesses, organizers of Grow Michigan Fund II seek to fill a demand for growth capital across the state, especially in underserved markets. The fund right now has eight potential deals in the pipeline, he said.

“We think that we will get some traction in finding new businesses and growing small ones to really create more jobs in the state and move it forward,” O’Keefe said.

The first Grow Michigan fund made 33 loans totaling $67.1 million to companies that went on to leverage the funding to collectively secure $320 million in private-sector capital and support more than 3,200 jobs, according to the Michigan Economic Development Corp.

Of the first fund’s approved loans, more than 80 percent went to qualified small businesses, 36 percent were in low to moderate income areas, and 14 percent went to minority-owned businesses

The Michigan Strategic Fund board initially committed in October 2018 to investing in a second Grow Michigan fund. The commitment came as Grow Michigan was completing investments in the first fund, resulting in a slow start to fundraising for the second fund. That fundraising didn’t begin for several months as final terms and agreements were negotiated, said Chris Cook, the MEDC’s director of capital access.

“The management of the fund was kind of at that point still pulling double duty because it was seeking to make investments at the same point it was seeking new investments into the fund,” Cook said.

Proposed changes at the time in the federal Community Reinvestment Act also slowed banks’ interest in investing in Fund II, Cook said.

That all resulted in Grow Michigan lacking enough investors by the Dec. 31, 2019, closing date for raising capital and signing private-sector lending partners that would prompt the state’s investment, Cook said. Rather than extend the closing date, the Strategic Fund opted to re-evaluate the market needs and alter the fund’s scope, he said.

The onset of the COVID-19 pandemic in Michigan in March 2020 further delayed the process. The pandemic “made it more difficult” to proceed with Fund II as the MEDC concentrated on creating and administering small business relief funds and banks “understandably were focused” on assisting clients and managing the crisis internally, Cook said.

The Strategic Fund board’s approval in March to commit $9.6 million also reduced Grow Michigan Fund II’s minimum loan size from $1 million to $250,000. The approval also added a seat to expand the board of managers to 10 members to focus on equity by directing half of the capital raised to minority-owned businesses.

The MEDC put $7 million into the first Grow Michigan fund and expects to receive a positive return on investment, Cook said.

Grow Michigan has met the MEDC’s goal to leverage private-sector investments, leading to the subsequent $9.6 million commitments for the second fund, Cook said.

He added that the first fund showed an ability to leverage the private sector but also an ongoing need for “this kind of small mezzanine-type lending that doesn’t otherwise have significant availability in the market.”

The second fund’s “much more of a specific effort to be equitable in its lending practices and seeking out additional opportunities to provide lending to historically underserved areas and businesses are all in line with goals of the MEDC,” Cook said.

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