KALAMAZOO — A Grand Rapids mezzanine fund’s investment will enable Keystone Solutions Group to maintain its strong growth trajectory in the years ahead.
Charter Growth Capital Fund, formed this past summer by Grand Rapids-based Charter Capital Partners, made its first deal this month with an investment in Kalamazoo-based Keystone Solutions Group.
The funding will go toward supporting further growth, including buying an enterprise resource system that carries a six-figure cost, as well as purchasing new equipment, making strategic hires, and executing on initiatives “that keep us on this nice growth path,” said Keystone Solutions President Jim Medsker.
In the last year, Keystone Solutions’ revenues have grown “in the 40-percent range” and the next few years “could be similar,” with growth rates of 30 percent to 50 percent, Medsker said.
“We’re growing like crazy,” he said. “This helps us to stay on that path.”
Financial terms of the deal with Keystone Solutions were undisclosed. Charter did receive a minority equity stake in the company and a seat on the board of directors for John Kerschen, the investment firm’s president and managing partner.
Keystone Solutions provides product design for the medical device, aerospace and automotive industries, plus contract manufacturing for medical devices at its 50,000-square-foot facility in Oshtemo Township, near the I-94 and 9th Street interchange. The company employs about 45 full-time employees.
The mezzanine fund’s investment may benefit Keystone through the expertise and contacts Charter Capital Partners has in both the medical device and life sciences industries. The investment firm also runs Michigan Accelerator Fund I, a venture capital fund that invests in life sciences startups.
Keystone Solutions and Charter will “explore new initiatives” together to continue growing, Medsker said.
“It’s not only the investment,” Medsker said. “There’s a partnering at that level where there is synergy and expertise and business models possibly that can help us grow even faster by capitalizing on some of the relationships that they have and we have and combining them.”
Medsker and Kerschen have known each other for a decade. Kerschen has watched the company’s progress, and Charter decided to make a minority investment when Medsker presented the firm with an opportunity.
“He’s taken it quite a long ways and we collectively can use that capital to continue to build out the team and the infrastructure and build a base for continued growth,” Kerschen said.
Charter likes Keystone Solutions’ business model that combines engineering and product development capabilities with contract manufacturing for medical devices. That’s a similar model successfully used at Grand River Aseptic Manufacturing LLC, only applied to pharmaceuticals, where Charter was a past investor, he said.
The unique combination has driven growth at Keystone Solutions and plays into a trend in the medical device industry particularly among younger companies to outsource production to contract manufacturers.
“Keystone is one of the few holistic providers of both product development and contract manufacturing services for medical devices, providing value across multiple points on the product supply chain,” said Hector Bultynck, a managing director at Charter. “We are excited about their growth opportunities and look forward to translating that growth into meaningful returns for our investors.”
Filling the pipeline
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 creating the fund, the founders aim to fill a market demand with loans and equity investments at a level below where mezzanine funds typically invest.
Although Charter will scout for deals across the Great Lakes region, a “big portion” of the fund’s investments will go toward Michigan-based companies, Kerschen said.
Charter Capital Partners seeks to raise $100 million for the fund, which in July closed on $22 million raised from about 20 investors, including Mercantile Bank in Grand Rapids. Fundraising will continue into 2020, Kerschen said.
The investment in Keystone Solutions came after Charter Growth Capital Fund looked at more than 100 prospects since July, he said.
The mezzanine fund has two more “reasonably well developed” deals that could close in the fourth quarter. Kerschen expects to fund 15 to 20 companies over the next five years, depending on the amount of capital raised.
“We just have tremendous deal flow. We’re seeing multiple opportunities every week for this kind of capital. It proves out our belief that this is an underserved segment here in Michigan for this kind of capital — and in the Midwest,” Kerschen said. “We have plenty of deals and we have the benefit of being able to choose which ones fit best, which ones we connect with the entrepreneur and business owner, (and get) the best terms for our investors.”