A new $200 million fund to support growing businesses in Michigan intends to direct half of the capital it raises to financing minority-owned companies.
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.
Administered by Detroit-based First Independence Bank, one of the largest African American-owned banks in the U.S., the statewide Grow Michigan Fund II will lend to profitable companies that typically need $500,000 to $5 million, have established relationships with senior lenders, revenue of $3 million to $50 million, and where the capital will increase employment in Michigan.
By targeting $100 million of the fund’s goal toward minority-owned businesses, organizers of Grow Michigan Fund II seek to fill a demand for growth capital across the state, especially in minority and underserved markets.
“We believe that the opportunity to try to deploy this type of capital certainly exists in this market,” said Kenneth Kelly, chairman and CEO at First Independence Bank and chairman of Grow Michigan Fund II.
“It’s underserved, and capital formation for minorities has been a challenge across the board. What we are attempting to do is look at being a solution to this and figuring out ways we can really create wealth,” Kelly told MiBiz.
Formation of Grow Michigan Fund II follows the prior mezzanine fund that Grow Michigan LLC created eight years ago as the state was beginning to recover from the Great Recession. Fund I has since provided $61.7 million in mezzanine financing to companies that used the funding to leverage capital investments totaling $320.1 million and create nearly 3,200 jobs.
As with the first mezzanine fund, Grow Michigan Fund II will work with banks for client referrals of companies that may not completely qualify for a traditional commercial loan to cover all of the growth capital they need. The fund can partner on deals with banks to cover the difference and leverage the senior debt they provide.
Grow Michigan will also seek to attract prospective borrowers directly, Kelly said.
“We hope it’s not just one way, as Grow I was,” he said. “We can attract some opportunities to us also.”
Grow Michigan Fund II will also have an advisory council consisting of seasoned, retired business professionals that can advise, mentor and provide assistance to leadership of borrowing companies “so they can be successful going forward,” Kelly said.
“That’s one feature we believe is going to be very helpful with Grow II moving forward,” he said.
The fund already has “quite a few ‘soft commitments’ at this point” toward the $200 million goal, and will approach banks and other financial institutions for support, Kelly said. In conversations with prospective backers, Grow Michigan has found a “very, very warm” reception,” said Kelly, who expects Fund II will also receive support from the Michigan Strategic Fund that invested in the first fund.
Organizers could find success with banks that have announced commitments to equity and inclusion as they seek fund backers.
Kelly noted the “heightened desire within the financial sector to look at opportunities around diversity and inclusion.”
Cincinnati, Ohio-based Fifth Third Bancorp Inc., the market leader in West Michigan, this week announced a $2.8 billion Accelerating Racial Equality, Equity and Inclusion initiative. The commitment includes $2.2 billion in lending, $500 million in investments, $60 million in financial accessibility and $40 million in philanthropy.
Kelly hopes Grow Michigan Fund II can close its first deal in early 2021.
“Our intent is to start locking and loading pretty quickly,” he said. “We’re pretty confident we’ll get a reasonable amount of funding. It’s just going to be a matter then of prudently looking for the right types of deals and not rushing it.”