Editor’s Note: The story below may leave the impression that the Michigan Prosperity Fund is a single blind pool. The author wrote a subsequent column clarifying that its sponsor invests on a deal by deal basis.
Michigan may be the home of the auto industry and a hub of beer brewing and manufacturing, but the midwestern state hasn’t produced an abundance of home-grown private equity firms — Huron Capital Partners of Detroit being a notable exception. Now that’s starting to change.
“More and more people are discovering what a great state Michigan is for investing,” said Martin Stein, founder and managing director of Grand Rapids-based Blackford Capital, whose specialty for the past five years has been acquiring family-owned businesses in the state.
Indeed, at least two other firms have set up shop in Grand Rapids within the past year: Consensus Capital Holdings, which early this month launched to buy companies on a deal-by-deal basis with backing from a network of about 10 wealthy families; and Auxo Investment Partners, founded by three partners, two of whom left Blackford Capital last fall, seeking to raise a debut fund of $50 million largely from wealthy families.
When Stein, a Michigan native, moved back to the state several years ago, some 85 percent to 90 percent of private equity deals were sponsored by firms outside the state. “I said, ‘wouldn’t it be cool to have a [local] fund dedicated to investing in Michigan businesses?’” said Stein, who had been sponsoring one-off deals, including through a search fund, dating back to 2000.
Blackford Capital raised just such a fund. About 70 family offices and wealthy investors backed the $50 million, vintage 2012 Michigan Prosperity Fund. With nine portfolio companies, all but one based in the state, that pool is about 80 percent invested.
Stein, who sees room for one or two more platforms, has been discussing with potential investors a successor fund with an expected target of $100 million to $150 million and a broader geographic mandate.
Great Lakes Prosperity Fund would be earmarked to acquire family-owned companies in states bordering or close to the Great Lakes — most likely including Iowa, Indiana, Illinois, Michigan, Minnesota, Pennsylvania, Ohio and Wisconsin. Expect it to be launched next year after the first fund returns significant distributions, said Stein.
All three firms, Blackford Capital, Consensus Capital and Auxo Investment Partners, seek to acquire family-owned companies with backing from wealthy families. But they aren’t cookie-cutter firms by any means.
Blackford Capital buys companies generating $20 million to $100 million of revenue in manufacturing, distribution and business services. The ideal seller is a family struggling to transition from one generation to the next and whose company needs an infusion of cash and operational help. Most of the sellers tend to care as much about their legacy — taking care of employees, suppliers, their communities — as they do about the sale price, Stein said. Most maintain “meaningful” ownership stakes of some 20 percent to 50 percent after the sale.
One of Blackford Capital’s hallmarks is its emphasis on outbound phone calls to business owners and intermediaries to drum up deal flow. A half-dozen analysts make on average 100 phone calls a week each, or some 30,000 calls a year, said Stein. That and related deal-sourcing efforts, including the hosting of webinars, produce some 5,000 opportunities that the firm evaluates, which in turn leads to some five to six platform and add-on deals closed each year.
Jason Byrd, managing partner at Consensus Capital, and his co-founder, Michael Brom, set up their firm to acquire platform companies generating revenue of more than $5 million in manufacturing, automotive, medical devices, distribution, business services, and food and beverage. For nearly seven years starting in 2007, Byrd and Brom had worked closely together buying companies for Huizenga Group. That’s a Grand Rapids-based direct investment arm of the family office of J.C. Huizenga, a founder of National Heritage Academies and cousin of H. Wayne Huizenga, who founded Waste Management.
Along with family-owned businesses going through generational transitions, Consensus Capital has its eye on corporate carve-outs, growth equity investments, management buyouts and recapitalizations. Byrd said that in attracting deals in the Eastern and Central time zones, he and Brom plan to capitalize on their reputation for fair dealing and for communicating in an open, direct manner. “We’re able to build a good rapport with those that are able to refer opportunities to us, and with business owners,” said Byrd. “Our approach, coming out of the Midwest, resonates well.”
Consensus Capital won’t go into deals touting a predefined exit timeline. That can be a selling point for companies worried about embarking on a series of disruptive ownership changes.
The firm also plans to offer substantial operational support to companies. “A number of business owners do not necessarily enjoy the administrative side of owning the business,” said Byrd, pointing to such tasks as obtaining financing, getting insurance, doing legal work and handling human resources. “Those are the types of things we offer to our portfolio companies, to relieve that burden … so they can focus on continuing to grow the business,” he said. The firm plans to buy its companies through special-purpose entities, then strike management agreements with them for additional services.
For its part, Auxo Investment Partners intends to have some $100 million, including co-investments, at its disposal to buy manufacturing, industrial, distribution and business-services companies generating EBITDA of $1.5 million to $15 million. It will invest anywhere in North America but expects three-quarters of its portfolio companies to be located in the Midwest, Managing Partner Jeff Helminski said. Like Consensus Capital, the firm presents sellers with no predetermined timeline for exiting. And the partners bring what they consider to be midwestern values to the table, such as being trustworthy, focusing on relationships, and giving back to the community.
Auxo expects to hold a closing on its first fund within the next three months — possibly a first and final close depending on demand. Helminski said all initial investors, nearly all families, will have an ownership stake in the firm; they will co-invest in deals; and they will pitch in on deal sourcing and other areas. Auxo also expects to generate deal flow from large companies that would like to ensure that key suppliers transitioning to new ownership end up in good hands.
“Because of our long-term-hold philosophy, we become very interesting to [those companies] as someone that can come in as a trusted partner,” said Helminski.
Action Item: The Family Office Exchange recently released results of a survey of family offices. https://goo.gl/4O5sWH
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