The venture capital industry’s success over the last decade in Michigan has created a significant challenge as the demand for funding in the next few years far outpaces the availability of capital, requiring a broader approach by managers creating new funds. The Michigan Venture Capital Association’s annual research report identified an estimated $1.3 billion need from existing portfolio companies for follow-up investments in the next few years. Prospects to help fill that gap include institutional investors that historically have not put a lot of money into state-based VC funds — the pension funds, endowments, foundations and family offices. But that could be changing as they now appear to have a greater willingness to invest their money in Michigan companies, sources said.
Part of the higher interest from institutional investors stems from the maturation of the state’s venture capital industry that has many firms now looking to form larger, successor funds in the next few years, said John Kerschen, co-managing director of Michigan Accelerator Fund I. Michigan-based funds that formed in the last decade continue to progress with their initial investments and reached a level where they will “be generating returns to those investors that are attractive,” Kerschen said. “That will help draw more LPs that can contribute larger dollars into our next generation of funds.”
Institutional investors have been reluctant to put money into the small, first-time funds in Michigan that have formed over the last decade and first want to see a track record of success, he said. “Institutional investors that can invest all over the country or all over the world aren’t going to entrust large sums of money to small, first-time, unproven fund managers — and most of us in the state are still in that early development,” Kerschen said. “The bulk of the Michigan-based venture organizations are still relatively young and we need to prove our capabilities via returns.”
Michigan Accelerator Fund I has so far invested $10 million in eight portfolio companies. The firm in time will begin to look at forming a second fund, Kerschen said.
Jason Byrd, a managing director at Charter Capital Partners and a member of the Association for Corporate Growth's global board of directors, said private equity has also become an increasingly viable option for business owners seeking growth capital or who are willing to part with a majority stake, although more deals are occurring that involve minority investments.
Still, he said, private equity can do a better job of promoting itself. The ACG organization has been making a “big push” to create more awareness of private equity and its role in the economy, Byrd said. “There’s certainly more awareness, but I still believe there is more room for improvement, and maybe a little bit outside of the business community as well,” Byrd said. “We want to get more business owners comfortable that aren’t comfortable with it, and then it’s that next layer of legislators and regulators that need to understand our market as well as they do other industries.”
Michigan is a lower- to middle-market state for private equity, with transactions typically ranging from $10 million on the low end to $250 million at the top, Byrd said. More funds are getting started in the state, more funds outside of Michigan are looking to invest here, and family offices are increasingly looking to make direct investments, Byrd said.
Private equity funds could find a potential match in companies whose owners are ready to exit, including those who want to stay on and continue running the business. Many private equity firms like to retain management and prior ownership to maintain continuity, Byrd said.
The retirement of business owners from the baby boomer generation who lack a next generation to sell to or to turn over the company to should drive a good number of private-equity deals in the years ahead, he said. “You’re just going to see this consistent process of private capital coming into what has historically been family-owned business,” he said. more