By Mark Sanchez

As published in MiBiz

statewide loan fund that provides growth capital to rapidly growing businesses expects to start doing deals soon after agreements with its initial investors have been finalized.

Seven banks across the state committed a combined $28 million to Grow Michigan LLC’s second mezzanine fund. Grow Michigan has another $13 million to $14 million that it’s discussing with potential investors, including other banks, said Grow Michigan CEO Patrick O’Keefe.

Raising $50 million total for Grow Michigan Fund II “would be a good number,” said O’Keefe, who’s now laying the groundwork for a third, larger fund.

Now that initial committed funding has moved out of escrow after Grow Michigan II signed final agreements with investors, the fund can begin taking applications from companies that need growth capital.

“The second fund is up and running,” O’Keefe said. “We can make capital calls and start doing deals right now.”

Grow Michigan Fund II — the successor to a first 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. 

‘A good fit’

Fund II was formed with $9.6 million that the Michigan Strategic Fund approved last spring. Grow Michigan has since been soliciting banks to invest in the second fund. 

Kalamazoo-based First National Bank, which supported the first fund, is among banks that invested in Fund II.

After investing $375,000 in Grow Michigan Fund I, First National put $500,000 into Fund II. The bank readily invested in Fund II after Fund I “worked out extremely well,” said First National Bank President and CEO Dan Bitzer.

“It’s just been a good fit for a community bank that takes care of larger customers and more sophisticated customers,” Bitzer said. “This is one of the few tools available for mezzanine financing, which is very important to help the capital stack and in making some deals work.”

First National Bank has six offices in Kalamazoo, Portage, Grand Rapids, Holland and Lansing, plus a loan production office in Traverse City that opened in early 2021. The bank at the end of the second quarter had $803.7 million in total assets, $580.1 million in net loans, and total deposits of $661.1 million.

Filling a niche

Grow Michigan is among a limited number of options in the state for growing businesses that need to add capacity to accommodate high growth but need an amount less than what mezzanine lenders typically provide. Most mezzanine lenders usually start at $5 million loans, Bitzer said.

Businesses seeking mezzanine financing generally won’t qualify for a conventional commercial loan because, for example, they lack the needed collateral, cash flow or existing revenue — even though they have signed contracts for future business. Banks can refer those clients to Grow Michigan for financing.

The first Grow Michigan fund made 33 loans totaling $67.1 million. The companies that received funding went on to leverage it 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.

Half of what Grow Michigan raises for the second fund will go toward financing for minority-owned small businesses that need growth capital.

In approving the $9.6 million and authorizing the second fund, the Michigan Strategic Fund board reduced the minimum loan size for Fund II from $1 million to $250,000, an amount “that really fits nicely in a community bank profile,” Bitzer said.

“This is a nice niche,” Bitzer said.

Grow Michigan Fund II’s focus on supporting minority-owned businesses also works into the bank’s federal Community Reinvestment Act goals, he said.

Other banks that have invested in Grow Michigan Fund II include Bank of Ann ArborHuntington Bank, Farmington Hills-based Level One BankmBank in Manistique, and Oxford Bank. Final documents are pending for another regional bank.

New investments coming

O’Keefe hopes Grow Michigan Fund II can close its first deal by the end of September and do two to four financings in 2021. The fund has eight potential deals in the pipeline, two of which “we’re kind of interested in” that would involve an expanding food processor in West Michigan and a consumer products company on the east side of the state, he said.

As the fund looks to start doing financings through Fund II, O’Keefe is preparing to start a larger third Grow Michigan fund.

Some of the large banks that Grow Michigan approached for Fund II indicated that they were interested in making “pretty sizable” investments in a fund that makes larger loans to borrowers, O’Keefe said.

Grow Michigan Fund II has a cap of 10 percent of total available funding that can go into a single deal, O’Keefe said. The third Grow Michigan fund will not have a cap.

In addition to larger banks, Fund III could also appeal to foundations that want to invest. Grow Michigan’s fundraising goal remains at $200 million between the second and third funds.