GRAND RAPIDS — Three years after forming a fund to invest in companies needing growth capital, Charter Capital Partners LLC has begun preparing to start a larger, successor fund.
The Grand Rapids-based investment bank’s first mezzanine fund, known as Charter Growth Capital Fund, has so far deployed $31 million of the $41 million it raised from 43 investors.
With investments in nine companies over three years and a robust pipeline of prospects, the deal flow indicates continued demand for a second fund that targets investments in a segment of the market that’s below where many larger mezzanine lenders participate.
“We feel our initial thesis when we contemplated fund one has confirmed or validated that there is need for this — we’ll call it junior capital — at the lower end of the middle market,” said John Kerschen, president and managing partner at Charter Capital Partners. “That means we’re going to start thinking about fund two. We believe there continues to be market demand for this kind of capital.”
Founded in 2019, Charter Growth Capital Fund invests $1 million to $5 million through loans or non-controlling equity investments, or a combination of the two, in fast-growing, profitable companies in the lower end of the middle market. The fund targets growing companies with annual revenues of $10 million to $50 million in the Great Lakes region: Michigan, Ohio, Indiana, Illinois, Wisconsin and Minnesota.
The mezzanine capital helps fill the gap between the amount of capital a business needs and what it can secure from a senior lender through a conventional commercial loan.
Of the nine companies that Charter Growth Capital has backed, five are based in Michigan. Kerschen expects the fund will make a total of 12 investments and begin seeking investors for the successor fund after another one or two deals, probably in the fourth quarter.
Five of the nine investments were syndicated deals completed with another capital investor, Kerschen said. The other four involved capital from the business owner.
When making an equity investment, Charter Growth Capital obtains a minority stake in the company.
“We want to be a meaningful part of that capital structure, but not necessarily control,” Kerschen said. “The entrepreneur maintains control, or our syndicate partners are the control investor and we’re supplemental.”
The company does not have a specific dollar target to raise for the second mezzanine fund, although Kerschen expects it “to be a significantly larger fund than fund one.”
In preparing for a second fund, Charter Capital Partners intends to approach institutional investors, family offices, banks and high net worth individuals to invest, Kerschen said.
The next fund will “probably allow us to write little bigger checks” of up to $7 million to $8 million per investment, “so we can stay solidly in this lower tier,” he said.
“There are some good companies out there that just need a little additional capital to buy out a partner or do an acquisition or to pursue a growth opportunity, and they don’t have the collateral base or cash flow that a conventional lender would require,” Kerschen said.
Recent deals for Charter Growth Capital Fund include a February investment in Grand Rapids-based Lambert Global LLC, the holding company for public relations and investor relations firm Lambert & Co. and its affiliated companies.
Founder and Chairman Jeff Lambert said at the time that the Charter Growth Capital investment would go to support growth, set up new practice areas and recruit talent and accelerate M&A. Lambert Global, which recorded a compound annual growth rate of more than 20 percent over five years, then made a subsequent minority investment in March in Detroit-based Van Dyke Horn Public Relations LLC.
Charter Growth Capital’s first deal came in October 2019 with an investment in Kalamazoo-based Keystone Solutions Group, a provider of product design for the medical device, aerospace and automotive industries, plus contract manufacturing for medical devices.
At the time, Keystone Solutions Group owner and President Jim Medsker was seeking a capital partner to have “some financial horsepower behind you,” expand and maintain growth, and mitigate his risk in the business. The offers he received were from prospective investors who wanted a majority share in the business, which he did not want to give up.
In a recent interview, Medsker said he began talking to Kerschen, who he had known for years, and eventually “one thing led to another and we did this deal” with Charter Growth Capital Fund for a minority position in the company.
The investment has provided growth capital “to position this company for good, sustainable, long-term growth,” Medsker told MiBiz. Keystone Solutions Group added production capacity, including new clean rooms and high-speed packaging equipment, and implemented an enterprise resource planning system. The investment also allowed Keystone to scale up its head count.
“I was a little more aggressive in making key hires for strategic positions as we grow,” Medsker said.
Additionally, Charter has served as a key adviser, “sounding board” and valuable referral source for Keystone, especially as the company navigated through the pandemic, he said.
“It’s enabled us to build some infrastructure we didn’t previously have,” Medsker said. “It’s created a much better situation.”