Published in Finance

New PE firm to target small manufacturers in rural Michigan markets

BY Sunday, January 06, 2019 11:29am

small private equity firm started in Southern Michigan plans to invest in a niche area most investors ignore. 

In targeting small manufacturers in small towns and other rural markets across the state, Parma-based Fresh Water Ventures Fund LP seeks to acquire small businesses and maintain operations in their hometowns.

Mature small manufacturers with revenues of $1 million to $5 million represent a market below where private equity firms invest, said Jeff Matzen, a director at Fresh Water Ventures. The fund, headquartered between Battle Creek and Jackson, has no intention to compete for deals in a market with established private equity firms such as Blackford Capital, Auxo Investments Partners or Concurrence Capital Holdings, all based in Grand Rapids.

“We’re designing it specifically where there is little competition,” Matzen said. “I think there’s going to be a ton of opportunity, and you mix that with the idea that says, ‘We’ll write the smaller equity checks.’”

Fresh Water Ventures Fund seeks to raise $20 million from investors, according to a December regulatory filing with the U.S. Securities and Exchange Commission. The filing listed the minimum investment at $250,000.

The fund plans to pursue one acquisition per year from owners who want to exit a business and retire. They’re targeting owners who would “like to keep it local” after the sale and are “looking for some partner who will help him do that,” Matzen said.

“We can be that equity partner,” he said. “We want mature, cash-flowing businesses that don’t need someone to come in and make it better or grow it to be profitable. We’re looking for an owner who says, ‘I’m 50, 60, 70 and I’ve had a good run. It’s time to move on.’”

Fresh Water Ventures would make improvements where needed at acquired companies, such as implementing better accounting or an ERP system, although “the idea is not to centralize everything to save expenses,” Matzen said. The fund would retain the local workforce, as well as keep intact the back-office administration, local vendor and supplier relationships, and community involvement of the acquired company.

Eric Seifert, a principal at Muskegon-based Left Coast Capital Resources LLC, likes the fund’s approach. Seifert works with small business owners on short- and long-term exit planning and securing capital or credit, plus represents buyers and sellers in the M&A market.

Seifert has been promoting a “sell local” approach to small business owners who are looking to exit. He urges them first to consider a local buyer, or someone who would retain local operations, particularly as private equity moves down market. He believes Fresh Water Ventures could find plenty of opportunity across the state.

“There are a huge number of smaller firms in the $2 million to $10 million revenue range that would be within Fresh Water’s target range, and they are driving the backroads to find these firms,” Seifert said. “I think it’s a good strategy.”

Seeking alternatives

Matzen and his partners formed Fresh Water Ventures Fund and seek backing from investors as private equity today gets more attention from investors seeking to diversify their holdings through alternative investments.

Investors considering private equity also are lured by the chance to generate a greater return than what they could get in the stock market. A September report from the trade group American Investment Council showed private equity returns beating public markets for both short- and long-term returns.

“I would say the sentiment we hear about is a belief that the stock market just isn’t going to produce the long-term returns that it used to. (Investors are) looking for alternatives that have a higher yield possibility than they think they’re going to get in the public markets,” Jeff Helminksi, a managing partner at Auxo Investment Partners in Grand Rapids, said during an M&A roundtable hosted by MiBiz.

Randy Rua, managing partner at M&A firm NuVescor Group LLC in Grand Rapids and president of Rua Associates LLC in Zeeland, said he’s been getting inquiries from past clients who sold their businesses and are now seeking advice on where to invest the money.

“We’re hearing that a lot more as a question, and people that sold businesses several years ago have contacted us and said, ‘You know, I’m still trying to figure it out. We got a lot of funds that were generated from my sale, and we’re thinking about investing in privately held businesses,’” Rua said. “‘Where can I get involved in private equity? I’d like to be able to invest in small businesses.’” 

Applying lessons

Matzen’s vision for Fresh Water Ventures originated during the five years he spent with GROW Michigan, a mezzanine fund that provides subordinate debt to growing companies. GROW Michigan targets borrowers that fall below the size of credit that other mezzanine funds are willing to write.

Matzen and his partners saw an opportunity to replicate that thinking in private equity.

“We were successful at GROW Michigan because we played in a space that most people don’t compete in. Most mezz funds won’t do loans less than $5 million. We did, so we had plenty of opportunity and not a lot of competition,” Matzen said. “The thought was, ‘What if I took the lessons I learned from the mezz world and brought them down to the private equity world, and what if I’m willing to raise a $20 million fund and be willing to write a $500,000 to $3 million check.’ That was one of the lessons — let’s play in the smaller market where most people don’t play and we might be successful.” 

Read 5658 times Last modified on Monday, 07 January 2019 09:39
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