The Small Business Administration announced on Tuesday that it had formed a $130 million venture capital fund to invest in high-growth companies in Michigan. The fund is the first of what Karen Mills, the S.B.A. administrator, said is a $1 billion commitment over five years through what the agency calls Impact Investment funds, part of the Obama administration’s Startup America initiative announced in January.
In Michigan, the S.B.A. has joined forces with the State of Michigan Retirement Systems, which will contribute $35 million through its own investment fund, and Dow Chemical, which will invest $15 million. The S.B.A. will provide up to $80 million in debt financing. In the next three or four years, the fund, called the InvestMichigan! Mezzanine Fund, will invest between $5 million and $15 million in about 20 companies that either do business or have a substantial presence in Michigan or are poised to relocate there.
Speaking on a conference call that included the chief executive of Dow and Rick Snyder, Michigan’s Republican governor, Ms. Mills said the state’s dire economic situation made it a logical starting point for the program. “This is an economy in transition,” she said. “But the good news is the opportunity is also there. Many of the high-growth firms in Michigan simply need more capital to grow, scale up, and hire.”
The Impact Investment Fund initiative is a new variation on the agency’s longstanding, and grossly under-utilized, investment program. As currently constituted, the program allows funds, called small-business investment companies, to borrow money from the S.B.A. and in turn re-loan that money to their portfolio companies. The S.B.A. then pools the money lent to the small-business investment companies and sells the debt as debentures on Wall Street; because the investment is guaranteed by the government, the interest rate is low. According to Kelly Williams, a managing director of Credit Suisse and a manager of the InvestMichigan! fund, the interest rate on these debentures is presently about 4 percent — much lower than a bank loan.
The program, which is self-financed through the interest payments and fees charged to the investment companies, is authorized to loan $3 billion each year; last year, Ms. Mills said, it committed only half that.
But the initiative does have limitations. Though the program is called Startup America, Invest!Michigan will not invest in start-ups. Because small-business investment company investment is typically more debt than equity — in the case of Invest!Michigan, about 70 percent debt, according to S.B.A. spokeswoman Hayley Meadvin — the companies receiving the investment must have enough cash flow to make regular interest payments to their backers. Indeed, according to Ms. Williams, the fund will seek companies that have already proven themselves, generating revenue of at least $20 million a year and profit of $3 million to $5 million.
Until 2004, the S.B.A. also licensed small-business investment companies that took pure equity stakes in portfolio companies, and so could invest in risky early-stage companies. However, the Bush administration, convinced that losses in that program would cost the government billions of dollars, stopped issuing new licenses for those types of investment companies. The program’s authorization eventually expired, and Congress has not renewed it.
The Obama administration has not sought to renew the equity program, either, though the S.B.A. says it is developing a $1 billion fund for early-stage companies, set to be launched in late 2011 or early 2012. In the meantime, the administration has channeled more private-sector dollars into the debenture program. And with the Impact Investment initiative, it has taken a decidedly more hands-on approach. Unlike a typical S.B.I.C., where an investment manager would first organize the fund and then approach the S.B.A. for a license, this fund was in fact organized by the agency itself.
While many newly elected Republican governors have taken pains to distance themselves from Obama administration initiatives that they view as heavy-handed federal intervention, Gov. Snyder had no such qualms on Thursday. “We’re pleased that you look upon Michigan as a great opportunity, because we want to be a pioneer on an opportunity like this,” he said to Ms. Mills on the conference call. “It’s very exciting to be part of this process.”
Ms. Williams said the fund has already started scouting for prospective investments. The first deal, she said, would close within a month or so.