News

MACC—Growing Capital for "Boring" Companies

SIX MONTHS AGO, hopeful entrepreneurs seeking to secure financing from Kent Madsen generally fit the profile
of the quintessential venture capital target portfolio company: brash, innovative businesses brandishing disruptive technologies,seeking to change the competitive landscape in their respective industries—or even spawn entirely new industry categories.

5/25/2004

http://www.wasatchvc.com/press_view.aspx?id=41

Now Madsen would turn such companies away without a second thought. He is looking instead to fund what he
describes as “boring” companies: stable businesses operating in welldefined, established industries, with positive EBITDA (earnings before interest, taxes, depreciation and amortization), and earning between $5 million and $100 million in annual revenues. Why this sudden, dramatic shift? Is Madsen experiencing early-onset midlife crisis at age 37? Has he spurned his extensive venture capital education and training?

A NEW SPECIES OF INVESTMENT FIRM FOR UTAH

The real answer to this mystery lies elsewhere: Madsen has traded in his full-time managing director position at
Wasatch Venture Fund for a new role as CEO of MACC Private Equities, Inc. In so doing, he and his new partners are bringing an entirely new type of investment firm to Utah — on February 25, MACC received shareholder approval to move the company’s headquarters from Cedar Rapids, Iowa to Salt Lake City, effective March 1. MACC was licensed in 1959 and went public in 1985, trading on the NASDAQ Small Cap Market. The firm is the parent company of MorAmerica Capital Corporation, the third oldest small business investment company (SBIC) in the United States and one of only a handful of publicly traded private equities firms in the country, trading on the NASDAQ stock exchange under the ticker “MACC.”

In addition to its new Utah headquarters, the firm will maintain offices in Cedar Rapids, Portland, Oregon and
Kansas City, Missouri, and will partner with the Wasatch Venture Fund http://www.wasatchvc.com/ offices in Arizona and New Mexico. MorAmerica invests in companies from diverse industries, especially manufacturing, services, technology and communications. MACC seeks to provide an underserved niche in the Utah and U.S. marketplace, investing in a variety of smaller but profitable later stage companies. There are currently just over 40 portfolio companies located throughout the U.S. The firm’s average investment is between $1 million and $2 million per deal. The overall strategy is one of stable, lowrisk growth relative to venture capital firms. MACC’s portfolio companies tend to be relatively small but established, profitable companies looking for expansion capital.

Few venture funds can boast (nor would they necessarily choose to) a portfolio that includes an ice cream
company (Oregon-based Deluxe Ice Cream), a purveyor of pickles and pickle jam (Minnesota-based Gedney Pickles) and a bolts manufacturer (Hinckley Boats in Maine). “We serve a niche that often isn’t serviced in the U.S.,” says Madsen. “These are small but successful organizations; our charter is to help them grow larger and more successful. In the past, we’ve seen companies outside of technology but couldn’t do much about it. This really opens up the world for us.”

A NEW CLASS OF SHAREHOLDERS FOR THE PRIVATE EQUITY MARKET

Perhaps one of the most remarkable contributions MACC can make in the marketplace is to bring a new set of
investors into the world of private equity by decreasing the investment hurdle rate. “The fact that we are publicly traded allows individuals who wouldn’t meet the multi-million dollar threshold to get into the private equity game,” says Madsen. People can spend a few hundred dollars and buy or sell shares in a fairly liquid form, in contrast with private venture funds, in which the money is locked up for ten years before the shareholders see anything back, even if it’s successful.

MACC also seeks to fill a void for companies that are not able to or do not wish to secure bank financing or
venture capital. The firm’s approach is to fill a middle ground between the higher-risk, usually pure equity form of investments made by most venture capitalists, and the lower-risk “primary” debt loans that businesses receive from retail banks. “Some of the deals we do, neither the VCs or banks would be interested in doing,” says Madsen. MACC will employ a variety of funding arrangements in building its investment portfolio. “We’ll do some straight equity, and maybe some straight debt, but most often a combination,” says Madsen. The firm also plans to offer collateralized venture leasing deals for companies wishing to make property, plant and equipment investments.

Unlike most banks, MACC is willing to subordinate its debt to other more risk-averse debtors. This means that in
the case of bankruptcy or liquidation, MACC’s debt would have lower legal priority than non-subordinated “senior” debt, and MACC would be repaid only after the more senior debt had been paid in full and then only if enough funds remained to pay MACC’s claims on the company’s assets. According to Madsen, in relation to a typical bank loan, “It’s higher risk, so there’s usually a higher interest rate associated with it.”

The firm’s most common form of investment will combine subordinated debt with warrant “kickers,” which can be converted into options or used to buy equity stakes at a later date. “The terms are part of the negotiation,” Madsen adds. “If we get a better deal on the warrants, we may charge a lower interest, and vice versa.”

One significant aspect of MACC’s investment approach is the ability for management teams to grow while retaining control of their companies’ direction. Unlike many equity investors, MACC does not seek to acquire a controlling interestin its companies, and the warrants will generally be structured to allow management to repurchase them from MACC. “We don’t need to have an IPO or acquisition for our exit,” says Madsen. “This is good for management buyouts, where management often wants to keep their ownership in-house instead of selling the company or going public.”

Another potential benefit for portfolio companies is that a MACC investment can attract co-investors to the deal. Typically, MACC initially invests between $0.5 million and $3 million, and up to $5 million in follow-on rounds, but often companies can leverage the investment they get from MACC to add senior debt, additional co-invested equity and/or subordinated debt from other funding sources, including bank loans, venture capital investments and other financial instruments. “It’s usually packaged as part of a whole,” says Madsen. “Before you know it, you’ve quadrupled the total investment over what you got from us.”

MACC’S JOURNEY TO THE BEEHIVE STATE

It wasn’t a singular “aha” moment that led Madsen and his team to seek control of the firm, but rather a gradual evolution that progressed in small steps. Madsen became aware of MACC through his experience as a managing director of Wasatch Venture Fund and Zions Bank SBIC, LLC. For the past several years Madsen’s partner Todd Stevens, the founder and managing director of Wasatch Venture Fund, served on MACC’s board of directors. Zions Bank was a significant investor in both Wasatch and MACC.

According to Madsen, “As it became apparent over time that MACC’s previous management team was reaching a point in their careers where they were starting to contemplate retirement and succession plans, it seemed like it might be a positive thing for all concerned if we were to purchase a controlling interest and manage the company from here in Utah.”

During the next several years, Madsen worked with Stevens and others to evolve an effective transition plan for thecompany and to bring the deal closer to fulfillment. He recalls feeling a growing sense of excitement as he sat at a restaurant table with an investment banker friend furiously scribbling notes, still in his possession, about how the Utah-based MACC would function and his plans for its growth. “Around that time, it started feeling much more real,” says Madsen, “and there was a growing sense of energy and momentum around the idea.” Zions Bank received the plan to purchase a controlling interest in MACC with enthusiasm. “They liked the fact that it brings another financing instrument to help grow the Utah economy, and that it keeps the third oldest SBIC in the US intact,” says Madsen. Zions was also impressed with the team of experienced partners and board members the deal brought together, and quickly bought off on the plan. Madsen and his team now own 40 percent of MACC.

GROWING THE UTAH PRESENCE

At present only one of MACC’s portfolio companies, Phonex Broadband, is in Utah. Going forward, Madsen anticipates that approximately 20 to 30 percent of the future portfolio may be made up of Utah companies. This is consistent with the fact that about ten of the firm’s current portfolio companies are clustered near the Iowa and Missouri offices, with additional companies scattered throughout the upper Midwest, close to the company’s previous headquarters. The clear message is that investment firms tend to invest close to home. “This could really become a significant Intermountain fund,” says Madsen.

According to Stevens, “The wonderful opportunity for Utah companies and entrepreneurs is the mid-tier, late stage investor, especially for smaller growth-stage companies for whom product risk has been dealt with and it’s been proven that the dogs are eating the dog food. This says to them, ‘Let’s ramp it up and expand it nationally or internationally and grow from $5 million to hundreds of millions in revenue.’ Getting that middle piece taken care of has been a missing piece in Utah. MACC will be a great resource for Utah companies and entrepreneurs.”

In addition to the new jobs and growth capital that will be invested in Utah companies through MACC, the state should also benefit from increased interaction with MACC’s beefed up board of directors, which includes such prominent national players as Hewlett-Packard CTO Shane Robison; Jasja Kotterman, former VP of strategic planning and business development at publishing giant Primedia, and managing director of the company’s international development arm, Primedia International; and Martin Walton, president of TD Options LLC, one of the world’s leading equity options market makers.

“These global business leaders will be rubbing shoulders with local industry and government leaders in Utah,” says Stevens. “That contact and their expertise can only help in building our local companies and economy.” MACC’s new leadership team may also bring an increasing proportion of technology investments to the firm’s portfolio, which could benefit established Utah IT and life sciences companies seeking growth or expansion capital. In contrast with most venture capital firms, which invest almost exclusively in technology ventures, on average only between 10 and 20 percent of MACC investments currently go to technology companies—a number some observers acquainted with Madsen privately predict will increase under his leadership.

AN AMBITIOUS INTERNAL GROWTH PLAN

Just as MACC provides growth capital for portfolio companies, the company’s principals envision an aggressive
growth plan for MACC itself. Muc h of the key to MACC’s growth plans lies in its status as a publicly traded entity. “Because it’s a public company, we don’t have to go out and raise money like most venture funds do,” says Stevens. “We can grow by reinvesting our profits.”

In addition, the company intends to pursue secondary public offerings, including PIPE (private investment in public entity) funds that allow institutions and high-net-worth individuals to directly purchase newly issued shares. Another piece of MACC’s growth strategy will involve increasing trading activity through heightened visibility and awareness in the marketplace. When the new management team took over the reins, for example, the firm had yet to create a Website or create many basic marketing materials. “We believe, the previous leadership did a great job of building up value in their portfolio,” says Madsen, “but didn’t focus as much on getting the word out about MACC itself. As a result the firm has been trading well below book value.”

The new management team is working to increase MACC’s market presence and to enhance investor understanding of the company. “Furthermore, if we keep reinvesting profits, make wise investments and get the word out, we believe we can build shareholder value,” says Madsen.

What is MACC’s ultimate goal? According to Madsen, “The bottom line is, we plan to create a monster fund here in Utah.”

**************

Contact:

Kent Madsen

[email protected]

801 524-8939

**************

Kimball Thomson is senior editor of Digital IQ and Utah Business magazines.

Sorry, we couldn't find any posts. Please try a different search.

Leave a Comment

You must be logged in to post a comment.