Emerging from Bankruptcy Protection, Detroit Now Offers Attractive Opportunities for New Businesses and Investors, Say Kevyn Orr and Ken Buckfire at the Michigan PE Conference

As Detroit emerges from municipal bankruptcy protection, the Motor City is dusting off the cobwebs of corruption, polishing its tattered financial image and courting new businesses and investors who can help jump-start its transformation into a thriving 21st century metropolis.

Speaking at this year’s Michigan Private Equity Conference on Oct. 17, former Detroit Emergency Manager Kevyn Orr and one of his key advisors, investment banker Kenneth Buckfire, president of Miller Buckfire, presented a scorecard detailing Detroit’s progress through its painful three-year restructuring process and their predictions for its post-bankruptcy trajectory. Their pitch to private equity investors gathered in the Michigan Union’s Rogel Ballroom was upbeat and optimistic.

“I believe there are tremendous financial opportunities to invest in Detroit,” Buckfire said. “The city’s challenge will be to convince you that Detroit is worth considering for investment.”

“The opportunities appear greater than I’ve seen in Miami, New York and Washington D.C.,” contended Orr, noting that those cities also experienced troubled times before undergoing a successful economic recovery. “Detroit has the same type of texture, but it’s got to wake up.” Orr, a 1983 Michigan Law School graduate, was appointed to his Emergency Manager post by Michigan Gov. Rick Snyder in March 2013 to restructure the city and shore up its finances. Four months later, in July, Detroit filed for Chapter 9 bankruptcy protection, becoming the largest city in U.S. history to do so.

With its financial and creditor-related roadblocks now in the rear-view mirror, Detroit is refocusing attention on the attributes that make it an attractive location for investment dollars, Orr and Buckfire said. These include:

  • A strategic location along the Detroit River, a major shipping channel
  • Proximity to Canada, one of America’s largest trading partners
  • Access to fresh water needed for many manufacturing processes
  • Low acquisition costs for real estate and companies
  • 44,000 land parcels available for redevelopment
  • Nearly 700,000 underserved residents who need new housing, retail outlets, financial institutions and other services

Making Detroit a safe place to live, work and invest has become a priority for state and local officials, according to Orr. Among the steps being put in place to achieve that goal are:

  • Spending $150 million annually for the next 10 years on reinvestment in city services, especially public safety providers, such as police, fire and EMS
  • Working with DTE Energy to restore street lighting throughout the city by next March
  • Establishing a seven-person Oversight Commission, which would include the governor and Detroit’s mayor along with other state leaders and appointees, to oversee the city’s finances, budgets, debt issuance and revenue estimates for at least 20 years
  • Promoting greater regional cooperation, including a proposal to create a Great Lakes Water Authority that would enable Detroit to lease its water system’s infrastructure to suburban communities and use fees and payments to finance an estimated $500 million to $800 million in bonds to repair the antiquated system

Encouraging signs of the city’s nascent turnaround, Orr noted, include the inflow of young people to the downtown area and the launch of several mega-projects scheduled for completion over the next three to five years. These projects include:

  • The M-1 Rail project, a 3.3-mile circulating streetcar line along Woodward Avenue between Congress Street in downtown and West Grand Boulevard in the New Center area; it represents an unprecedented public-private partnership and a model for urban transit
  • The new $650 million Red Wings hockey arena and sports-entertainment district on the northern edge of downtown orchestrated by the Ilitch family; the arena is envisioned as a springboard for five new neighborhoods that will transform the urban landscape
  • The New International Trade Crossing bridge project, which would link Detroit and Windsor, facilitating the movement of goods between the U.S. and Canada; backers hope to see the new bridge open to traffic by 2020

In their parting shots, Orr and Buckfire emphasized that support from the business and investment community is critical for Detroit’s long-term recovery.

“If the city is able to maintain its credit rating and keep going, it will rise from the ashes and experience a renaissance,” Orr said. “But we need everyone’s help.”

“You cannot have a great state without a great city,” Buckfire concluded. “Detroit has a long and painful history, but we’ve closed the chapter on it.”

Where Are They Now: Heath Silverman, MBA ’08, Head of International Business, Edmodo

According to Stewart Thornhill, executive director of the Institute, there are two types of entrepreneurs—those who have the desire to run their own company and be their own boss, and those who want to use their entrepreneurial skills to benefit a larger corporation. Heath Silverman, Ross MBA ’08, falls into the latter category.

Prior to Ross, Heath already had the entrepreneurial bug. Since graduating from University of California at Berkeley, with an undergraduate degree in cognitive science, Heath had started two companies. However, he still felt that he needed a deeper business skill set that could come from enrolling in an MBA program. He was looking for total business immersion in conjunction with a strong, well-rounded general management education.

Heath chose to pursue his MBA at Ross and dove into the graduate program headfirst. He immersed himself in programs offered through the Zell Lurie Institute, including Dare to Dream, the Zell Commercialization Fund (formerly the Frankel Commercialization Fund), the Michigan Business Challenge, and entrepreneurial MAP. He also served as co-president of the student-led Entrepreneur and Venture club. Through these experiences, Heath gained real-world insight and grew his professional network.

Following graduation in 2008, Heath landed roles at larger organizations, where he served as a product manager at Amazon.com and in various positions at Intel Corporation, including product m and venture investing. In the investment role he was surrounded by high-caliber colleagues and was granted the flexibility to take calculated risks that were backed by large company resources. Heath’s career goals centered on entrepreneurial pursuits within his job roles including the deep involvement in the early stages of Amazon Web Services’ international expansion and the development of education services at Intel, an important new layer of the company’s education solutions offered around the world. Heath touts his ability to run international business at Edmodo to his experience of being on all different sides of the equation.

Edmodo is a K-12 social learning platform enabling teachers and students to connect and collaborate. It was founded six years ago by two Chicago-area high school administrators and has grown into a powerful, global network used by more than 40 million educators and students across 190+ countries. Heath is passionate about the company’s mission and is happy to apply his combined startup know-how and “big company experience” to the rapidly growing company. “I’ve tried it all,” he says, “and that’s what has helped me understand what I’m really passionate about.”

When asked what advice he would offer current Ross MBA students, Heath says, “You don’t have to have everything perfectly planned out in advance; people with ‘perfect plans’ often end up a couple years down the road feeling unfulfilled wondering how they got to where they are. You should always be inquisitive, exploring and opportunistic. Every six months, I ask myself if I am still learning, feeling challenged, and excited about what I am doing, and if not, I make a change.”

Michigan PE Conference Keynote Bon French Says the Mainstreaming of Alternatives is Reshaping the Asset Management Industry

The world of asset management, particularly private equity, has changed enormously in the past 30 years, said keynote speaker T. Bondurant French, CEO of Adams Street Partners, during a Fireside Chat discussion with CVP Director David Brophy at the 2014 Michigan Private Equity Conference on Oct. 17. “When I started with Adams Street in 1980, I thought I was late to the venture business, which already had a 25-year history,” he remarked. “The changes since then have been nothing short of mind bending.” Adams Street Partners is a global private equity investment management firm.

Over the last three decades, the private equity industry has spread from the U.S. to every continent except Antarctica. Adams Street alone has investors in 33 countries. Today the industry is raising $400 billion a year (venture capital and buyouts combined) versus $7 billion in the mid-1980s. Managers, who once numbered in the hundreds, now number in the 10s of thousands globally. PE funds have gone from single digits to more than 250 globally during that 30-year time frame. “In 1980, venture capital was a prohibited investment for public pension funds in 40 of 50 states,” French remarked. “This restriction required numerous educational seminars and retreats to convince public pension investment staffs and state legislatures to rethink their rules.”

For other alternatives, such as hedge funds and real estate, the growth has been even greater. French reported that global assets under management in alternatives (private equity, hedge funds, real estate, commodities and infrastructure) hit the $7.2 trillion mark at the end of 2013. “With their premium fees, alternatives now constitute almost 30% of the total asset management industry revenues while comprising only 12% of industry assets,” he stated. “Alternative allocations, including private equity, now have become a mainstream part of institutional investors’ asset allocations.” Many investors have indicated they plan to maintain or increase their allocations to alternatives in the next three years.”

The drivers behind the accelerated adoption of alternatives are structural, rather than cyclical, forces, according to French. These drivers include:

  • Concern with traditional asset classes in an era of increased volatility and macroeconomic uncertainty
  • Changes in thinking about portfolio construction
  • A desire for specific portfolio outcomes, such as inflation protection or volatility dampening
  • A search for higher yield on behalf of institutional investors, particularly defined-benefit pension funds seeking to close their asset-liability gap

The mainstreaming of alternatives is driving a trillion dollar convergence of traditional and alternative asset management. “Mega-funds are now in an ‘arms race’ to expand across all alternatives through acquisitions and organic internal start-ups,” French said. “Within the private equity category, many firms have gone beyond buyouts to include secondary capability and primary fund-of-funds capabilities. Several firms have taken their management companies public.” This expansion of product lines by hedge funds, PE firms and traditional asset managers, who previously had well-defined niches in the investment management landscape, has contributed to a blurring of roles and heated competition for an overlapping set of client and product opportunities in the growing alternatives market.

Other forces also are impacting the asset management industry, especially private equity. Under the Dodd-Frank Act, increased regulatory scrutiny by the U.S. Securities and Exchange Commission has compelled private equity firms to devote more time and staff to documentation activities and preparation for SEC exams. “We now have a seven-person legal team, which has increased our costs,” French said. “The biggest regulatory burden is in the Europe Union where we have to register under the AIFMD (Alternative Investment Fund Managers Directive) in every single country. Institutional investors there are seeing dramatically reduced opportunities from U.S. private equity fund managers.”

Turning to the Midwest, French observed that the venture capital industry has seen an increased concentration of assets and shrinkage in the number of managers. He estimated the top 20 VCs control nearly 70% of the assets, following a “huge shakeup” in the industry. Angel investors, French noted, are becoming more sophisticated and taking on a broader role, and the proliferation of business incubators is driving the growth and development of start-ups in Chicago, Detroit, Ann Arbor and other locales. “The bio space is more of a level playing field here in the Midwest, where there are so many small bio companies,” he added.

Overall, French characterized private equity as a win-win-win scenario for companies, investors and nations. “It’s a win for entrepreneurs and management teams because they receive new equity capital,” he said. “It’s a win for investors because it has been a successful investment class. And it’s a win for countries because it creates jobs, wealth and goods and services.”

Wolverine Venture Fund highlighted in BusinessBecause

In need of some midweek reading? Catch up on a BusinessBecause article all about MBA entrepreneurs and the funds investing in them, including the Wolverine Venture Fund at Ross.

From the article:

“Set-up in 1997, Wolverine, which operates out of the Michigan Ross School of Business, has a fund totalling $7 million. It is run by a team of about 25 MBA and dual-degree MBA students, and has a portfolio of 14 companies, says Nickhil.

Wolverine typically co-invests with other VC firms in start-ups that are already revenue generating and are looking for a first round of capital. Investments range from $100,000 to $700,000 and the fund typically takes a sub-5% stake in companies, says Nickhil.

It has invested in MBA-run companies before but most investments pump cash into spin-outs from the wider university. The fund’s successful exits include Intralase, an optical laser company which raised $85.8 million when it listed on the NASDAQ stock exchange in 2004. Advanced Medial Optics later acquired it for $808 million, in 2007.”

To read more about the Wolverine Venture Fund and other similar funds at business schools, check out the full Business Because article here.

Stewart Thornhill to join Financial Times panel on entrepreneurship

Executive Director Stewart Thornhill will join a panel of experts for the Financial Times MBA Jobs Clinic Q&A on starting your own business this Thursday, October 16, from 9 to 10 a.m. EST. The panel will be a great opportunity for business students to get advice on entrepreneurship, start-ups, and launching a new venture.

Other panelists include Jonathan Moules, Financial Times business education correspondent; Howard Kingston, co-founder and chief marketing officer of London technology start-up Future Ad Labs; Mike Grandinetti, global discipline lead and professor of entrepreneurship and innovation at Hult International Business School; and James Hickie, lecturer in entrepreneurship at the Manchester Business School.

Interested readers can send questions by email to ask@ft.com or tweet @ftbized with the hashtag #MyMBACareer to get their questions answered on the Financial Times MBA Blog.

2014 Michigan Private Equity Conference Will Spotlight Industry Challenges and Opportunities, Says CVP Founder David Brophy

Constantly shifting winds ─ emanating from changing federal regulations, financial market conditions, limited partners’ expectations and geopolitical situations ─ are buffeting today’s private equity industry and compelling PE fund managers to be more creative and agile in their deal sourcing and deal making, says Finance Professor David J. Brophy, director of the Center for Venture Capital and Private Equity Finance at the University of Michigan Ross School of Business.

The challenges and opportunities facing PE investment firms will be discussed and dissected by seasoned industry pros at this year’s Michigan Private Equity Conference on Oct. 16 and 17. The event, now in its ninth year, includes a noon golf outing at Radrick Farms, an afternoon tour of the Big House and an evening dinner reception at Campus Inn on Thursday. The conference opens Friday at 7:30 a.m. in the Michigan Union ballroom.

“This is going to be one heck of a conference,” Brophy predicts. T. Bondurant French, the CEO of Adams Street Partners, will address a broad range of top-of-mind PE industry issues during his keynote “Fireside Chat” with Brophy on Friday morning. Later in the day, Kevyn Orr, Detroit’s former emergency manager, and Ken Buckfire, president of Miller Buckfire, will tackle weighty questions about the status of the Detroit bankruptcy and what they anticipate in the post-bankruptcy era. “Kevyn and Ken also will talk about the opportunities and necessity for private equity investment in Michigan in general, and Detroit in particular,” Brophy explains. “Our conference panelists are very authoritative on current fundraising issues, as well. We find that people appreciate the size and scope of this conference, and we draw interested parties from around the Midwest as well as both coasts.”

Brophy characterizes the state of private equity as very good, but notes that PE fund managers are dealing with knotty challenges in several different areas. These include:

Rising public stock market

“The cost of buying both private and public companies has gone up with the rising stock market to the point where that approach is a bit in decline,” Brophy observes. “Financial buyers are realizing that high prices and high valuations of companies may not yield great returns. In the public markets, the P/E ratio average has risen to roughly 18 from about 12 over the last two years, which is a significant increase.” He says this may indicate the peak of a market cycle. “On the flip side, when potential sellers of larger companies mark to public market ratios, they may choose to go public. The IPO market has been up and strong recently.” Brophy says these circumstances have compelled private equity investors to look more closely at the middle and lower end of the market and to adopt a “buy and build” strategy, i.e., buying a company, investing growth equity, putting management in place and increasing the value of the company to the point where it can be sold or taken public.

Contraction of the distressed debt market

“In the 2008 period, companies that had stretched their debt and then suddenly hit the recession were bankruptcy candidates,” Brophy says. “This was a huge market for private debt and equity, which acquired, reorganized and refinanced these companies to build them up. At this point, we’re not sure whether we’re in the middle or at the top of a boom. However, this market is still the second largest destination for institutional funds, after buyouts.”

Increased power of limited partners

General partners are finding it tougher to raise money from limited partners who are increasingly more cautious, inquisitive and judgmental. “LPs currently have the advantage in the marketplace and are looking more carefully at the funds they invest in,” Brophy says. “They are taking a harder stance on prior performance and how fast capital has been returned to investors.” In addition, some pension and sovereign wealth funds are skirting private equity funds altogether and making their own direct investments, co-investments and secondary investments. “To me, this represents a shift of power or influence between general and limited partners, which swings back and forth according to the cycle we are in,” Brophy observes. “Today, the power is swinging toward the LPs.”

Regulatory restrictions

Increased regulatory pressure has reached the private equity business, particularly with respect to the availability of leverage.  The attention of Congress, the SEC and the bank regulators on private equity has increased the “regulatory nervousness” and cost of doing business for PE firms, Brophy says. “Many people believe that when we removed the Glass-Steagall Act and permitted investment and commercial banking to be done under one roof, we opened the door for a lot of bad things to happen,” he explains. “The whole set of current regulations puts a damper on the prospect of private equity as a growth engine. That’s the bottom line. It’s more difficult and expensive to do deals and get acceptable returns now.”

Global market uncertainty

“I think the biggest challenge is the global market,” Brophy says. “With global uncertainty, investors who developed an appetite for investing in other countries must now do so with great caution. The more these countries adopt policies, legal systems and financial systems that are stable and positive, the better off the global market will be and the better conditions will be for global private equity.”

Where are they now: Alumnus turns passion into good food startup

Jeff Robbins

Jeff Robbins

Ross alumnus Jeff Robbins’ (BBA ‘08) passion for environmental sustainability started during his employment as a beach lifeguard where he became deeply connected with the ocean. That passion led Jeff to explore entrepreneurship and sustainable business development while attending business school at the University of Michigan and to becoming co-founder of Revolution Landscape in 2008.

Since then, San Diego’s physical infrastructure has been evolving to cope with the effects of a major drought and coastal pollution as well as to provide urban agriculture spaces to connect people with good local food. At its core, Revolution Landscape works to transform conventional landscaping into eco-friendly spaces where people can enjoy a healthy and natural environment as well as grow their own food including fruits, vegetables, and chickens!  The company provides sustainable landscape design, installation, and maintenance services for both residential and commercial clients.

Jeff had the mindset of an entrepreneur from the get-go, creating a solution to a problem he saw for the environment and community. His business education gave him the opportunity and resources to write a business plan which has been essential in maintaining their mission and vision, as well as profitability.  He says the most rewarding thing is starting a for-profit social-impact business that the community rallies around, helps to grow, and wants to see succeed in making a long term positive impact.

Partnering with Ari Tenenbaum, a biology graduate from University of California – Santa Cruz who had started a farming program; their company Revolution Landscape has been featured on several occasions in the San Diego Union Tribune, Fox News, as well as many environmental publications.

Revolution Landscape now has a dozen employees and two locations in San Diego, CA. Find out more about the company here.

Photo courtesy Revolution Landscape.

Photo courtesy Revolution Landscape.

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