Credit Suisse Customized Fund Investment Group: The Michigan PE and VC Industry Connection and Future Plans

Credit Suisse Principal Sean O’Donnell spoke with us this month about the Customized Fund Investment Group’s (CFIG) role in Michigan’s venture capital industry, how Michigan’s venture capital industry has grown and the CFIG’s plans for the future.

How does the CFIG play a significant role in the Michigan VC industry?

The CFIG has been involved with private equity and venture capital investing in Michigan for nearly 15 years. Kelly Williams formed CFIG in 1999 and the State of Michigan Retirement Systems was our first client.

The Michigan relationship and connection has grown from multiple angles since that time. We were able to get involved early as an original member of the Michigan Venture Capital Association over a decade ago. Around this same time the groundwork for Venture Michigan Fund was laid through the passage of the Michigan Early Stage Venture Investment Act. As Venture Michigan Fund came to fruition in 2006, the Michigan Strategic Fund bolstered its commitment to private equity and venture capital and the Michigan 21st Century Investment Fund was launched.

CFIG has been privileged to manage both these funds and we were able to continue to invest capital into Michigan venture capital through Venture Michigan Fund II, for which we raised the financing in 2010 and are now actively investing. We have also had a great deal of success with funds that invest directly in Michigan companies, and now manage three funds under the Invest Michigan! program which are focused on providing growth equity and mezzanine financing. In total, CFIG manages six funds and more than $600 million of capital dedicated to Michigan.

How has the VC industry grown in Michigan since the implementation of the 21st Century and Venture Michigan funds?

When compared to the early 2000s, the current venture capital environment in Michigan is almost unrecognizable. A decade ago you could count the number of venture firms in Michigan on one hand. Many of those original venture funds are active today. There also is a new wave of participants who are launching funds locally, as well as larger funds that are showing an interest in Michigan, putting resources in the state and ramping up their local investment activity.

By the latest numbers, there are now 20 venture capital funds headquartered in Michigan and 27 firms with a presence in Michigan, managing approximately $3 billion. As impressive as these numbers are, I think it is a little understated. We are working with the Michigan Economic Development Corporation to help review venture manager candidates for an innovative program they put together called the Venture Development Fund.

I believe we are going to see a dozen or more applicants to that program in total, all of which are headquartered in Michigan, and most of which are first-time funds not included in the previous count. I also know of three or four out-of-state venture funds that are looking to put a professional on the ground in the next twelve months. Those funds manage $400 to $500 million combined, which is a tremendous amount of new capital with a dedicated interest to investing in Michigan.

Beyond counting venture managers and the amount of capital they manage, the real impact that we have observed is the development of an ecosystem. Resources have been put in place that help fund companies at every stage of development; there is a critical mass of capital at work in Michigan; and there is a growing talent pool to help generate ideas for, operate, grow, and invest in local companies.

How will the CFIG contribute to increased investment and success?

Michigan’s success and growth has happened as collaboration between numerous companies, individuals and leaders around the state. The programs we manage are generally geared toward venture and growth capital, which is a spectrum that starts with early stage venture capital fund managers who are raising their first institutional capital and extends out to investing directly in a growth financing for a company with tens of millions of dollars of revenue.

From a capital perspective, Michigan has been incredibly proactive at developing capital solutions and we have identified nearly $1 billion of capital targeted at investing directly in Michigan through a variety of strategies. Each of the CFIG-managed programs is returns-driven, meaning our primary objective is to maximize the return to our investors under a given strategy. There are multiple strategies within these funds, but they all share the common goal of growing and strengthening the Michigan venture capital and private equity ecosystem.

There is an extraordinary amount of effort that goes into defining, implementing and measuring the success relative to this underlying goal. To work toward these program goals, our commitment goes well beyond managing capital. For example:
• We have had an office in Michigan for the past seven years, staffed by two senior investment professionals.
• CFIG has held major private equity conferences in Michigan and is a significant sponsor of important events and groups such as the Michigan Growth Capital Symposium and the Michigan Venture Capital Association.
• Investment activity in CFIG-managed programs has led to investments in over 50 companies, impacting more than 5,000 Michigan employees
• We have met with hundreds of entrepreneurs to help them find the right sources of capital for their businesses.

Can you share a bit more about CFIG’s investment strategies and any other future plans?

CFIG will continue to work to develop innovative programs in Michigan. In the past two years we have launched two Michigan-focused successor funds in Venture Michigan Fund II and the Invest Michigan Growth Capital Fund II. We secured the financing for Venture Michigan Fund at a very difficult time in the marketplace and deployed the capital for the first growth capital fund in three years with significant returns in order to raise the Invest Michigan Growth Capital Fund II.

We have been working with the US Small Business Administration on a number of initiatives nationwide, with Michigan leading the way as the first impact investment fund with the formation of the CFIG and Beringea-managed Invest Michigan Mezzanine Fund. We also continue to explore a number of new programs for Michigan ranging from an urban-focused investment fund to the next source of capital to support venture capital fund managers.

CFIG continues to grow by, as the name indicates, developing customized investment solutions. This strategy has led to incredible growth from the first relationship with the State of Michigan Retirement Systems in 2000 to the diverse range of programs CFIG manages today.

Kelly Williams, Managing Director and head of CFIG, will present the keynote speech at the MGCS. What can we expect from the speech?

We are going to continue to explore along the lines of some of the topics discussed in this interview. How has the Michigan venture capital industry developed? What are the key drivers? What has and hasn’t worked? Beyond that, Kelly is going to talk about how Michigan compares against a national backdrop for venture capital, what some other venture hotspots are doing and some of the themes we are seeing in the private equity and venture capital industry.

MITechNews’ Mike Brennan Speaks to Michigan’s Growing Startup and Venture Landscape

In November at the Michigan Venture Capital Association annual meeting, Kelly Williams, who leads the Credit Suisse Customized Fund Investment Group, told an over flow crowd of private equity finance professionals that Michigan was bucking the national trend – its Venture Capital sector was growing rapidly, while nationally the industry was in steep decline. She described it as the Michigan miracle.

William’s group manages or co-manages over $625 million of capital dedicated to investing in Michigan, including the Invest Michigan Growth Capital Funds, Invest Michigan Mezzanine Fund, Venture Michigan Fund and Michigan 21st Century Investment Fund. But her group also manages a total of $23 billion for all its institutional investors. So her words carry much weight in the private equity finance world.

“Michigan is in the midst of a steady increase in venture capital activity by every measurable metric,” Williams said. “At the beginning of the last decade, Michigan had seven venture firms. A decade later there were 20 Michigan-based venture firms and another seven firms with an office in the state. These Michigan-based firms manage $1.5 billion, which is up nearly 70 percent from five years ago.”

Since 2000, Michigan lost roughly one million jobs as the state No. 1 industry, auto makers, got trapped in a downward spiral that only last year began to return the industry to production levels closer to the former norm. Ironically, last year Michigan venture-backed companies landed $232 million, the best year since 2000.

“This is tremendous progress, which we expect to see continue,” Williams said. “By contrast, the US venture capital industry has been contracting for the past ten years with fewer venture firms and investment activity still only about one third of the 2000 peak levels.”

More than half of the money invested in Michigan last year went into three companies: $72.64 million for Protean Electric in Auburn Hills that’s developing drive systems for electric and hybrid vehicles; $32.5 million to EcoMotors Inc. in Allen Park; and $16.44 million to medical device company CertoPherx Inc. in Ann Arbor. So autos still remain the dominant industry. But the lost first decade of the 21st century, as it is referred to in Michigan, finally hammered home a point that many government, academic and business leaders had been making for a long time – Michigan had to diversity its economy and return to the entrepreneurial roots that made Detroit the Silicon Valley of a century ago.

“What if an industry gets so big it absorbs all the resources in the state?” asked David Brophy, a University of Michigan Associate Professor of Finance who also is Director of the Office for the Study of Private Equity Finance. “Fur, copper, mining, and timber all dominated the state economy in their time and disappeared. Somehow we thought car manufacturing would remain forever. We kept saying let’s diversify the economy. But we never did. And in the last decade we paid the price for it.”

In 1980, Brophy took a leave from the U-M to do a study on why Michigan had so many startups, but never developed into a Silicon Valley type of region. The reason he discovered was the auto industry sucked the financial juice out of the state, leaving nothing for entrepreneurs, a word that was just starting to come into vogue. There were home grown banks, like National Bank of Detroit, and Manufacturers Bank, started by the auto industry so if you were a supplier that needed a line of credit to build a million car parts, you got the loan with General Motors’ backing.

Silicon Valley had its own financing mechanism for home-grown ideas that spun out of the high-tech companies in Northern California, as well as the innovation hot bed of Stanford University – Venture Capital. Unfortunately Michigan had become in the 20th century a big corporate state – both for auto and medical device manufacturers – letting what Grand Rapids entrepreneur Rick DeVos, the grandson of Amway co-founder Richard DeVos, described as the atrophy of its entrepreneurial muscles.

Brophy, results of his study in hand, decided to do something to help match entrepreneurs with capital when he launch the Michigan Growth Capital Symposium in 1980. The symposium brought together about 100 people to take a look at a handful of Michigan startups. Most of the Venture Capitalist came from outside the region, many former Brophy finance students.

In May 2013, the 32nd edition of MGCS will host upwards of 500 Venture Capitalists and Angel Investors who will hear pitches from 32 pre-qualified Midwest companies seeking up to $20 million. In the past decade alone, more than 300 companies have presented at the symposium where about 70 percent raised capital totaling more than $1.7 billion. Twenty percent of these companies have had successful exits.

“Financiers go where deals are,” Brophy said. “As we get more smart people who like living here, the extent that these people can combine good living conditions and business they like to do, they become our new bedrock. Our growth is not sustainable if you fund start-ups and they go someplace else. We still have to make Michigan a place for growth oriented, innovation oriented companies and then gets the job you want, not putting lug nuts on the rear wheels of a car, but putting them to work in building medical devices or advanced manufacturing.”

Fast forward to 2013 and Williams of Credit Suisse said Michigan has now become an investment destination and local investment firms have built a reputation that is recognized nationwide.

“We expect the level of innovation to accelerate and continued support for local entrepreneurs,” Williams said. “In the future as the ecosystem becomes more fully developed we believe a culture of innovation will become more deeply embedded with Michigan’s talent base, making it easier for innovative companies to gather the talent and expertise needed to grow. We also expect to see a more diversified landscape of companies. Life sciences have long been the dominant sector of focus for venture capitalists in Michigan. There has been a trend in recent years toward IT companies and the level of innovation and investment interest in this sector has increased. We expect IT to continue to expand as an investment sector for venture capital.”

Top business leaders in the state also saw the lack of Venture funding as a major obstacle to Michigan’s economic success. Members of the organization then known as Detroit Renaissance – since renamed Business Leaders for Michigan – had decided in 2007 to raise a fund of funds that would invest in venture capital companies that would, in turn, invest in tech start-ups in southeast Michigan. They managed to raise $45 million with corporate investors including the Kellogg Foundation, Huntington Bank, Blue Cross Blue Shield of Michigan, AAA and DTE Energy Co. It was the first effort of its kind in the nation — large companies raising a fund to invest in start-ups.

Today the Renaissance Fund has raised $110 million, invested in 11 funds, and made financial commitments of about $40 million, said CEO and Fund Manager Chris Rizik, who is Michigan Gov. Rick Snyder’s former business partner in VC Fund Ardesta LLC.

“For every dollar we’ve invested, Rizik said, “we’ve attracted $3 from other investors who also have brought along other VCs. “And seven of those companies have already had exits, returning 2.7 times their investors’ money. Our money has been leveraged 15 times into Michigan companies. Our $110 million will lead to more than $1 billion coming into Michigan.”

The Renaissance Fund has been so successful that Procter & Gamble has used it as the model for Cintrifuse, a Cincinnati regional fund that has raised more than $55 million to boot strap Southern Ohio Venture firms.

“In Michigan, technology we’ve always had,” said Rizik. “Now the culture has changed. 2008 was a terrible year for this state, but it was the final straw in a decade-long recession. We saw a lot of people who hadn’t thought about doing things entrepreneurial, 2008 was the tipping point for them. Folks saw anything not a big company was a high risk. But then they saw two of the largest employers in the state go through bankruptcy. So they focused on entrepreneurial activity and tried to manage it. It opened the door for entrepreneurs to break out. Not just college kids, but people in their 30s and 40s.”

Rizik said it is still difficult to raise capital in the Midwest. Despite all the efforts by Michigan government, business and academia, the state has less than 2 percent of the nation’s Venture Capital under management. But the trends all point up, he said.

“We used to be in the middle of the pack nationally among states,” he said. “Now Michigan is in the top 20 moving towards the mid teens.”

Three very active Michigan governors have contributed to the Michigan miracle. First Gov. John Engler started to monetize the $1 billion Michigan was scheduled to receive from the Tobacco Settlement to invest $50 million a year in grants to fund Life Sciences companies along the so-called Michigan Life Science Corridor, stretching from Kalamazoo, to Grand Rapids, to Lansing, to Ann Arbor, to Detroit.

When Gov. Jennifer Granholm was elected, she took the tobacco money in 2005 and created the 21st Century Jobs Fund, broadening the state’s investment portfolio to include not only Life Sciences, but also Alternative Energy, Advanced Auto Manufacturing and Materials and Homeland Security and Defense. She also created the Venture Michigan Fund, now two fund-of-funds that have $215 million to invest in VC funds that invest in Michigan companies.

Under Gov. Snyder, the state has put added emphasis on the Michigan Growth Capital Partners fund, launched in 2008 as part of the $300 million InvestMichigan! Program. In February 2013, Credit Suisse and its investment partner Beringea announced the launch of Michigan Growth Capital Partners II, a $180 million fund dedicated to providing growth equity to Michigan companies. Since 2008, more than 1,200 deals have been reviewed with investments made in 28 companies that employ more than 5,000 people in Michigan.

Rizik said what’s particularly pleasing to him is seeing a lot of high-net worth individuals in the state, and institutions that previously watched from the sidelines start to invest in VC funds.

“We’ve seen two large programs, the Renaissance Fund and the Venture Michigan Fund, set aside to support creation and growth of VC funds in the state,” he said. “We’ve seen the state pension funds more active in investing. We’ve seen foundations, and to a lesser extent, the university community doing it. The capital piece is not yet there, but it keeps getting better.”

Certainly, the role of the state in rebuilding the private equity finance infrastructure in Michigan can’t be underestimated, said Paul Brown, vice president of capital markets for the MEDC.

“The largest 13 funds were all supported by the state in one form or another,” he said. “Most of them were helped with their seed rounds. Engler started it. Granholm increased it. Gov. Snyder also is a Venture Capitalist and entrepreneur who understands this space.”

He also pointed out that the unintended consequences of the 2008 recession was to unleash a lot of skilled talent that was resident at big Michigan corporations, many of whom have gone on to create the latest round of technology and life sciences startups.

“Michigan is awash in Life Science and auto engineering talent because of troubles with the big OEMs in those industries,” Brown said. “It was a painful transition, but when you have a lot of smart people with time on your hands, you get a lot of deal flow that attracts investors.”

Brown said the only a couple pieces are lacking in Michigan, the first is large venture funds. Michigan has a few, such as Beringea, RPM Ventures and Arboretum Ventures. But he said the state needs many more.

“If a company needs $5 million for a round they can find that locally,” he said. “If it needs $50 million, they have to go to the coasts and then they tend to move there. Secondly we hope to have a larger number of diverse smaller funds gaining more traction.”

But what Michigan does have in its Venture Capital sector is a tight knit community of firms that work well together.

“The Michigan venture community is modest in size, but a well balanced group of professionals that have developed a unique community amongst themselves,” Brown said. “They feel camaraderie; something I think is unique to Michigan.”

Mike Brennan is Editor & Publisher of MITechNews.Com

InvestMichigan Mezzanine Fund Boosts Michigan’s Appeal to Entrepreneurs and Investors

The InvestMichigan Mezzanine Fund is the latest in a series of InvestMichigan funds focusing on growing a new generation of Michigan companies and generating strong returns for investors. Launched in July 2011 and co-managed by Credit Suisse and Beringea, the fund will invest $5 million to $15 million (up to $130 million) in a broad range of lower-middle-market Michigan companies, including those in the industrial manufacturing, business services, health care, technology, and consumer products sectors. “The program was formed in partnership with the SBA through its new Startup America SBIC Impact Investment Initiative,” said Beringea Senior Managing Director and Co-Founder Charles Rothstein. “Michigan was the first state to benefit from the initiative.” To date, the InvestMichigan Mezzanine Fund has invested in three companies: Dantom Systems, Inc., Huron, Inc., and a premier Mich.-based food distributor.

Beringea is the largest provider of venture and growth capital in Michigan. Headquartered in Farmington Hills, Michigan with an additional office in London, Beringea has more than 70 portfolio companies in the US and UK. “It’s important that the entire entrepreneurial community works to change the message that Michigan is a flyover state,” said Rothstein. He notes that the Michigan Growth Capital Symposium (MGCS) is helping to change that image. “The Symposium helps send a signal that Michigan is a place where technologies are commercialized, young companies can grow, and investors are receptive – which in turn attracts new entrepreneurs and resources to our state as momentum grows.”

Beringea is a long-time sponsor of the MGCS. “We believe in its mission of showcasing the best young companies in the Midwest,” Rothstein said. “We find great value in the exposure MGCS offers us to entrepreneurs that might otherwise have travelled under our radar, and in turn we’re able to share our funds’ investment strategies with a targeted audience.”

For more information on the InvestMichigan Mezzanine Fund, click here.

State Funds Attracting Major Players to Michigan

Although fundraising is a constant challenge, things have been looking up in Michigan in the past five years, according to Credit Suisse Customized Fund Investment Group (CFIG) Vice-President Sean O’Donnell. Venture capital firms and assets under management have increased, resources such as the Venture Michigan Fund II (VMF II) are infusing more capital into Michigan companies, and the state is attracting some major players. A recent $15 million investment by VMF II has wooed Massachusetts-based Flagship Ventures to open an office in Michigan by the end of the year – a major win for the state. Flagship Ventures, a $900 million fund,  is known in Michigan for its success with University of Michigan spin-off company Accuri Cytometers.

CFIG manages or co-manages over $500 million in capital. VMF II falls under the group’s umbrella, along with other programs investing in VC, private equity funds, and growing companies in Michigan. As a founding member of the Michigan Venture Capital Association, CFIG has committed over $200 million to VC firms in the state since 2006, with another $80 million scheduled to be committed through 2013.

O’Donnell notes that innovation is what drive new technologies and industries, providing vital support to the state’s economy. “In the early stages, these new industries employ very highly skilled and educated workers,” he said. “In the long run, emerging companies in new industries assist in diversifying the Michigan economy and retaining and attracting human talent to Michigan.”

Credit Suisse has a longstanding relationship with the Michigan Growth Capital Symposium (MGCS), and is a sponsor of this year’s event. “CFIG is a strong supporter of the Michigan venture community, and has sponsored and attended hundreds of events in the state,” said O’Donnell. “I view the MGCS as the premier event in Michigan to bring together entrepreneurs, venture capitalists, limited partners and intermediaries. The event’s reach is by far the most comprehensive, attracting firms from the coasts who are not regular attendees at the numerous other Michigan events.”