MEDC: Put venture funds to work

Approval is expected Wednesday by the Michigan Strategic Fund board for the final four companies to get funding from the $109 million 21st Century Investment Fund.

ESP Holdings II L.L.C. of Cleveland, Peninsula Capital Partners L.L.C. of Detroit, Triathlon Medical Ventures L.L.C. of Cincinnati and Arsenal Venture Partners Inc. of Winter Park, Fla., are expected to get a total of $35.5 million. Individual investment amounts will be disclosed at the meeting.

Greg Main, president and CEO of the Michigan Economic Development Corp., told Crain's that, now that final recipients have been selected, it's time for venture capital and private equity funds that have received funding to be more active in investing it in state companies.

Main said he has been disappointed at the pace of investing thus far, slow economy or not. Of the $73.5 million that had been committed by the 21st Century Investment Fund prior to Wednesday's meeting, $30.9 million had been invested in 12 Michigan companies, according to Credit Suisse's New York-based Customized Fund Investment Group, which administers the fund.

“It's no secret. I've said it at a number of public venues: I'm not pleased with the pace of investing,” Main said. “It's an issue that needs raised. Portfolio managers need to know they have to put the money to work. Some people have had our money for more than a year and haven't made an investment,” he said.

In June 2007, a commitment of up to $10 million was made in Relativity Fund L.P., a New York-based private equity fund, which has yet to make an investment in the state, said Main.

“I've met with three funds and I'm going to meet with the rest of them,” said Main. “We at the MEDC need to drive demand and put deals in front of them. If there's anything we can do to help them make an investment or two, we will. We need to get them to know we're serious. Michigan is in crisis.

“We can't have money sitting idle. You select funds because they're the pros. Their discipline is very important, but at the same time, they need to invest in Michigan.”

Of the companies expected to be approved Wednesday, Peninsula Capital is a private equity firm specializing in mezzanine lending. The other three are venture capital firms. Peninsula is one of three local private equity firms associated with William Campbell of W.Y. Campbell & Co., who was recently honored by Crain's with a lifetime achievement award in mergers and acquisitions.

Peninsula is raising a fifth fund of $400 million.

ESP Holdings invests primarily in Midwest high techs; Triathlon is focused on medical devices; Arsenal focuses on early stage companies in defense and homeland security.

Out-of-state firms that get state funding are required to open state offices or find local partners.

Triathlon, which is raising a second fund of $150 million, announced last month it had hired Mina Sooch, president of the Michigan Venture Capital Association and former managing partner at Kalamazoo-based Apjohn Partners, as managing partner to run a Michigan office at a location yet to be determined.

Arsenal hired Michael Psarouthakis, who had been a senior portfolio manager with the MEDC, to run an Ann Arbor office.

ESP will open an office in Ann Arbor, according to LeAnn Auer, executive director of the Ann Arbor-based Michigan Venture Capital Association.

The Customized Fund Investment Group, which manages both the 21st Century Investment Fund and the $95 million Venture Michigan Fund, had a legislatively mandated deadline of July 27 to disperse the 21st Century funds, which were authorized three years ago.

The investment group faces an Aug. 4 deadline for dispersing the last $27 million from the VMF fund. Kelly Williams, the group's managing director, said she expects to wrap those investments up by the end of July.

Eight previous investment firms and one clean-tech company, Microposite Inc. of Auburn Hills, had received money from the 21st Century fund. An increase in a commitment to Ann Arbor-Based RPM Ventures was approved in December, but no investments in new investment firms had been made since last June, which gave rise to speculation that Credit Suisse would not meet its deadline and might ask for an extension.

Williams said much of the delay was a result of the economy, with some investment companies canceling new funds or delaying fundraising. One commitment was rescinded when Ann Arbor-based Ardesta L.L.C. decided fundraising in this economy was too tough and pulled the plug on its new fund, with co-founder Rick Snyder later testing the waters for a run at the Republican nomination for governor.