GRAND RAPIDS – Investors attracted to deals on the coasts for years overlooked Michigan as a flyover state, but those perceptions seem to be slowly changing as more outside money sets its sights on in-state companies.
Just ask Ned Tomasevic, principal of Los Angeles-based private investment firm Toma Capital Management LLC.
Tomasevic, who earned his MBA at the University of Michigan Ross School of Business, created Toma as a search fund. His business model involves raising money from a pool of investors ? in this case, a handful of entrepreneurs, investment bankers and executives ? to finance the search for businesses the investors could acquire.
Toma created its fund in November 2012 with a group of 20 former CEOs and has yet to do its first deal. The firm wants to close a deal or two by the end of this year, Tomasevic said.
Tomasevic now has a two-year mandate to spend the money raised, an amount he declined to disclose other than to say it was eight figures. He said the amount could be much more because many of his investors might be willing to write a big check to buy the right company.
?I?m trying to find an owner who gets this model,? Tomasevic said. ?I like to be in a place with good pool of people to work with, and Michigan offers that for me.?
Specifically, Toma is looking for companies with EBITDA between $1 million and $5 million whose owners are looking to exit or to take on a focused role within the company.
?Maybe he or she loves selling, so we?d keep him or her as head of sales,? Tomasevic said.
Tomasevic said his firm is searching for traditional service companies in the Great Lakes region, with particular emphasis on Michigan, that would perform better with, say, the right software. Toma Capital is also looking for businesses that are bigger than a Main Street mom and pop, but not big enough to attract private equity investors, he said.
To date, the firm has focused on the insurance, health care and education industries, he said.
Tomasevic, who has been shopping in the state for the past few months, said he has narrowed his list to about 10 companies, but he?s open to getting solicitations from others that fit the bill.
Prior to starting Toma Capital, Tomasevic, 33, had been involved in private equity, corporate finance and restructuring, and banking in California and Minnesota. He had never raised his own fund before.
He also said none of the high net worth investors backing his fund have pledged to invest a minimum amount of money each year ? how most angel investment funds operate.
?They haven?t pledged a minimum because we don?t know what kind of company we?re looking for yet,? he said.
The firm has set its sights on the Great Lakes region and, particularly, Michigan, at a time when both venture capital deals and private equity investing in the state are on the rise. Between 2000 and 2010, private equity firms invested $40 billion in 415 deals in Michigan, according to data shared at a recent presentation sponsored by the Association for Corporate Growth Western Michigan chapter.
Private equity firms invested $687 million in Michigan companies in 106 deals through November 2012, up from $429 million in 82 deals in the previous year, according to a special report from MiBiz and Crain?s Detroit Business in March. That activity does not include the deals from a busy month in December, when many sellers looked to finalize transactions to avoid higher capital gains taxes.
Moreover, while venture capital investment declined 10 percent nationwide last year, the amount of activity in Michigan in 2012, $232 million, nearly tripled the previous year?s total of $85 million, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association.
Toma?s initiative also fits nicely with what the Michigan Economic Development Corp. is seeking to do, said Michael Flanagan, manager of equity capital programs at the state organization. The state is targeting its services at businesses with less than $20 million in revenues that have capital needs.
?It?s an underserved market,? Flanagan said. ?Those businesses are maybe too high a credit risk for traditional banks and too small for private equity or mezzanine financing.?
That?s why the MEDC has worked to develop two new funds focused on these small to middle-sized companies, he said. The Michigan Strategic Fund announced in February that it had partnered with the MEDC and the banking community to fund Grow Michigan, a $60 million fund based in Plymouth that will offer subordinated debt to the state?s small businesses. The fund has had a first closing of $30 million and expects to finish fundraising by the end of March, with $10 million coming from the Strategic Fund and $50 million from member banks.
A second fund, with the working title ?Michigan Income and Principal Protected Growth Fund,? also backed by the MEDC, hopes to attract dollars from institutional investors like foundations and money managers. The MEDC investment comes from an $80 million federal grant.
?We are helping structure our investment to incentivize investors in a space not seeing much investing,? Flanagan said. ?We?re helping to pool together dollars and structure our investment to help mitigate the risk for these other investors we hope to attract.?
