Local businesses drive returns for Michigan state pension

  • Fund managed by GCM Grosvenor and Beringea nets 16.1 pct IRR
  • Fund managed by Glencoe Capital generates 12.3 pct IRR
  • InvestMichigan! has $510 mln to work with 

They can in Michigan. One fund in Michigan’s in-state program, a $185 million vehicle managed by GCM Grosvenor and Beringea, netted a 16.1 percent IRR and 1.5x multiple across 30 deals as of June 30, according to state documents. A second fund in the program, managed by Glencoe Capital, netted a 12.3 percent IRR and 1.3x multiple as of the same date.

State of Michigan Retirement Systems had committed roughly $510 million to the program as of June 30, according to state documents. The in-state program – known as InvestMichigan! – features three distinct strategies. GCM Grosvenor and Beringea control two funds that make direct and co-investments, as well as an SBIC vehicle that provides mezzanine capital to middle-market companies. Meanwhile, the Michigan Opportunities Fund, managed by Glencoe, pursues growth equity and buyouts.

“I don’t know if it leads the country in terms of number of programs and amount of dollars, but we have to be near the top,” said a source familiar with the program, referring to the size of the program.

Recessionary launch

The strength of the returns generated by Invest Michigan! are somewhat surprising, considering the timing of the program’s launch and the state’s recent struggles.

Former Gov. Jennifer Granholm started InvestMichigan! in January 2008, seven months before the collapse of Lehman Brothers sent the U.S. and global economy into a tailspin. Michigan’s unemployment rate doubled between 2008 and mid-2009, hitting 14.2 percent at the height of the crisis. In 2009, the U.S. Government rescued two of the state’s largest employers, automakers General Motors and Chrysler.

“We bore the brunt of the economic storm that hit,” said Charles Rothstein, founder of Detroit-based Beringea. “I think those of us who were in this together, decided hey, we’re in this together. There’s a much more collaborative community than what you might see in other communities, because of what we went through as a community.”

That collaborative spirit actually propelled the program’s success in its early years, Rothstein said. InvestMichigan! was intended to serve as a follow-on to the state’s venture capital funds of funds programs, The 21st Century Jobs Fund and Venture Michigan. Those funds provided investment capital to early stage companies. That helped foster a local network of investment professionals who would eventually refer potential investment opportunities to InvestMichigan!, which invests in later-stage companies.

At the same time, Michigan was struggling to attract investors from outside the state, Rothstein said. Despite being the ninth-largest state in the U.S., Michigan ranked 19th in private equity investments in 2013, according to the Private Equity Growth Capital Council.

“It’s not really a small market, when you take into account R&D that happens here,” Rothstein said. “There was really a tremendous amount of deal flow, and there continues to be a tremendous amount of deal flow.”

Growth capital

One of those opportunities was in mophie, a company that makes battery pack cases for iPhones and other Apple products.

The company, which maintains a distribution center in Kalamazoo, Mich., was generating roughly $20 million in sales and needed $4 million in growth equity to continue its expansion, Rothstein said. The in-state program invested an undisclosed amount in mophie in August 2010.

“They were looking for a modest amount of capital, but there wasn’t really anyone out in our market who could write that check,” Rothstein said.

The investment appears to have paid off. In 2012, mophie expanded its Western Michigan facilities, and now has operations in California, China and The Netherlands, according to its website.

The InvestMichigan! program continues to provide capital to companies. GCM Grosvenor and Berignea’s second in-state fund, Michigan Growth Capital Partners II, had invested $33 million across eight deals as of June 30, according to state documents.

“They’re value-add people who bring something to the table,” said Kevin Prokop, a managing partner at Rockbridge Growth Equity, a Detroit firm founded by Quicken Loans founder and philanthropist Dan Gilbert. InvestMichigan! provided equity and mezzanine financing to Rockbridge’s investment in Gas Station TV, a Detroit-based video network that delivers content from ESPN and CNN to screens mounted to pumps at gas stations.

“We’ve just been partners with them for six months, but what I can say is they bring perspective to the boardroom,” Prokop said. “They see so much flow in so many different contexts, they have very good investment instincts. They understand the investment thesis instinctively and immediately.”

When asked if Rock Bridge would consider another investment with the program, Prokop said: “Absolutely, we’d love to do more with them.”