Small Business Loan Project

Marquette’s small business loan fund projection upbeat
by Mark Anderson Staff Writer

Tom Jenkins is CEO of Marquette Capital Partners, which is opening its second fund aimed at providing loans to small- and medium-sized businesses (Photo: Paula Keller)
Tom Jenkins is CEO of Marquette Capital Partners, which is opening its second fund aimed at providing loans to small- and medium-sized businesses (Photo: Paula Keller)
More: Marquette Capital Partners: local portfolio
Here’s one of those green-shoots stories possibly indicating that the capital markets and their customers are coming back – albeit very slowly, and with the continuing help of the federal government.

Marquette Capital Partners’ CEO Tom Jenkins says his group expects to raise $50 million to $100 million by second quarter 2010 for its second fund aimed at providing loans to small- to mid-sized businesses. And the Marquette Capital Fund II will bring even more powder than that to the market – it’s organized as a Small Business Investment Company (SBIC), enabling it to borrow low-cost money through the U.S. Small Business Administration. That should boost its lending pool as much as three times higher.

Jenkins hopes to close the first deal for that new fund by year end, and although the volume of deals coming across his desk is still meager, he says activity is growing in a niche that’s been one of Marquette’s specialties: closely held, often family-owned companies looking to grow in a bear market.

“There are still healthy companies that need capital for positive reasons,” Jenkins said. “They’re seeing weak competitors that they’d like to buy.” In fact, the majority of activity in Marquette’s initial $80 million SBIC fund, launched in 2004, is focused on acquisitions now.

“We’ve spent a lot of time on revenue generation, and earnings are starting to pick up at those companies (Marquette holds 21 companies in its portfolio). Now, we’re looking hard at acquisitions that make sense.”

Those buys will be financed with the initial fund’s final 15 percent, a cache that Marquette reserved for add-on acquisitions.

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That demand – and the company’s time-tested model – is driving interest in its second fund, too, Jenkins said. He expects almost 80 percent of Marquette II’s dollars to come from investors in the first fund – a group of about 20 wealthy families and a dozen financial institutions, mostly from the upper Midwest, who contributed about 65 percent of Marquette I. Marquette Financial Group, the holding company owned by the Carl Pohlad family and Marquette’s parent, invested the remaining 35 percent.

Performance is a key reason those investors are coming back. Marquette predicted returns of 18-20 percent on a five-year investment model, and in the three exits they’ve negotiated so far “we’ve exceeded those goals on each sale,” Jenkins said.

The group also created a portfolio of companies that’s been resilient through the recession’s buffeting.

“We’ve done some restructuring, but our original capital structures are holding up pretty well,” with no bankruptcies or losses so far, he said.

The fund’s managers deserve credit for that record, according to Holly Huels, senior vice president with Capital for Business, a St. Louis-based investment fund. Huels’ firm was an investor in Marquette I and an investing partner in two of Marquette’s portfolio projects, and she said their success is the result of old-fashioned investment virtues.

“They’re very disciplined in their evaluation of companies and their due diligence, but they also stick with the company. A lot of people put capital in and move on to the next investment. Marquette keeps paying attention, working with management, and that’s helped them and their investors.”

Timing provides another advantage for Marquette and the rest of the SBIC industry right now, said Dileep Rao, a lecturer at the Carlson School of Management and a veteran venture capital investor and adviser.

“The debacle of the last year [in the capital markets and the economy] created an opportunity for SBICs,” Rao said. “Banks that were generous in their lending criteria in the past are very much more conservative now,” forcing deal sponsors to find new sources to fill the new financing gaps.

With pension funds still cautious and equity investors having a hard time putting a reliable value on small companies, ventures like Marquette get more attention, Rao said: “SBIC’s are a source of funding that’s available, and as a result, they’re seeing more and more of the available deals.”

That market demand, as well as some easing in the licensing process, is swelling the ranks of SBICs, according to Brett Palmer, a spokesman for the National Association of Small Business Investment Companies (NASBIC) in Washington, D.C. SBIC applications had dropped to just six during 2008 – a historic low – but license approvals are already up to 11 in 2009, and an additional 25 are in the pipeline for 2010.

But new applicants still face close to a year-long licensing process, said Huels, this year’s NASBIC chair. That leaves in place a significant barrier to entry for new companies, and benefits already-licensed SBICs such as Marquette.

Jenkins’ team, like most currently licensed SBICs, delivers much of its capital in the form of subordinated debt, either to closely held companies that are expanding, or to help pay for takeovers. It often structures some equity investment into those deals in the form or warrants or direct stock investments, and it also shops for takeover partnerships where it can play a larger equity role.

But Jenkins said Marquette’s penchant for financing growing, closely held companies will probably dominate its new portfolio for awhile.

That’s in part because strong, closely held businesses are going to find good acquisition opportunities in this market. Many of those companies will feel edgy about teaming up with conventional private equity investors, though, Jenkins said.

“Private equity funds usually want to take a great deal of control, so most closely held businesses don’t want to talk to them,” he said. But Jenkins’ team – many of them bankers who’ve worked together in Pohlad-owned businesses for 20 years or more – can make deals that keep borrowers happy and the investment group in a strong fiduciary position.

“We can be the perfect solution. We’ve all learned how to structure securities in a way that doesn’t threaten [management’s] control.”

Marquette II enjoys a couple more benefits, thanks to rule changes enacted as part of the federal stimulus legislation passed in February.

SBICs are now able to invest greater sums in single investments, and they’re also able to borrow greater amounts from the SBA. That capability will probably double Marquette’s average investment in companies from $4 million to $8 million, giving it the ability to provide more comprehensive financing for its clients right through to Marquette’s exit.

The larger, more efficient fund also means Marquette’s staff roster will grow. Jenkins intends to open an office in Los Angeles this year, joining its Minneapolis headquarters and an office in Chicago. And he’ll add employees, too – growing from seven to 12 people.

And that gives them one more distinction: they’re one of the rare financial services companies that’s hiring.