The U.S. Department of Agriculture’s (USDA’s) recent partnership with McLarty Capital Partners opens up a vital capital structure for small businesses in rural America. The McLarty Capital Partners Rural Business Investment Company, which is targeting $100 million for investment, connects small businesses across rural America, including agriculture startups, with the equity capital markets.
“These funds provide an important layer of investment capital that would not otherwise be available,” Matt McKenna, USDA Senior Advisor, tells GAI News. Indeed, equity serves a much different purpose than the debt. “A new business that’s expanding cannot attract the debt it needs without equity capital as the foundation for the business. These businesses need equity as a key foundation from which they can expand. After that point they can subsequently borrow,” he adds.
This is not the first time that the USDA has partnered with the private sector, but until now the investments that these partnerships have facilitated have largely been on the debt side.
“The excitement of the RBIC program is that they approach investments from the equity side,” McKenna says, adding that the investments are exclusively private dollars. The USDA’s role is to exercise a licensing function for the rural businesses looking for investment. McLarty Capital then selects the businesses they believe are worthwhile investments.
Franklin McLarty, Co-Founder and Vice Chairman at McLarty Capital Partners, tells GAI News there is certainly a lack of access to capital for small- and mid-sized enterprises. “That’s a national reality, but it’s even more true in rural areas. We think small- and mid-sized enterprises (SME) need flexible capital. It’s equity. It’s mezzanine debt. It’s senior debt. It’s a one-stop shop that can work with enterprises to help achieve their goals,” McLarty says.
Investment Targets
RBIC investments are expected to be relatively small from a venture perspective, however, the funds will allow the businesses to hire and explore new ideas.
“In terms of ticket size, we’re open to anything in the small- and mid-sized enterprise space, with some caveats,” McLarty tells GAI News. “We probably wouldn’t look at anything under $1.5 million to $2 million investment in general unless we can expand our investment over time. We’re looking at the local home-grown enterprises rather than going out and trying to compete with big banks and institutions.”
McLarty Capital’s partnership with the USDA is a product of the investment firm’s relationship with the U.S. Small Business Administration (SBA) as a Small Business Investment Company (SBIC). “We crossed paths through our activities with the SBA,” McLarty says. “A lot of the deals we see by virtue of our family background are in the heartland of the United States and fall into the mandate of the RBIC,” he adds.
Indeed McLarty fully expects there will be some crossover from the deals and relationships he’s developed as an SBIC with the RBIC. “We are going to look at a lot of deals that come through our network that involve people we know and trust and have relationships with. Good partners help overcome a lot of obstacles,” he says.
While agriculture will be a focus of the RBIC fund, the investments won’t be exclusively dedicated to the ag sector. Nonetheless, given McLarty’s Arkansas roots and the fund’s focus on rural America, many of the deals that already come across the radar from the firm’s involvement with the SBC are tied to ag if only peripherally.
“We have car dealerships in places like Hope, Arkansas and Palestine, Texas,” says McLarty, adding that while these are not agriculture businesses, there are many heavy duty trucks that support farms.
Fund Overview
So far, the response from the small business community has been robust. “The deal flow amount we’ve seen at times has been a bit overwhelming. It’s a high-class problem to have, and it speaks to the need for capital for SME’s,” says McLarty.
McLarty Capital remains in the capital raising stage for the RBIC. The firm has a significant amount of capital already committed and anticipates a first closing in the second half of 2017.
Investors are comprised of institutions that are looking for a good risk-adjusted return where McLarty Capital can add the right balance and allocation in their portfolio, high net-worth individuals and family offices attracted to McLarty’s investment profile in the current environment where yield is so hard to find. And lastly, people with backgrounds in rural America and possibly agriculture that have a comfort level or vested interest with investing in the heartland.
“We’re providing returns that are not VC type returns. We’re not taking that kind of risk, that’s not our expertise. So without getting into specifics, we’re downside protection-oriented investors. We’re looking for nice solid returns for our investors with some current cash yield. That’s our profile on the investment side,” McLarty says.
Meanwhile, the USDA won’t be recognizing a return. “However very clearly our policy is to encourage the expansion of business in rural America, including the jobs they represent and the economic improvement to that part of the country,” says McKenna. “We’re very happy for these funds to be successful. These funds provide an importantly layer of investment capital that would otherwise not be available.”
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Gerelyn Terzo
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