New Fund Gives Rural Businesses Access to ‘Patient Capital’
A change in USDA investment licensing is allowing banks serving rural areas to make private equity investments in businesses. A New York bank has built a partnership with a capital fund to do just that.
Rural entrepreneurs often need funding options other than conventional loans to support growth and development. USDA’s Rural Business Investment Company licensing program tries to fill that need by allowing banks and venture capital partners to provide patient, more flexible investments for small businesses throughout rural America.
In 46 years as a small business lender, Allen Naples has met numerous potential borrowers who weren’t a good fit for more mainstream USDA Rural Development or Small Business Administration loan programs.
“It might be because of a strain on short-term cash flow, or the lack of sufficient collateral,” explained Naples, the regional president for Central New York of M&T Bank. “Some worthwhile small business owners don’t match the requirements for the conventional loan programs we offer.”
To fill this need, M&T Bank recently announced a partnership with Blue Highway Growth Capital. M&T Bank has invested $5 million with the private equity fund, who will use the capital for rural small businesses located in the Northeast and Mid-Atlantic.
Most banks are not legally allowed to make private equity investments of this type. But since 2014, USDA Rural Development has offered a licensing program for banks that serve rural communities that need more capital. Through the Rural Business Investment Company (RBIC) program, banks like M&T Bank can make direct equity investments in venture capital funds like Blue Highways.
“There’s a perfectly overlapping geographic footprint between the two entities. And we’re both committed to growing jobs and prosperity in rural communities,” Naples said.
Blue Highway Growth Capital is building a $50 million RBIC fund and also has partnerships with the Farm Credit system in addition to M&T Bank, according to Karin Gregory, a Blue Highway Growth Capital co-founder and managing partner.
“We’re interested in focusing on small businesses in the rural region in a variety of sectors,” Gregory said. “That could be the service sector, specialty manufacturing, transportation and logistics, business and technology services, healthcare and medical products, agriculture and more. We’re also interested in finding rural businesses interested in expanding broadband internet access.”
Blue Highway’s strategy is to invest $2 to $5 million in small businesses with growth potential, typically with $5 million or more in existing revenue and no other outside source of capital, according to Gregory.
“Equity funding can be more patient,” Gregory said. “We can provide a source of capital through the growth period and can look repayment in three to five years instead of needing a monthly payment right away.”
USDA’s RBIC program has been promoted by some rural economic development professionals as an innovation in improving the rural investment climate.
“Investment in venture-backed companies in the United States reached $57 billion in almost 4,000 deals in the first half of 2018. Yet, only a fraction of those dollars found their way to funds and companies based in rural America,” Matthew McKenna, founder and executive in residence of the Rural Opportunity Initiative at the McDonough School of Business at Georgetown University, wrote in an analysis of the rural capital gap in The Hill.
“Small businesses are the lifeblood of rural economies and will continue to be the single biggest opportunity for growth for small communities. Without crucial access to capital, job growth and rural economic development will continue to lag the rise in prosperity of the rest of the country,” McKenna wrote in support USDA’s RBIC program expansion.
Another USDA certified RBIC, Open Prairie, is an example of a rural equity fund that helped to provide jobs in rural communities. Open Prairie provided an equity investment in Tillerman Seeds to establish a holding company that would keep regional seed companies profitable and operating.
That holding company, now Legacy Seed Companies, has helped to keep numerous local seed companies open and operating in a seed industry facing rapid corporate concentration. Legacy Seed Companies focuses on traditional local seedstock to serve farmers in the Great Lakes region.
Naples, the banker serving rural New York, said that part of the success for rural investing is likely to be in leveraging existing partnerships.
“It’s critical to introduce our partners in the Blue Highways Team to the many local economic development organizations and agencies we work with all over the region,” Naples said, including the New York Business Development Council, which funds non-conventional businesses in the state.
M&T’s Bank Chairman and CEO Rene Jones called attention to the nation’s uneven economic recovery in his annual message to shareholders. Jones said that small communities with fewer than 50,000 people grew by only 0.3 percent while the national population grew by 8 percent over the last 10 years. These areas continue to lose jobs, despite 11 percent job growth across the rest of the U.S. since 2007.