West Des Moines-based PE firm marking third fund, 10 years in business

Midwest Growth Partners, a private equity fund manager based in West Des Moines, is about six months into deploying its latest investment fund, which is the firm’s third fund since opening for business in 2013. At the close of fundraising for Fund 3, MGP announced that it exceeded its fundraising goal of $170 million.

MGP has made three investments out of the third fund so far and plans to make a total of 10 to 15 investments over the next five years, Managing Partner John Mickelson said in an interview.

MGP invests in established companies, primarily in the food and agriculture industry, that are seeking a succession plan or growth capital investment. Mickelson said that the firm’s mission specifically concentrates on investing in underserved rural markets in the Midwest region.

“It’s a good market for us. It’s what we know, it’s where we’re from and there’s a lot of opportunity there because it’s not as crowded as other places,” Mickelson said.

In addition to its investments, MGP began hosting the Food and Ag Executive Dialogue five years ago, with the most recent one held this summer.

Attendees represent states around the country and include business owners, policymakers and industry and trade representatives. Mickelson said the goal is to bring together the “best and brightest minds” to discuss policy, industry trends and form new connections.

“If someone meets someone else, and they go off and do a deal together, that makes us very happy even though it doesn’t directly benefit us,” he said.

Mickelson shared more about MGP’s investment philosophy and direction for the third fund. Responses have been lightly edited and condensed for clarity.

What made it possible for MGP to exceed its fundraising goal for Fund 3?
I would say that, at its most basic foundation, we’ve said what we were going to do. We’ve been forthright with people, we’ve always done the right thing and acted with integrity. Those little decisions on a daily basis have added up to where we are today, and we’ve still got a lot to do and accomplish, but it’s been a daily journey of doing the right thing along the way. … Last year, the environment changed quite a bit with interest rates going up and then the bank fallout from Silicon Valley Bank and what’s happened within VC and the technology industry. So it was a tougher fundraising environment, but almost all of our Fund 1 and Fund 2 investors continued on for Fund 3, so we had a nice foundation there. The new investors, in many cases, were folks that we’ve known for years. They had been following us, and we developed relationships with them and kept them in the loop and with our progress, so when it came time to fundraise, those weren’t cold calls, they were relationships that we had, so really it was just a matter of showing them what Fund 3 was going to look like.

Does MGP have any specific goals it wants to accomplish with Fund 3?
Even though we’ve been around 10 years and there are other good groups that have been around 10 years, institutional capital that goes into rural marketplaces or smaller markets is still very scarce. Frankly, it’s a calling for us, but [those are] also the marketplaces that we play in, so when an asset allocator looks at us and they have to make a decision between us and maybe another fund, that may resonate with them and it may not. If it does resonate with them, there’s just very few capital providers that are specifically targeting those smaller markets and [that] are in smaller markets physically. Most of the capital resides in large, urban areas and on the coasts.

What is demand like in the rural markets MGP invests in?
When we got started 10 years ago, we told investors that we hoped to see 100 deals a year and we would do one or two. Last year, we saw 800 deals, and we did three or four. The demand has continued to exceed our expectations. There’s a generational shift where you have a lot of business owners that are of retirement age, so they are seeking succession planning scenarios and they may or may not have family or employees that are interested in taking over, and if they don’t, private equity is a pretty good alternative for them. We’re having those discussions daily with folks. I would say there’s lots of opportunity within the rural markets. The trick is that not everyone wants to sort of spend their time there, maybe it’s inefficient for them to go there. If you’re a large fund in Boston, and you’re trying to get to Ely, Iowa, you’re probably having to connect through O’Hare and then rent a car in Cedar Rapids, and it’s just tough for them to get there. For us, that’s where we’re from. It’s what we live and breathe, it’s who we are, so it’s very natural for us to get to places like that frequently and look for opportunities.

Considering higher interest rates and economic uncertainty, does MGP foresee challenges for the companies or industries it invests in as it deploys Fund 3?
We don’t traditionally use a ton of leverage on our deals, so unlike other peers, the higher interest rates don’t impact our business model as much. But what I would say is that there’s a whole generation of the workforce, very smart, talented, experienced people that have never operated in an environment where there is a cost of capital. The cost of capital for the last 13 years has been effectively zero, or pretty close to zero. Now when you look at capital expenditures, or if you look at acquisitions, or if you look at expanding your business, you have to account for the weighted average cost of capital being something more than zero. I think that’s a shift of mindset for folks that maybe weren’t in the workforce before 2009. If they haven’t seen that before, they can learn it, they can understand it, but they just have to change their mindset. There’s a scarcity of capital now that didn’t exist a year, a year and a half ago.

What approach does MGP take to its relationships and involvement with its portfolio companies?
We only invest in the company if we feel like there’s a way that we can help them other than just capital. The levers that we like to pull are helping them with the complementary mergers and acquisitions strategy. If they can buy a competitor or expand their product line, that’s something that we can help with. Major HR decisions and strategy, the banking and financing side, and executing on getting an enterprise resource planning system or a customer relationship management system in place are things that we like to help on. Those are areas where we feel like we can add value and where we do get very active with our portfolio companies. Where we don’t get active is on day-to-day minutia of business itself. For instance, we have a Cuban food manufacturer. MGP is not going to tell Catalina how to make Cuban food or what Cuban food is going to sell well within the Cuban community. That’s not our role, but what we can help them is optimize their systems, get the right people in place to lead the company, and then look at other ethnic food companies that might make sense to bolt on to them.

Related: Two investors break down venture capital vs. private equity investing