One man's "competition" is another's opportunity

Dateline: Boston

The news about the “winding down” of a competitor is never nice to hear, and it is unfortunate that many of our confreres at MMV Financial have been laid off over the past two weeks — as is now being reported in the Private Equity wires. In a relatively small space such as venture debt, there’s a camaraderie that builds up over time despite the competitive nature of the industry; you win some opportunities, lose others. That’s how it is.

Some like amortizing debt (them), others prefer growth capital (us). Much like Chevy and Ford, there’s historically been enough business to go around. This from Fortune’s Dan Primack earlier today:

Exclusive: MMV Financial in trouble

A venture debt provider stops writing new business.

MMV Financial looks like it’s on the ropes.

Fortune has learned that the Toronto-based venture debt provider has closed its three U.S. offices, laid off its U.S. staff and stopped writing new business. Seems that the overheated niche market – which has been flooded by commercial banks with lower costs of capital – has become prohibitively competitive.

“We feel that it is not prudent, or in our investors’ best interest, to write new business because of market conditions,” says MMV co-founder and CEO Minhas Mohamed, when reached via telephone. “We’ll continue to manage our portfolio from Canada.”

When asked if MMV ever plans to write new business again, Mohamed was noncommittal.

The closed offices were in Silicon Valley, New York and Reston, Virginia.

MMV was formed in 2004 to provide growth capital to emerging tech and life sciences companies throughout North America. Its management had worked on a previous venture debt platform backed by GATX Corp. (GMT), while the new effort was backed by a group of Canadian banks, private equity groups and pension funds. Sources have told me that one of MMV’s larger investors exercised a put option on the company due to ROI concerned, but Mohamed insisted that such speculation is unfounded.

For those of you truly “in the know”, the blast from Dan was not news if your read between the lines of a post from 12 days ago (see prior post “Always looking for experienced talent” July 6-11). Since our industry shares dozens of VC and portfolio relationships, there are few secrets; particularly big ones.

As reported in Fortune, the venture debt space is being crowded out by the commercial banks and is now too competitive to warrant further “prudent” capital deployments by private firms. According to the Fortune piece, the unnamed competitors have a very “low cost of capital”, which seems an odd fact to focus on given that MMV’s equity was understood to be levered at least 2-1 by credit facilities from Wells Fargo and ROI Fund, among others. In essence — assuming that understanding was correct — for every three dollars in a deal, MMV’s own investors put up just one. That’s a low cost of capital in every sense of the word.

As for stifling competition, that’s not been our experience, for sure. Good companies always have capital choices, which is something we’re used to after more than a decade in the sector. Over the past few weeks we’ve closed attractive VC-backed tech financings in California, New York and North Carolina, and have another NYC deal underway in documentation / due dili. To whit, Craig and I are in Boston today in the vain hope of meeting all 900 U.S. venture capital firms before we die.

One of the many benefits of having our firm’s entire capital base backed by pension funds and life insurance companies in a traditional 8 year GP/LP fund structure is that we aren’t subject to the whims of wharehouse lenders, hedge funds or growth equity investors with a 5 year horizon. It’s not permanent 99-year capital, but it’s long enough to provide stability for the management teams, portfolio companies and investors we are lucky enough to serve. We’ve had many opportunities to add leverage to our funding mix, but the question we always asked ourselves was: what happens to our portfolio companies if our lenders pull the lines? Venture lender specialist WTI, for example, saw US$200 million of its US$250 million bank line cut during the recent recession; and they’re a top drawer player that’s been in business for 30 years. They withstood the global credit crunch; others weren’t so lucky.

Before you ask, our current Fund III recirculates until 2014, and based upon a meeting we had last week with a new pension fund prospect, any Fund IV is looking as though it is in good shape when and if that comes to pass. As Dan Mida once said, “people come and people go”. Same could be said for some of one’s competitors; but there’ll be someone else there to take his/her place, so you have to build your own firm to not suffer from swings in the marketplace. Start by offering a product that’s more valuable to CFOs than merely being the lowest priced.

We’re doing our best to ensure that the firm will be staying around for a long time to come.

MRM