Midwest Growth Partners: ‘Private debt has pulled back’

The firm has seen deals slow down or halted altogether due to a lack of credit options in the US lower mid-market food and ag segment in which it specializes.

Prospective deals in the lower mid-market agriculture and food infrastructure segment are suffering from the retreat of private credit providers, Midwest Growth Partners managing partner and co-founder John Mickelson told Agri Investor.

While many of the larger private debt managers are expected to benefit from the bank pullback following the failures of Silicon Valley Bank and Signature Bank, smaller private debt providers more likely to service the lower mid-market segment are likely to be hardest hit by the US Federal Reserve’s interest rate increases, as reported by affiliate title Private Debt Investor.

“Within the industry, we have seen some sale processes that have slowed down or stopped because a lot of the private debt providers have pulled back,” Mickelson told Agri Investor. “And so not only has the interest costs gone up for potential acquirers, but then the availability of this credit that was out there for a lot of the bigger deals has gone away as well.”

MGP invests in food and agriculture businesses that are either trying to structure their succession planning or seeking growth capital.

The firm specializes in supporting US lower mid-market businesses in agriculture, manufacturing and distribution industries, which are mainly located in rural and underserved areas in the US Midwest.

Mickelson added that the firm does not use “a tremendous amount of leverage compared to some of our peers within our industry,” so the interest rate climate has so far been manageable across its investments.

“For our own portfolio companies, certainly interest expense has gone up, but it’s not an existential type of change for any of the companies so they still have good balance sheets and are still relatively conservative,” Mickelson said.

The Iowa-based firm closed its third flagship vehicle on $170 million in April. MGP targets returns in the mid-to-upper teens range on a net return basis.

Fund III has a five-year investment period and will make between 10 and 15 debt and equity investments worth between $500,000 and $20 million into profitable businesses. Target companies will have revenues of between $4 million and $100 million.

MGP received its USDA-administered Rural Business Investment Company license when it was raising its second fund – which closed on $113 million in 2019 – which allowed the Farm Credit System to become an LP in the firm’s vehicle, which it has been since Fund II.

Fund III also received commitments from family offices, commercial banks, corporations, trade organizations and individual investors.