Local Investment Driving Memphis’ Diverse and Growing Market: An Interview with Matt Heiter

Matt Heiter is a shareholder at Baker Donelson in Memphis, Tenn. He focuses his practice on public and private securities offerings, mergers and acquisitions, corporate governance and business planning.

Key Takeaways:

  • Companies in Memphis garner capital from a strong local market of investors, as well as eager firms from outside the state.
  • Tennessee government has effectively marketed the state’s attractive business environment, encouraging a steady stream of out-of-state money.
  • The pent-up supply of cash from the recession and a general confidence in the economy has created a robust capital market.
  • In addition to strong financials, companies should focus on their management team when seeking investors.
  • Tennessee’s emphasis on start-ups has increased access to capital for companies of all sizes.

Q: What is your sense of private capital for middle-market companies in the South?

A: Middle-market companies that we’ve helped in the last year in Tennessee, Mississippi, Georgia and Florida have been profitable and growing, so they’ve been able to secure capital. The market is robust, and there are many sources of capital.

In Memphis, for example, a company had a generous offer from a large private equity firm in California, but the client didn’t need the capital because of the financial strength of well-known local families and institutions and their willingness to make the investment. For a middle-market company with a good track record and good profits, there’s a very dynamic capital market available to it.

Q: So, Memphis is seeing out-of-state and local investor activity?

A: We’re in a great situation. We have a strong local capital market, although it’s not quite as organized as the out-of-state money. We don’t have many private equity firms headquartered in Memphis. Instead, we have large, active family offices with a lot of capital, as well as a small number of institutional equity firms.

I gauge the strength of the local economy from the amount of unsolicited calls or emails I get from firms in other states wanting to do business in Memphis. As firms run out of deals in their own market, they recognize and migrate to the strength of Memphis. Capital seems to be flowing equally from in-town as well as out-of-town sources.

Q: Is there a difference in how in-city money and out-of-state money behaves — in terms of the kinds of deals that interest investors, the kinds of risks they are willing to take and the terms that they are willing to accept?

A: When you’ve signed the documents, there are hardly any differences. Both local and out-of-town investors are sophisticated and know the right questions to ask. Local companies occasionally benefit because they’re known in the community and are more likely to garner a look from local investors. Memphis investors have a sense of community and want to give back by investing in successful and growing companies that can generate local jobs.

Q: Are there certain industries that attract in-state or out-of-state money?

A: We’ve had a diverse client base within the past year, everything from manufacturing to the financial services industry. In a growing economy, there are lots of investors who focus on particular industries, so a growing, well-managed company is more likely to find an investor who specializes in their particular industry.

Q: In Nashville, there’s a lot of money that understands and invests in health care, and companies that aren’t in health care have a harder time attracting local attention. How does this compare to Memphis?

A: It’s a bit different in Memphis. We have a growing biotech industry, but it’s a little different than Nashville. We lean more towards medical devices and have one of the biggest concentrations of medical device companies in the United States. It is a little harder to get a health care deal done here if it’s not a medical device type deal. But just a little harder — we have seen recently a number of health care companies receive funding that are in the information science and pharma industries.

Q: Is the accelerator for health care companies in Memphis attracting much interest?

A: Memphis Bioworks created ZeroTo510, the first health care accelerator in the country, which has been very successful. A large reason for its success has been the participation of 2 local health care based venture firms, Innova Fund and Memphis Biomed Ventures. Companies participating in this accelerator have received substantial upfront investment, and many of the graduates have continued in business and raised subsequent funding rounds.

Q: Why do you think that capital is so readily available now?

A: A lot of capital sat on the sidelines during the recession. So with a pent-up supply of cash and general confidence in the economy, everyone wants to put money to use. It’s a snowball effect, people see others aggressively investing, which increases the competition to invest in “good deals.” It’s great for the companies looking for funding because they can negotiate terms more favorable to them. 

Q: In other interviews we’ve seen that out-of-state money looks for an in-state partner in order to deploy capital effectively. Are you seeing the same thing happen in your part of the state?

A: My most recent experience has been that they want it all, and they don’t want to share the investment with an in-state partner unless they need co-investors.

Q: So they don’t see a need to have boots on the ground in order to keep track of what’s going on, or do they have people who are keeping track of that for them?

A: When it’s a significant investment, they will get a board seat. They usually have a person working very close with the management to make sure the money is put to good use.

Q: Is most of the capital being deployed to invest in companies instead of for strategic acquisitions?

A: I have a number of clients that are growing their companies through acquisition. Many of these companies have raised capital to fund these acquisition programs. These are typically companies who already have fairly mature business and infrastructure. Most of the capital being deployed in Memphis, however, is investing in companies to help grow their business by building the infrastructure necessary to support it.

Q: Why do you think Tennessee is attracting so much attention throughout the country right now from people with money to invest?

A: Nashville has a lot to do with it. It’s become a destination city for young professionals, and Memphis benefits from that. As people look at Tennessee, they realize that there’s a whole other part of the state outside of Middle Tennessee. We also have a very stable tax situation and great government with a governor focused on business, plus we don’t have a personal income tax, which many business owners find very attractive.

Specific to Memphis, we have a lot of dedicated, smart leaders who are working to get the word out. When the Memphis Grizzlies played the New York Knicks this season, the Memphis Chamber of Commerce rented out a suite and invited New York business leaders to learn about what’s going on in Memphis. PR/Marketing efforts like this have attracted major companies like Electrolux, Mitsubishi, Ikea, Bass Pro Shops and other major manufacturers and retailers to Memphis.

Q: What types of capital are most prevalent?

A: The easiest and most prevalent form of capital is mid-market growth capital for a business with steady revenue and cash flow. Previously, start-up and angel funding had been difficult to acquire. But recently in Memphis, it’s improved, thanks to a couple of angel-focused funds being developed here, as well as the accelerator programs.

Q: Are there particular types of businesses that seem to be more attractive to funders?

A: In a hot market like this where everyone is interested, you really can’t tell. If you’re in a particular industry and you’re doing well, you’re going to find somebody that likes that industry who is looking to invest in it.

Q: What can companies do to make themselves more attractive to funders?

A: Beyond having a decent business, companies need a strong management team. The numbers will drive the interest, but the management team will secure the investment.

Q: How important do you think it is that Tennessee state government is involved in things like the Insight program, TNInvestco and other capital injection programs?

A: It is extremely important. TNInvestco kick-started the start-up industry in the state. And I applaud the government for taking it from the start-up level and turning it into a co-investment fund. Government enthusiasm and involvement has added an additional layer of confidence for investors and a desire to get it done.

Q: Do you think that priming the start-up pump has lead to increasing access to capital for the more established companies?

A: Yes, a rising tide lifts all boats. We’ve generally created a more robust environment for companies being funded all across the board, from start-ups to the most mature of companies. And, it is very important for Memphis, and any community, to have a robust investment environment that invests in both start-ups and mature companies, and everything in between. Due to the tireless work of many of our community and business leaders, we’ve obtained that. And, the signs so far indicate that it will continue.

 

Brought to you by the team at FourBridges

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