Capital Looking For a Home in Charleston, South Carolina: An Interview with Bobby Pearce

Bobby Pearce is an attorney with Smith Moore Leatherwood and the co-managing partner of the firm’s Charleston office. His practice includes mergers and acquisitions, corporate law, private securities offerings and shareholder disputes.

Pearce has an entrepreneurial background, having started or invested in multiple companies, and since 1984, he’s spent a great deal of time working on economic development initiatives for the state of South Carolina and the Charleston area.

Key Takeaways:

  • There is a broad chasm in South Carolina between investors with money and companies seeking to raise funds. With a shortage of mid-market companies that have the longer-term, proven track record that most investors are seeking, capital often is being left sitting on the sidelines.
  • Established companies, especially with EBITDA of $2 million and above, now have many more options for capital.
  • Charleston is on a fast growth track with its commercial and industrial base of companies; the number of home-grown and recruited successful, mid-market companies is expected to grow exponentially over the coming years.
  • The snowballing growth of mid-market companies in this region will lead to many more successful exits and then much more capital being reinvested into new companies in the Lowcountry of South Carolina, creating a self-fulfilling cycle of formation, growth and corporate and investor success.
  • Tech-savvy and creative millennials are migrating to Charleston at a rapidly accelerating rate because of its livability, coastal amenities, historic charm and now high-impact work opportunities. The region is one of the top 17 fastest-growing metro areas in the U.S. and is experiencing some growing pains, having to explore infrastructure options to better accommodate the increasing influx of people and businesses.
  • Boeing’s new multi-billion dollar aircraft manufacturing and assembly plant here has spurred an explosive growth of investment in the Charleston region’s aerospace and aviation cluster. Daimler just announced its plans to grow the region’s automotive cluster by building a Sprinter plant, which will complement the already-existing defense, tourism and health care industry clusters.
  • South Carolina’s highly-integrated, 16-campus technical education college system has greatly helped to attract Boeing and other companies to the state and the region. This system offers unparalleled industry-specific training and education and thus provides a steady stream of well-trained, qualified employees, which most other states cannot provide.

Q: How available is capital for middle market companies in Charleston?

A: I’ve never seen so much money looking to do deals in the 31 years that I’ve been working in the Charleston business world. The difficulty is that there are not nearly enough companies that seem to meet investors’ criteria.

The money on the sidelines is eager to get deployed, and there are owners out there that would very much like to sell all or a portion of their respective companies. But there’s still a fairly large divide of risk and valuation between the two groups of supply and demand of capital. The money side can be reluctant to deploy the capital unless there’s a decently long track record of success by a company. As an example, we just closed a deal with a Fortune 50 company buying 20 percent of a local company. The due diligence and closing required seemingly armies of lawyers, but the investor eventually confirmed it had found great value and made the deal work.

I believe that an extra level of caution remains because there’s still some heartache from the Great Recession. So on the demand side of capital, the older and more successful the company, the easier it is to find capital. The sweet spot is having EBITDA of at least $2 million. If I had 10 local companies in that range that wanted to sell all or a portion of themselves, FourBridges and I could sell them tomorrow.

Q: Is there a gap for middle market companies?

A: Yes, there are many, many potentially high-impact young companies located here that aren’t ready for primetime yet; i.e., not of interest yet to major investors. We need to see more of these companies grow and mature and create a mid-market ecosystem which matches our very healthy small-company and large-company population. To put it bluntly, we need a greater supply of companies in that middle market to meet the demand of investors.

Q: What will it take to prepare more companies for interested buyers?

A: Incubators and accelerators, like The Harbor, have started reshaping the Charleston startup and growth landscape. We’re getting the ecosystem infrastructure in place to grow more great companies faster, but we still haven’t reached the “escape velocity” needed to where we can point to 10, 15 or 20 local IPOs and major successful exits. At that point, we’ll be able to plow hundreds of millions of dollars back into new companies and into smaller companies needing capital to make the jump to light-speed growth, so to speak.

I believe it is only a matter of time before we reach this escape velocity and are seeing five to 10 really successful smaller companies capture the revenue and EBITDA growth and size they need on an annual basis. The capital is there. And equally important, the intellectual capital is already here or is on the way.

One of the best attributes of South Carolina is our 16-school technical college system. I would argue that our 16,000-student Trident Technical College is one of the top three reasons why Boeing selected Charleston and why it has quickly jumped to having over 8,000 employees here in just a couple of years. We have the technical schools and programs that are geared to the Boeings of the world – the companies that need technically-trained employees by the thousands—but also that are geared to the smaller companies that need the trained employees, the intellectual capital, to really succeed.

 

We have had more and more notable successes with fast-growing companies here in the last couple of years, including PeopleMatter and BoomTown, which have each raised tens of millions of dollars. We’re getting more and more companies like these that didn’t exist a couple years ago and have hockey-stick growth here. Over the next decade, with successes increasing exponentially as we predict, the middle market gap is going to fill up, and there will be tremendous opportunity there for equity investors and debt-capital providers.

Q: Are early stage companies getting investor attention?

A: About seven years ago, we were very frustrated because we had a lack of capital at the seed level. Now, the Angel Investor Tax Credit gives up to a 35 percent tax credit to people who are investing in certain young South Carolina-headquartered companies. With that new legislation, we’ve already had at least 70-80 companies qualify for their investors to receive tax credits, which triggers interest in those companies and other companies from sources of capital that might not have invested locally, or at all, previously.

In the early stages of a company’s life cycle, investors usually consist of “friends, family and fools.” Now, more sophisticated angel investors are willing to help these companies bridge the “valley of death” through groups such as the Upstate Carolina Angel Network and other angel groups.

We’ve got other programs, such as the South Carolina Industry Partners Fund, which feeds into SC Launch. Six million dollars a year is available for investment in South Carolina companies through SC Launch, which helps grow these companies into middle-market companies that are of interest to venture capital and private equity money. We’re filling in the gaps in South Carolina, and we’re rapidly seeing results.

Q: Charleston is generally perceived as an old Southern town with a wealthy core. Is the money there being invested in local companies, or is it otherwise tied up?

A: If you had asked me in the ‘90s, I would have said Charleston was an old-guard town with money tied up mostly in real estate. In the last 15 years, we’ve become a cutting-edge technology and creative city along with being one of the top travel destinations in the world. Charleston is now a sophisticated business town with more and more successful, homegrown investors, plus those who have succeeded elsewhere, have now relocated and are planning on succeeding further here.

Q: What’s next for Charleston?

A: These next 10 years are probably going to be the best 10 years in Charleston’s business life. The creation of wealth and the formation of fast-growing, high-impact businesses in the Charleston region will make this a phenomenal time to be here.

Q: What has fueled this?

A: The Spoleto Festival had years ago put Charleston on the international tourism map. Boeing has now put Charleston on the international business map. We’ve been able to attract many more national and international businesses here. Thanks to Boeing, we have this wonderfully expanding aerospace and aviation cluster that complements other clusters, including defense and the growing IT/software cluster. These larger companies will help, through local contracts – many just-in-time contracts – to spur on the creation and fast growth of small companies into mid-market success stories. And then maybe many of these mid-market companies will attract capital from the sidelines and grow themselves into larger success stories.

Q: In addition to aerospace and automotive, what other industries are strong in the region?

A: The economy has diversified over the last 10 to 20 years. In the old days, as mentioned, investors used to focus mainly on real estate, and many fortunes were made that way. But the medical community, especially the research side of the Medical University of South Carolina, has placed huge emphasis on entrepreneurship and commercialization of research.

And then we have a major defense research presence with SPAWAR, which focuses on naval space and weapons research. There’s about three to four billion dollars in R&D contracts that flow through the SPAWAR complex here.

Tourism continues to be a staple in the economy, with about five million people coming to the Charleston area each year. Our port is one of the finest deep-water ports on the East Coast so it has long been a staple of economic growth not just in this area but for the entire state…without our port, much of our state’s economic development would not have occurred or be possible in the future as the world economy continues to shrink in geographic size in essence.

And growth isn’t just limited to US businesses. In the last year alone, I have taken on representation of a Chinese company, a Russian company, a UK company and an Italian company. With Charleston’s growing national and international business reputation, the region is really on its way, and companies from all over are looking to do business here and smart people who can live anywhere are choosing to live here.

Q: Has the talent expanded here as a result of growing industries and other reasons?

A: Over the last 10 to 15 years, we’ve had an influx of a younger high-tech and creative crowd. These millennials are drawn to the South and to the urban coast because they first are choosing where they want to live and then they are finding exciting work to do in their chosen place.

We also have an influx of older individuals who have been very successful elsewhere and are coming here with their families for the quality of life. I probably get three to four calls a month from people that have either moved here or are thinking about moving here and want to acquire businesses or find high-level jobs.

With the influx, though, is coming its own set of quality-of-life challenges.

Q: Can you elaborate on the quality of life issues?

A: Infrastructure is a major battle point between conservationists and proponents of economic growth. There are severe growing pains with balancing the quality of life and the need to support job development. Conservationists and preservationists on one side are doing a great job trying to protect what we have – and then you have the necessity of growing opportunities for all, while avoiding gridlock and the lowering of our treasured quality of living here for residents. The ability to conduct commerce depends on high-quality infrastructure. The difficult condition and congestion of our interstates is at the top of many people’s lists. It’s going to take great foresight for people to realize what’s happening and plan for 10, 20 and more years out.

Cost of living is also an issue as we’re getting around 1,500 new residents a month. We’re not that big of an area and with our backs against the ocean, we don’t have much remaining land to build affordable housing close in.

Q: What are some ways in which the local government has helped make Charleston a better place to live and do business?

A: Charleston’s soon-to-be-retiring Mayor Joe Riley has led us for 40 years. He helped turn this city around from a livability standpoint. For example, King Street was essentially dead back in the ‘70s. It’s now a golden mile with virtually every retailer in the world from Apple on down. Mayor Riley was instrumental in the heavily-negotiated development of Charleston Place Hotel in the mid-‘80s, which eventually satisfied preservationists and developers alike and triggered, over time, a rebirth of our downtown. Mayor Keith Summey in North Charleston has led a similar economic revival in his city that complements the efforts of Mayor Riley and other regional leaders.

Charleston is a living, breathing museum that miraculously is also in the still-early stages of a phenomenal economic growth spurt. Balancing all of these interests and goals and visions will not be easy for future leaders but the word is out: the Charleston region is at or near the top of companies’ wish lists for places to operate with qualified, highly-trained employees who are quite happy living in such a wonderful quality-of-life place.

Brought to you by the team at FourBridges

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