Intellectual Capital and Cautious Traditional Banking Fuel Investment Activity in the South: An Interview with Ken Cyree

Photo by Robert Jordan/Ole Miss Communications
Photo by Robert Jordan/Ole Miss Communications

Dr. Ken Cyree is the Dean of the School of Business and the Director of the Mississippi School of Banking at the University of Mississippi. He is also the Frank R. Day/Mississippi Bankers Association Chair of Banking, and a Professor of Finance at the University. He holds a Ph.D. in finance from the University of Tennessee at Knoxville. His research interests include banking and financial markets, and his papers have been published in the Journal of Business, Financial Management and Journal of Banking and Finance, among other academic journals.

Key Takeaways:

  • The culture of debt financing in the Southeast has typically been risk-averse and remains that way today.
  • Because traditional banks remain risk-averse in debt financing, there are more investment opportunities in the Southeast for private equity firms, venture capital firms and angel investors.
  • To best fuel middle market growth and activity in the Southeast, create partnerships between venture capitalism, private equity, traditional banking and hedge funds to support companies from inception to the middle market stage and beyond.
  • The intellectual capital found in the South’s college towns and cities have the resources to spur entrepreneurial growth.

Q. From your academic perspective, what are some middle market trends you’re seeing in the Southeast region of the U.S.?

A. In general, I would describe the areas I’m familiar with — my home in Mississippi and places I often travel, such as Louisiana, Memphis, Nashville, Birmingham and Tampa — as having a measured pace in terms of middle market activity. From my experience and conversations, the South is doing better than many other places in the country with regards to deals in the middle market.

There are certain “hot pockets” in the South, where there is significant activity right now in middle market mergers and acquisitions. Two such towns that quickly come to mind – Nashville, Tenn. and Oxford, Miss. – are both homes to universities, and I think that plays a significant role in economic growth and development.

In rural spots, activity is typically much slower, with less opportunity for economic growth. Cities like Atlanta are growing rapidly, whereas other cities in Georgia, such as Macon or Savannah, might only see a fraction of the activity that happens in Atlanta. Trying to balance growth across all economic climates contributes to the measured pace of the South.

Q. Why do you think that college towns, in particular, typically reflect a hotter market?

A. There is a great deal of intellectual capital in towns with universities, and it comes from both students and professors. The energy and enthusiasm of students who are eager to build businesses create a vibrant sense of entrepreneurialism throughout the community. As a result, many people want to live and work in these areas. Young impresarios find guidance and mentorship from professors or through programs within their schools, further increasing their chances of success.

Universities also foster an environment of shared knowledge and entrepreneurialism that makes job creation by way of new businesses noticeably easier and more efficient than it might be for a town without these intellectual resources. And because of the range of knowledge that exists in a university community, a diverse group of industries can be supported. The lack of diversification and support is visible in rural communities with one industrial focus. If a small community’s main industry declines, and there are no new ideas or opportunities coming in through the creation of new businesses, it creates a difficult situation for the entire town.

Q. Much of your academic history has been spent researching traditional banking. What is your opinion on debt financing in the Southeast?

A. The culture and tradition of Southern banking tends to err on the side of caution, and the recession has helped cement that way of thinking. In the case of small banks wishing to break into the middle market in the Southeast, decisions are deliberate, careful and measured because there is not much room for error — a few bad deals can be detrimental to a small bank. So, it can be more difficult for middle market companies to secure debt financing right now because they must demonstrate their business model has very little risk and a high predicted return.

There are larger financial players, such as Suntrust Bank, Hancock Bank and Regions Bank, doing good things for the middle market space in the Southeast. Most of these large banks, however, are more likely to overlook companies under the $25 million threshold.

Q. Since debt financing can be challenging within the middle market—how can companies best position themselves in front of potential lenders?

A. Before 2008, the main focus for many bankers was on growth, but now they are more interested in seeing a strong balance sheet. The bulk of the failures in the 2008 financial crisis came from high leverage and loans made to high debt companies. Lenders are trying to avoid making those mistakes again.

Now, banks tend to look for high levels of collateral and small amounts of debt. Company growth and high cash flow, while important, tend to carry less weight.

Q. How has the risk-averse nature of traditional banks made way for other types of finance in the region?

A. Many traditional bankers don’t like to partake in the first few rounds of financing for a new company, leaving opportunities for other types of financing and investment. Private equity firms are less risk-averse, so they’re more likely to jump in for the first round of funding if there are obvious growth opportunities. Also, middle market companies in the South exhibit a steady pace of growth, which is attractive to investors in the private equity sector because it is less risky than a faster-growing company.
Venture capitalism, which is traditionally more available on the East Coast, is starting to gain more traction in the South as well. There are more deals being done, thanks to angel investors and crowdfunding, in markets that aren’t traditionally thought of as venture capital powerhouses, like Tampa, Nashville and Birmingham.

Q. Why do you think that venture capitalism is gaining traction in these areas?

A. The measured pace of the South combined with high levels of innovation and an educated market make these areas attractive to venture capitalists. It’s about cost, return and risk — there’s simply less risk in a city with an already-booming economy and a surplus of educated citizens. Venture capitalists are looking to invest in industries like technology and manufacturing— two industries that are currently thriving in the Southeast.

Q. What hopes do you have for the future regarding the middle market sector in the South?

A. Universities and governments play a vital role in creating cultures where innovation can be harnessed and developed into strong companies that support local and regional economies. In both entities, smart people with real passions have the ability to solve problems and create change. But I think we could do a better job at commercializing these ideas so that they develop into startups that grow into vibrant middle market companies. At the University of Mississippi’s Center for Innovation and Entrepreneurship, we’re working to improve this with a mentorship program, access to free legal clinics and guidance on government resources.

I also think the South needs a convergence of banks, private equity, venture capitalism and peer-to-peer lending to provide better access to capital for middle market firms. I think if these entities formed partnerships and regularly communicated through symposiums or other consistent interaction, we’d naturally build a more direct pipeline for companies to receive the capital they need at each stage of growth. I hope that in working to achieve that, we do it quickly, safely and competitively to provide an engine of growth in Mississippi and throughout the Southeast as a whole.

Brought to you by the team at FourBridges.

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