Business development fund revival being led by Volpe

From the St. Louis Business Journal 05/25/07
by Greg Edwards

The St. Louis Business Development Fund is something of a well-kept secret, and that's the last thing it wants to be.

"In its 13 years, I think it's safe to say the fund has been undermarketed. It's been sitting here largely unused," said Vince Volpe, who was hired as business development liaison five months ago to change that.

Founded by Rick Palank in 1994 and based in Clayton, the fund invests in businesses that need bridge loans of $50,000 to $500,000 to grow but don't qualify for loans with conventional lenders, such as banks, and don't want to sell equity in their businesses.

"Our target market is privately held, family-owned companies," said Volpe, who also teaches business law and entrepreneurial studies at Saint Louis University's John Cook School of Business. "They're growing companies, but they can't get the money they need to grow further."

Despite its bureaucratic-sounding name, the fund is a business run for profit, though there hasn't been a lot so far. It's owned by 23 banks, ranging from Bank of America to St. Johns Bank and Trust, and by the St. Louis Development Corp., the St. Louis County Economic Council and the Economic Development Center of St. Charles County. The banks provide the funds to make the loans, and the shareholders split the profits.

The shareholders take no ownership interest in the companies. "Our slogan is 'investment without ownership,'" said Palank, president and chief executive. "There's nothing like this in the marketplace."

The fund charges interest at the prime rate plus 3 percent or 4 percent and what it calls a success fee, payable at the end of the five-year loan period. Typically, that fee is 10 percent a year and is based on the original amount of the loan. So if you borrow $500,000 and pay off the loan after five years, you pay the fund $250,000 on top of the interest rate. If you pay off the loan in less than five years, you pay proportionately less. There is no prepayment penalty.

"It sounds expensive, doesn't it?" Palank said. "But suppose you raise that $500,000 by selling off 20 percent of your company to an investor and your company grows and that 20 percent increases in value to $2 million in five years.

"You not only gave up 20 percent of your company; you also gave up the difference between $2 million and $500,000."

When the fund started, its loan limit was $50,000. That was later upped to $200,000, and now it's $500,000. The average loan was $342,000 in 2006, up from $214,000 in 2005 and $133,000 in 2004.

The fund made six loans totaling $800,000 in 2004, eight loans totaling $1.7 million in 2005 and seven loans totaling $2 million in 2006. While the loans are amortized over five years, the average loan is paid off in half that time.

The fund's profit was $172,695 on revenue of $821,405 in 2006, up from a profit of $52,940 on revenue of $481,008 in 2005.

Stan Morrison, a former Rawlings Corp. executive, worked with the fund after he bought a closed Rawlings plant in Licking, Mo., and started TAG Team Uniforms. The business grew so fast that he needed capital to continue its growth.

Heartland Bank provided a $1.5 million line of credit, and the development fund invested $500,000, which "allowed TAG to secure much-needed capital without diluting its ownership," Morrison said. TAG's sales increased to $5.5 million in 2006 from $1.4 million in 2004, the year the company started.

The 26 shareholders in the fund are in it for more than their share of the profits. For the banks, the companies the fund invests in don't fit in their loan ranges now but might if they grow. The three economic development agencies and their communities benefit from job growth and increased taxes.

The fund, which currently has 30 companies in its portfolio and $3.8 million in loans, is ready and able to make more loans, Palank said, but many companies don't know it exists. Fifty percent of applications are approved, and the fund has had no delinquencies.

To increase the fund's visibility, Volpe is talking with professionals who work with growing businesses, such as bankers, attorneys, accountants, business brokers and financial advisers.

gedwards@bizjournals.com