Charleston Regional Development Alliance

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Kiawah Development Partners set out on new venture to fund small businesses throughout the Southeast

Nov. 1, 2003
Charleston Post and Courier
By Frank Norton
Real estate holding company Kiawah Development Partners, the creator of Kiawah Island's chic residential communities, is setting out on a new venture funding small businesses throughout the Southeast.

The Charleston-based firm, through a newly created investment subsidiary, has partnered with Miami-based small-business investor Banyan Mezzanine Fund, an 18-month-old company that specializes in alternative financing for small companies.

Together, the firms have so far raised about $60 million in capital, including $40 million in matching funds from the Small Business Administration. They hope to raise another $15 million before putting the money to work in fast-growing companies that show promise of growing even faster.

In the finance world, the effort falls under the private-equity or debt-financing umbrella, an alternative to bank financing whereby a group or groups of investors pool money to either loan out or buy stakes in promising enterprises. Kiawah and Banyan plan to mostly make loans.

The agreement between the two firms gives Banyan an investment presence in Charleston and the Carolinas and provides Kiawah a much larger capital base to work with.

It also creates the first SBA- backed Small Business Investment Company in South Carolina, a distinction that Kiawah partners say will play a key roll in bringing much needed investment dollars to South Carolina's underserved small-business market.

The federally funded SBIC program was created in 1956 to encourage investment in small businesses by setting up a matching fund for investors. Every dollar a fund raises from private investors is matched with $2 by the federal government.

Banyan Partners' principals include two former Bank of America executives and a former investment banker with Morgan Stanley.

Kiawah Development Partners, lead by Charles P. Darby III, Leonard Long and Pat McKinney, say they have already identified six to eight candidates in the Carolinas that meet their investment criteria: at least $5 million in annual revenue.

"South Carolina has had very few alternative funding sources and that has made it quite difficult for a lot of people to grow their businesses," said Kiawah Development Partners President Ron Owens, who was hired to help manage the fund.

"Because it's a small state, it's hard to say whether the lack of alternatives is due to a lack of companies or a lack of capital. More and more, I think it's due to a lack of capital," he said.

The enterprise plans to make capital investment loans in the range of $1 million to $3 million to companies that demonstrate strong cash flow and the ability to pay back debt.

Owens said he expects demand to be strong, especially in light of consolidation among large and regional banks, a trend that has disrupted service to many small companies and resulted in a scarcity of financing options in South Carolina and the Southeast.

"We're not just doing this to help out small businesses who need growth capital," he said. "We're here to make money, and feel that fueling small-business growth is a good way to do it," said Owens.

He said the firms hope to deliver a rate of return of up to 18 percent.

According to Colin C. Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth College's Tuck School of Business, that rate is quite possible.

"These funds play a critical role for small to mid-market companies that need money to grow their businesses and aren't serviced by banks, who often deem them too risky a profile," he said. "In return, private equity financers generally get a higher interest rate than what the banks charge."

He said private equity funding is on the rise due to renewed growth in the economy and the number of small businesses looking to expand.
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