Petra Capital's Blackburn: Maybe 'everyone's on-strike'

Injecting wry humor into discussion of the nation's woebegone economy, Mike Blackburn said the slowdown has left him "feelin' a little idle."

Then, during an interview with VNC, the managing partner of Petra Capital Partners provided a sample of obstacles to getting deals funded — factors beyond the dismal economy and the paralysis of lending institutions.

First, said Blackburn, while company valuations are lower than two years ago, entrepreneurs are still holding out for valuations they would have been lucky to get, even before the implosion of the U.S. economy.

Implying that no relief on valuations is likely to come from the buy-side, Blackburn predicted that until entrepreneurs' expectations adjust downwardly, relatively few deals will get done. Based on experience in earlier cycles, that resetting of demands could take another year. Meanwhile, he said, "we feel that, at best, it will all just bounce along the bottom, for awhile."

"The political rhetoric is unfriendly," continued Blackburn. A caustic environment, he said, particularly one in which private investors are "villified" as underproductive or profiteering, simply heightens investor fears about such things as increased taxes. Blackburn's list also includes Sarbanes-Oxley regulatory compliance – excessive to the point of being "silly," in his view – which he believes hampers entrepreneurs, investors, boards of directors and others.

Those same concerns are often among factors cited as contributing to the near-total evaporation of the market for initial public offerings (IPOs), which have, until recent years, been private equity's exit of choice.

And then, said Blackburn, there's the consumer. Even though the recessionary environment has been in-place for a year or so, weak consumer confidence is pummeling many portfolio companies, he said.  The Conference Board on Jan. 27 said consumer confidence remains "at a historic low."

Worse, he said, looking toward the near term "we believe it gets worse, before it gets better." He added, "The consumer's got to start feeling better" before recovery can get traction.  Even with falling oil prices and rock-bottom interest rates, Blackburn said, there's no immediate remedy for consumer fear on the horizon.

As a result, he said, "I think everybody's just gone on strike."

Not to say that 13-year-old Petra Capital, itself, has ground to a halt. Blackburn explained that although Petra Growth Fund II, which closed ten months ago, will probably invest its full $160 million during its five-year window, to this point the fund has made only two investments.

One of those investments was in Mycroft Inc., a St. Louis-based IT services company that is focused on identity management and applications security. The other was T2 Systems, an Indianapolis provider of parking-management software.

The two businesses joined the Petra portfolio, which already contained American Hometown Publishing and ConnectivHealth, both Nashville-based media plays; and, Lakeview Farms, a Delphos, Ohio, company that manufactures food items. Petra has exited nine companies.

"We're very, very active in trying to invest money," said Blackburn, but it's tough going. While Blackburn said he believes Petra II may make upward of 15 investments by spring 2013, it could be awhile before transaction number three actually drops.

As contrast, Blackburn explained that Petra issued 13 indications of interest in deals in the fourth quarter of calendar 2008. That baker's-dozen of 4th-Quarter prospects yielded three term-sheets, one of which has recently been signed. As for fresh activity in the current quarter, Blackburn said, "We have issued one new indication of interest this year, which was turned down. We have two signed [letters of intent], which we are in due diligence on right now..."

Petra seems unlikely to have a zero-deal 2009, and, in any event, Blackburn was unequivocal in saying that Petra's limited partners well understand market conditions and are not unduly pressing Petra to invest.

Neither is Blackburn exactly reeling. At age 45, he has been through enough downturns to observe that the present calamity "feels very similar" to the downblasts of "9/11" and the Dot.com Bubble burst.

In addition, before joining Petra 11 years ago, Vanderbilt- and Owen Graduate School of Management-educated Blackburn worked six years as a vice president of another local VC, Richland Ventures.

Petra's next surge of growth, assuming there is one up-ahead, might be driven by Tennessee ventures, or the impetus might come from Arkansas or Iowa. Less than a year ago, the Arkansas Finance Authority and Iowa Capital Investment Corporation (through the Iowa Fund of Funds program) have invested a total of $9.5 million in Petra Growth Fund II, with an agreement Petra will explore funding Iowa ventures in healthcare and information technologies.

Blackburn said Petra networked its way into those agreements via long-time ally Oklahoma City-based Cimarron Capital Partners, which is active in both Iowa and Arkansas.

Petra Growth Fund II's institutional investors represent about 75 percent of assets under management, according to Blackburn. The institutions include Goldman Sachs, SunTrust, Bank of America, and others.

Blackburn said institutional investors have signed-on with Petra because the firm has a record of "knockin' it out of the park," when it comes to returns, which Blackburn has previously characterized as running more than 20 percent. Confident of his funds' performances, he said he doesn't "take personally" the fact that Vanderbilt University and some other prominent in-state institutions have apparently refused to invest in Tennessee funds.

Petra has a track record. In its earlier Petra Growth Fund I, Petra had $63 million to invest. The two growth funds – together, $223 million – included a total of $147 million in Small Business Administration leverage, available to Petra as a licensed Small Business Investment Corporation (SBIC). An earlier Petra fund, with more than $70 million in assets, was not an SBIC-licensed fund.

Today's strangling market notwithstanding, Blackburn and his five colleagues (including one intern) stay busy enough, tending to portfolio companies' needs, networking for deal flow, and sifting through roughly 250 formal venture submissions that make it into the Petra database each year, from which 50 may be "good-enough fits" to warrant closer examination. The candidates are strained through Petra criteria and processes.

Petra has its deal-flow filters in place at each stage of the winnowing. Looking nationwide for good deals, Petra says it likes to back businesses' founders; and, it likes healthcare services or business services (including IT).

"The historical range of companies in which we have invested is $5 to $50 million," Blackburn said. "The average is closer to $25 million. We prefer to find companies with at least $10 million in revenue and $1 million of EBITDA at the time we invest," and preferably with a record of 25 percent or greater growth, per year.

Blackburn acknowledged that entrepreneurs have a tough slog trying to get the attention of investors, but, then, so do people like himself. He explained that for Petra's second fund, the management team made roughly 250 inquiries among prospective investors, ultimately gaining 25 new investors, bringing their total investor number to about 50. He cautioned that the majority of investment came from a smaller subset of that group.

Blackburn echoed the sentiment of many entrepreneurs, as he explained that when he's pursuing investors, he prefers getting a straight "yes" or "no" decision from them – rather than being left twisting in the wind by the sort of prospect who declares, "I want to be the last guy in your fund."

For now, though, the pace within Petra Capital's Bedford Commons offices in Green Hills seems to afford Blackburn more time for volunteer duties. For example, he has become active in the new capital-formation board sponsored by Tennessee Technology Development Corporation, and previously served on the Nashville Area Chamber's "Entrepreneur Project."

Blackburn is also a member of an SBIC advisory board and has volunteered to help with arrangements for an SBIC private-equity conference that will convene at Nashville's Hermitage Hotel, in April.

Asked about his role in that event, he replied, "I'm in charge of the golf pairings." When a reporter noted the task seemed perfect for a man who feels "idle," Blackburn replied, "Exactly." ♦