Mass. investment firm may offer growth capital in R.I.

The Business Development Company of New England could funnel millions in loans to fledgling companies.

PROVIDENCE - The state Economic Development Corporation plans to announce today a partnership with a Massachusetts investment firm that state officials hope will pour tens of millions of dollars into local start-ups and growing businesses.

The Business Development Company of New England has access to more than $150 million for investments in companies that have struggled to secure bank loans or tempt venture capitalists. Until now, it has invested mainly in Massachusetts, although it has accepted proposals from Rhode Island firms.

"The real difference is in our outreach effort," the company's president, Kenneth J. Smith, said yesterday. "We intend to be aggressive about finding deals."

For the first time, the Business Development Company has hired a loan and investment officer, Nancy M. Gibeau, for the Rhode Island market. It is now negotiating for office space at the EDC headquarters on Valley Street in Providence.

A related investment firm, the Business Development Company of Rhode Island, has operated here since 1953. But it has limited capital and typically caps loans at around $500,000; its Massachusetts counterpart provides up to $2.5 million.

Garrett B. Hunter, president of The Business Development Company of Rhode Island, said the needs of local entrepreneurs exceed the company's lending capabilities. Working with its Massachusetts counterpart, he said, "we can help bring more and larger amounts of growth capital to companies that need it here in Rhode Island."

Both companies are financed primarily by member banks. The Massachusetts company also gives loans backed by the U.S. Small Business Administration, and invests through three private equity funds that it manages.

The expansion into Rhode Island, the product of six months of meetings between EDC officials and The Business Development Company, is part of a broad effort by the agency to direct investment to fledgling companies in high-wage industries such as information technology and pharmaceuticals.

"There's a lot of good companies to invest in," Smith said yesterday. But "there are huge gaps in the marketplace," he said, for investments in companies that do not qualify for bank loans and promise strong growth but little prospect of becoming the "next Google."

Venture capitalists, Smith said, "are not looking to hit singles with their equity money, they're looking to hit home runs."

Rhode Island start-ups have been complaining about the lack of investment - including seed capital, working capital and expansion capital - since long before the national mortgage crisis left banks with little appetite for risk.

That challenge, state officials say, has stunted the development of promising companies, stagnating job and income growth. Total employment in Rhode Island grew by only 0.7 percent last year, and the median wage trailed the national average.

"One of the key barriers that comes up in every conversation is the availability of growth capital," Saul Kaplan, the EDC executive director and Governor Carcieri's top economic adviser, said yesterday. Coordinating with The Business Development Company, he said, the EDC will "play offense," searching out local companies that could use a major investment.

"They'll work very closely with us," Kaplan said. "You have to be in the marketplace. You have to have a good sense of where the growth opportunities are."

This is not the first attempt by state officials to help shepherd companies through the early stages of development.

The Slater Technology Fund, a taxpayer-backed program, provides venture capital to technology start-ups; the Rhode Island Science and Technology Advisory Council awards grants to pay for research that has the potential for commercialization; and the EDC distributes Innovation Tax Credits, allowing companies to reward investors with up to $100,000 in credits off their individual state income-tax bills.

On average, however, those programs provide companies with relatively small sums, not nearly enough to pay for years of research into a new drug or medical device.

The state's soaring deficits have complicated efforts to expand grant programs. But the EDC is trying to significantly broaden its ability to help companies bring in private money.

Today, the EDC will call for legislation that would give it the authority to guarantee $20 million in private borrowing. That money would help companies secure loans without the assets typically required for collateral.

Since 1958, the Rhode Island Industrial-Recreational Building Authority has guaranteed loans for companies investing in new machinery and real estate. But the demand for that money has dried up as many of the state's manufacturers have shut down or moved their operations overseas. The authority has committed only $16.4 million of the $80 million it is permitted to guarantee at any time.

The proposed legislation would reduce that guarantee authority to $50 million and shift $20 million of the state's potential liability to a new fund, the Growth Capital Guarantee Program.

The new program would not be restricted to investments in equipment and buildings, allowing companies to use the money to broaden their sales forces, develop software products or buy supplies to satisfy large orders.

Under the proposed legislation, the EDC board would vote on applications for loan guarantees.

"This is an important time for Rhode Island. We are at a tipping point and must confidently move forward with a common vision and actionable plan for creating a stronger economy," Carcieri said in a statement. The new fund, he said, "will help create better jobs for Rhode Islanders."

House Majority Leader Gordon D. Fox, D-Providence, and Sen. William A. Walaska, D-Warwick, plan to sponsor the legislation, Kaplan said.

"One of the key barriers that comes up in every conversation is the availability of growth capital."

Saul Kaplan,EDC executive director

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