In mid-September, Monroe Capital announced their selection by The White House to develop a first-of-its-kind investment strategy focused on supporting businesses operating in the U.S. automotive supply chain. With the support of MEMA, The Vehicle Suppliers Association (“MEMA”) and the Alliance for Automotive Innovation, Monroe will launch this new strategy known as the Drive Forward Fund LP (the “Fund”), to help address this key White House initiative. The Drive Forward Fund LP will seek to raise up to $1 billion and focus on suppliers and manufacturers, as well as other businesses that provide complementary products and services to the industry, by investing in these companies that play a pivotal role in fueling growth and innovation within the ~$1 trillion U.S. automotive industry.
ABL Advisor met with Monroe Capital’s Alex Parmacek, Managing Director and Portfolio Manager of the Fund to learn more about this new Fund for Monroe Capital and the reasons for this initiative beyond the significant investment opportunity.
ABL Advisor: How was this relationship with the White House established?
Alex Parmacek: I anticipate that we were selected as the optimal partner to lead this strategy for a variety of reasons. Predominantly, our 20-year track record and expertise investing in the lower-middle market, a market where we have grown into a leading asset manager with approximately $20 billion of AUM (as of July 1, 2024). Companies operating in the lower-middle market closely resemble the financial profile and scale of the businesses that we intend to focus on investing in within the automotive supply chain. By providing capital solutions to these small and medium-sized companies in this relatively underserved sector, these businesses will have the potential opportunity to utilize proceeds to help them navigate the evolving landscape and their transition from internal combustion engines to electric vehicle and hydrogen fuel cell technologies, as well as invest in other major innovative technological advancements that are occurring within the space.
We believe, the automotive industry is going through a tremendous transformation and growth phase, and I believe, these growth tailwinds are likely to be relatively sustainable for the foreseeable future. To capitalize on this growth opportunity, capital investments are likely to be required. We've seen companies working through this transition both at the operational and the strategic level, but the bottom line is, it takes capital support to endure the transition and build out the necessary infrastructure to support the growth. The automotive industry is a complex space for companies to operate in and for investors to invest in. It is capital intensive and is cyclical in nature. These dynamics make it challenging for these businesses to access traditional forms of financing given the heightened regulations resulting from the GFC, notably, Dodd Frank. As a specialized asset manager with significant experience in lower middle market lending and having made more than ~$1 billion of investments in the automotive sector1, Monroe is an ideal partner to lead this White House initiative.
In addition to our expertise and investment track record, we've also run several SBIC funds in our history and was awarded the SBIC Lender of the Year in 2015 by the Small Business Administration (SBA). I believe our familiarity with the SBA and government financing programs was also a consideration.
ABL Advisor: You touched on capital intensive nature of this sector. Why are small to mid-sized auto suppliers finding it difficult to find the financing they need from traditional lenders creating the need for this Fund? What are some of their greatest challenges?
Parmacek: While I can’t speak for the traditional lenders, who may have faced a different regulatory environment, I know that it has become more challenging than ever for these small and medium-sized automotive-focused companies to access traditional forms of financing. This is a highly competitive industry that is growing and evolving at a rapid pace. To navigate this environment, companies are faced with the need to make capital expenditure investments to expand capabilities, operating capacity, and implement new technologies. The capital intensity of these businesses, in addition to the cyclicality and a highly competitive landscape of this sector pose challenges for credit providers. There's volatility in demand and in margins, which can make it very challenging for these operators to maintain a steady stream of production and ultimately cash flow.
All those factors as well as leverage and structuring constraints, make it difficult for traditional financing sources to be an optimal partner. In our view, you need flexibility, speed of execution and high touch expertise. Those are all things that a direct lender such as Monroe provides that differentiates us. Companies place meaningful value on the flexible and sophisticated solutions offered by a lending partner as they prepare to navigate all economic environments and industry changes.
ABL Advisor: Why is Monroe taking this leadership role in this first of its kind investment strategy for the automotive industry? To clarify, is this strategy for purely an investment opportunity, or also to facilitate what Monroe believes is an important future shift toward clean energy and sustainable vehicle production?
Parmacek: That's exactly it. Monroe is an asset manager, and our job is to generate compelling and attractive risk adjusted returns for our investor base. With this opportunity, we believe we are in a position to also provide attractive solutions to an underserved market undergoing an exciting growth and transitional phase. Beyond the investment opportunity, we are extremely excited to play a leading role in a bigger and very meaningful initiative. As a country, Americans are aligned in understanding the importance of the automotive industry to our economy. The U.S. automotive sector is a ~$1 trillion industry, the largest U.S. manufacturing market, contributing roughly 5 percent of our annual GDP and accounting for millions of jobs. America has been at the forefront of the global automotive industry for a very long time. We are very passionate about having the opportunity to be at the forefront of supporting this industry and ensuring that the U.S. remains at the forefront of the space. For us, this is about leveraging our capabilities and expertise to truly make a difference and a positive impact.
ABL Advisor: A seemingly important part of this strategy is to work closely with MEMA, The Vehicle Suppliers Association and the Alliance for Automotive Innovation among others as advisors to the Fund. Please tell us about Monroe’s relationship with these organizations and how you will be working together on this initiative.
Parmacek: These groups are on the front lines of the industry and will be very valuable counsel for us as we execute this strategy. No one understands the industry’s opportunities, challenges, and composition at the level that they do. We believe that their knowledge, expertise and network will be essential guidance for us as we invest in the space, allowing us to truly make a difference and ensure the automotive community is best served going forward. We believe these groups are very excited and passionate about this opportunity for small and medium-sized businesses in the industry to access private capital in order to keep the wheels turning on the American auto business.
ABL Advisor: What are the next steps toward launching this fund and what is the timing of this launch?
Parmacek: Everything is in process right now. We are moving forward with the SBA approval process and are having conversations with prospective LPs. I think in a perfect world, we can start deploying capital at some point later this year, but realistically, we're probably looking at some point in early 2025. There are a lot of moving parts and many different processes all going on at the same time, and we're moving as quickly and as efficiently as possible to try to put this into action.
ABL Advisor: Any parting thoughts you would like to share about this announcement?
Parmacek: I would like to reiterate that we are very excited about leveraging our expertise in lower middle market direct lending to play a meaningful part of this initiative that we hope every American can stand behind and support. The Drive Forward Fund has the opportunity to be a positive solutions for the OEMs, suppliers, workers, and for investors. This vehicle offers potential solutions to these automotive companies as they address the challenges they're facing within the supply chain head on, but also financial support as they seek to capitalize on the very compelling tailwinds that are driving growth and innovation for the industry.
The Fund intends to help America remain at the forefront of the automotive industry, which is the overarching theme of the White House initiative. In our view, the Fund will help create and support jobs for U.S. automotive workers, making sure automotives are created in America by American automotive workers for the foreseeable future. Further, it will help OEMs and tier one communities remain community anchors and at the epicenter of this part of the economy for years to come. All of these factors make us very excited about the launch of the Drive Forward Fund.
1.Excludes syndicated loan which would not be considered for the Fund