How much success have some Opportunity Zone investors had in deploying capital into early stage venture companies?

Leonard Mills is CEO of Verte OZ, an Opportunity Zone fund that invests in high-growth disruptive businesses.

Click the play button above to listen to my conversation with Len.

Episode Highlights

• An overview of the Verte Opportunity Fund strategy, the characteristics that make it unique, and why it’s ideally suited to take advantage of the Opportunity Zone tax incentive.
• Strategy for early exits of portfolio companies within the fund, and why it’s a good problem to have.
• The eight portfolio companies that Verte OZ has taken an early investment in.
• How Opportunity Zone investors are able to choose among share classes that have exposure to different thematic sub-portfolios.
• How different state-level tax credits can be combined with Opportunity Zones to improve investor returns.

Featured on This Episode

• Leonard Mills on LinkedIn
• Verte OZ
• Len Mills on the Opportunity Zones Podcast:
  • Raising Capital for Opportunity Zone Business Development (Episode #61)
  • The First OZ Fund to Deploy Capital to Businesses (Episode #80)
• Verte Portfolio of Companies
• Trevor Pryce
• State of Maryland Biotechnology Investment Incentive Tax Credit
• State of Ohio Opportunity Zone Tax Credit Program

Industry Spotlight: Verte OZ

Launched in September 2019 by Leonard Mills, the Verte Opportunity Fund focuses on high-growth, disruptive businesses in sectors with enormous upside potential, including logistics, biotech, and the carbon economy.

Learn More About Verte OZ:

• Visit VerteOZ.com
• Follow Verte OZ on LinkedIn
• Email Len: [email protected]

About the Opportunity Zones Podcast

Hosted by OpportunityDb.com founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

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Show Transcript

Jimmy: Welcome to the Opportunity Zones Podcast. I’m your host, Jimmy Atkinson. In 2020, Verte OZ became one of the first qualified opportunity funds to successfully deploy capital to startup companies. Joining me on the show today is Verte’s CEO, Leonard Mills. Len joins us today from College Park, Maryland. Len, welcome back to the show.

Len: Hello, Jimmy. Great to be back.

Jimmy: Great to have you here, Len. We met in Miami, I believe it was, almost two years ago now, late 2019. And this is your third time on the podcast. You joined me on the show shortly after we met in person in November of 2019. It was actually before the final regs were issued, if I recall correctly, and we discussed some of the challenges of your unique type of fund which is not a real estate fund, but rather a QOF that invests in operating businesses.

You, Len, and your company Verte OZ is really one of the pioneers in the Opportunity Zone industry in that regard, offering one of the first funds of its kind that invest not in real estate, but in operating businesses. That was kind of your intro to the “Opportunity Zones Podcast” in late 2019 but you joined me again, early last year, a few months into 2020, still pre-COVID though, I think was mid-March of 2020, and you were discussing with me some of the early successes that your fund had, both in terms of raising capital from investors and successfully deploying that capital to several startup companies.

So now you’re back and we’re about midway through 2021, you’ve got some new updates for us. So I’m excited to dive in to the updates on where your fund strategy has taken you so far and where you expect it to take you in the future. But first, to back up, for those listeners who may not have heard our first couple of episodes or maybe they want a refresher, can you give us an overview of the Verte OZ fund strategy?

Len: Sure, Jimmy. Yeah, as you pointed out, we invest in early-stage companies that we think have high-growth profiles. So that is different than the typical real estate Opportunity Zone fund. We also pride ourselves and try to achieve what we term sustainable impact and sometimes you’ll hear the words environment, economy, and equity are the 3 E’s, and the three P’s, planet, prosperity, and people. That’s another aspect that’s very important to the mission of the Verte Opportunity Fund.

We obviously look for tax efficiency, not only with the Opportunity Zone benefits to the investor but we also layer that in with tax incentives that are available in these same areas to the companies, be it at the federal level or the state level. So we look for maximum tax efficiency. And the other thing that is unique about our fund is we view our funding as a multi-year effort, and we are expanding through time. We talked about some of our early fundraising last year, we will give an update on that. But we also, through that expansion, want to continue to grow the portfolio. We have about 8 companies now, and we’re hoping to build that up to about 20 companies.

The other thing that I think is somewhat unique about the Verte Fund is there are certain investor advantages. We have the capability to develop thematic sub-portfolios. And as we go through some of the companies, I can talk about some of those themes. We’re organized as a c-corp, which is, again, different than most of the funding. So one of the things that it enables is 1099 reporting versus K-1 reporting, which for our investors is a big benefit in terms of their accounting and tax filings. And finally, we’re open to both capital gains investors and other investors as well. So there’s a mixture of things that we, Verte, are different. And we’re quite proud of the work we’ve done so far. And I’m looking forward to continue the expansion of the fund.

Jimmy: Right, and your fund is different than most other funds. What are some of the questions that investors ask you about your particular fund? I think they must ask you, how is your fund different from a lot of other OZ funds, but then also, how are you different than a traditional venture capital fund?

Len: Yeah, so we are different, which presents some challenges and some benefits as well. Yeah, with the OZ investors, they typically have come into the OZ space and are most aware of these investments through some real estate strategy. So again, we’re not in a real estate strategy and we are in that regard more akin to a venture capital strategy. However, we don’t really fit into that hole as well. We’re another square peg in a round hole there, for better or worse, but we think for the better, namely, we’re not traditional venture capitalists in that we’re looking for quick exits, relatively quick exits.

And the reason I say relative, by nature of being an OZ fund, we’re focused on long-term capital commitments to the companies and the communities for 10 years, for example, with respect to the investor benefits, and that’s longer than the horizon, many investors, including venture capital investors, so that’s another challenge and another unique aspect that comes back to why we do this as a multi-year effort is that we plan to provide liquidity to the investors from time, which is again, a little bit different than the other strategies that are out there. So the conversations with investors are along those lines, why are you doing this, why are you doing that, and particularly focused on, why early-stage companies? Or why aren’t you like the other venture capital funds? So that’s some of the questions we often get.

Jimmy: Yeah, definitely a bit of a different animal, your fund, being that it is an Opportunity Zone fund, but also not a real estate Opportunity Zone fund. So definitely, somewhat unique in that regard. But I wanted to get back to your point about investment horizons, or having to hold the investments for 10 years, is there a strategy that you have to potentially exit from some of your portfolio companies a little bit early, say, one of them pops and you see an exit opportunity after holding it for three or four years? Could you take that gain and roll it over into a new portfolio company potentially? Or how does that work? How is that structured inside the fund if one of your portfolio companies has an exit earlier than 10 years?

Len: Well, there’s a few things that the fund can do. And yeah, we handle that issue inside the fund. I often characterize it. It’s a good problem to have, it’s not a bad thing, because typically when you see an exit in a short timeframe, it’s probably because the company’s doing well. And then we effectively got bought out by a higher price. So it’s a good problem to have. We handle that inside the fund by… We’re able to… By the legislation, we’re able to roll that investment inside the fund through at least 2026. Because the corporation itself can be an accredited investor.

So the basic strategy there is… We can obviously also create distributions back to the investors if, you know, that’s, you know, deemed to be desirable. That may create some tax implications for them, the investors, so we need to be careful that those exits, you know, what generates capital gains could generate capital gains, and we have to be careful about how those are retreated back to the investor. But again, it’s a good problem to have, the investors, is a really big win, but the worst part of that big win is, yeah, you might have to pay some taxes. But our general idea is to roll inside the fund, provide liquidity to the investors by other means. And that will come from a continuous path of new offerings inside the fund and, again, potentially some distributions as well.

So we have strategies when those events can happen. Some of the companies we’re also investing in, I should point out, are generating revenue, and hopefully profits. Of course, that kind of income to the fund does not come from an exit. In other words, it’s a different type of… It’s income into the funds. So it doesn’t trigger any of those tax implications. It’s just more profits to the fund. So exits versus profit distributions from the individual companies are quite different animals and we have strategies for both.

Jimmy: Right. And just profit distributions are just ordinary income, difficult to avoid taxation on that. I was curious about the exits and the capital gains that they may generate. So that’s a good answer, though. And I agree, it’s a good problem to have if you’re exiting early within the fund. I wanna talk to you more about liquidity and returns and exit strategy in a few minutes, Len, but first, I wanna back up and recap a little bit about what we discussed last time you were on the show a little over a year ago. We started discussing the first four portfolio companies that Verte OZ had taken an investment in and I wanted to ask you what’s new overall with Verte at this point? Beyond those first four, I think you now have eight portfolio companies that you’ve invested in, maybe you can walk us through some of them and tell us a little bit more about your overall strategy as 2020 rounded out heading into 2021?

Len: Yeah, with respect to what we’ve done with the company since this time last year or thereabouts, there’s basically two updates to give. One update is on the companies that we had already invested in at that time and part of our strategy is to do follow-on investments as those companies succeed and show progress and give certain milestones. And each of the companies, I believe, I need to refresh my memory on the spot here, but I think each of them… We’ve done follow on investments in. And one of those companies, for example, is Galen Robotics, one of our first investments, they’ve, you know, made significant progress with respect to their technology, their robotic technology as well as their path to FDA approval.

And we, based on those accomplishments, we did a follow-on investment in that one. Also, from a tax point of view, there were some benefits topping up our investment on that one because of the certain tax credits that we were getting from the State of Maryland, that particular investment is located in Baltimore. I believe one of the other ones we talked about was the Smith Electric Vehicle Company in its joint venture with another company in the portfolio called SOZ. I think that was on the plate last year.

Jimmy: It was, yeah, yeah. Smith OZ Electric Vehicles was one of the companies that we discussed, correct.

Len: Yeah. So they are continuing their restart. They’re actually out in the market now with an offering of their own. We were providing some equity financing to bridge them to their bigger round. They got the plant open again. So, again, we did a follow-on investment in that early stage to take advantage of the progress that they’ve made. There’s a sister affiliate company called SOZ, SOZ has actually purchased a truck. This is a light-duty commercial manufacturer of electric vehicles. And so SOZ actually purchased a truck and we’re in the process of trying to get that leased out as a pilot for that separate investment. And then I think the data storage company called AON Fortress, they’ve made progress mostly on some of the patents and intellectual property matters that they needed to resolve. So we re-upped on that one.

The last one, I believe, was Native American Partners at this time last year, that one, the COVID pandemic hit the Native American community very hard. And effectively all the tribal nations effectively shut down completely, except for really emergency activities such as food, and housing, and medical. And so the projects associated with that are basically put on hold. So we haven’t re-upped on that one. They did make some progress on their projects. One of the investments is actually generating revenue and profits that are flowing back to the fund, not as an exit, but again, as profits. So they’re making progress, although we haven’t re-upped on that one.

And then, of course, the other part of the developments in the last year, you know, the new investments, new companies. So we’ve done another investment in an electric vehicle. We invested in a charging network that’s right now based in South Florida, but they’re looking to expand to other parts of the country. We did an investment in a workforce development technology called RiseKit. They’re based in Chicago. However, again, they are looking to expand to other parts of the country. They’ve got a good foothold there in workforce development in the city of Chicago, but they’re expanding into Dallas and Atlanta, presently.

And then the last company we did last year was a company called Outlook. The backstory on this one is very interesting. It’s an animation studio located in Baltimore, Maryland. It’s founded by a former NFL player all-pro, but more importantly, they have a good track record of producing children’s content. It’s an interesting character. When this individual was playing, Trevor Pryce is his name, when he was playing football, he actually had this creative bent to him and wrote children’s books. And that has now grown into children’s animation. He has two series on Netflix already. He founded a company, his last things in the NFL was in Baltimore, one of his last things, and that’s where he made his roots. And he’s looking to do things there in Baltimore as an animation studio, which is really unique for Baltimore there. In fact, there is no such studio. There is not any studios I think anywhere really on the East Coast like that. The closest analog would be Los Angeles.

So again, all very innovative companies all doing different things in different industries, and all making contributions and we believe all have a great future. So that’s… We continue to invest. The short answer to your question since last year is we continue to invest not only in existing companies, which is part of our strategy but also in finding new opportunities.

Jimmy: Yeah, that’s great. Very neat. A little while earlier, you talked about the investors having a choice potentially of going into thematic sub-portfolios. How do those work exactly? Can you tell us a little more about that?

Len: Yeah. So even as I was speaking there, you may sense a theme. So we made, for example, a number of investments in an electric vehicle. We’re looking at investments in… We have one and looking at some other ones in workforce development technology. And so that’s another theme. There is a bit of a concentration as well in the State of Maryland right now, but we can expand that theme into other geographic areas. And we’ve got structuring in place to do that. I think I may have touched on that a year ago. And we’re about to… I can’t at the time of this broadcast here, I can’t go into too much detail, but we’re about to announce a deal that takes advantage or classic shares that take advantage of a certain theme. Again, I can’t go into too much detail today. But that’s we’ve been continuing to work on that idea because, fundamentally, particularly those investments have a very local flavor. So investors like to invest locally and companies, like, are fundamentally location-based. So marrying those themes is part of the strategy as well.

Jimmy: Well, that’s a good segue to my next question, which has to do with different state-level incentives. I’m looking at your deck right now that you sent over to me and you’ve got incentives in the State of Maryland, and in the State of Ohio. Can you explain what those incentives are exactly?

Len: Yeah. So in the case of Maryland, Maryland has particular incentives at the fund level, Maryland has particular incentives around cybersecurity and biotechnology and those incentives flow back to the fund. I mentioned a few minutes ago, Galen Robotics as an example there. We put in an investment and they already had an incentive for that industry, Verte biotech. However, what the State of Maryland did with respect to OZ investors, which Verte fund is an OZ investor is they juiced that program specifically for biotech companies in OZs. So Galen Robotics is an example. So in that particular investment, you know, we put in a certain dollar amount, and it’s basically the State of Maryland ends up rebating anywhere from 65% to 75% of the investment back. And we’ve got that rebate.

That was another accomplishment, actually, early this year, not in 2020. But we got that rebate. And what that allows us to do is recycle those funds. First of all, it mitigates the risk because instead of potentially losing 100% on that particular investment, the most we can lose is 35% because we get the 65% rebate from the state. But second of all, it allows us to recycle that capital. So we’re able to take the state rebates and put them back into new investments inside the fund. Ohio has a similar program and one that we’re looking at a couple of investments currently in the pipeline. In Ohio, regardless of the investment… It could be real estate for that matter. It’s a 10% rebate, effectively a 10% rebate on OZ investments in the State of Ohio. We haven’t done one in Ohio yet, but we’re looking at a couple of deals in Ohio.

Jimmy: Well, those both sound great. That’s free money any way you look at it. Hard to beat that.

Len: Yeah, and the states… There’s been some discussion about some states decoupling from the overall federal tax benefits. But my experience is when it comes to, again, local investments, mayors, and other state and really local representatives, as a general rule, like the OZ program. It gets wrapped up in some politics. That’s inevitable with any kind of tax legislations, but they see dollars coming in, and Maryland and Ohio are good examples, they see dollars coming in, the local people that are on the ground fighting for jobs in their jurisdictions like to see that. So they generally welcome these kinds of activities.

Jimmy: Yep, absolutely. The OZ incentive itself is already powerful enough if you can further stack on other tax credit programs or rebate programs that are offered at the federal level or the local level, that just makes the investment option that much more enticing. What about your funds’ numbers looking forward? What do you offer to your investors in terms of liquidity and return projections and exit strategy in the long run?

Len: Again, we do this as a multi-year strategy. So we’re trying to provide liquidity to our investors along the way. And what does that mean? We have the offering that we closed last year at the end of 2020. We collected our books, got our books in order, and we came out with a second offering on that same structure, private placement structure portfolio, the same… Everything is the same except for because we’ve had that some profits come in and because we have the rebate come in, we did revalue the portfolio at a slightly higher price. So it’s the same off of shares, you just set it at a slightly higher price. So, you know, that’s an example for people to come in even though we closed the first offering, the first round. I shouldn’t say offering. I should say round. These are different rounds with the same offering. And then the next few years, we also hope to have other offerings, including some public offering possibilities. And those public offerings will give investors an opportunity to sell if they wanna sell and get liquidity that way. Again, that’s some few years down the road but is part of our planning process.

So we envision the fund itself as I mentioned earlier, rolling any exits of the companies inside the fund by providing liquidity through a series of multiple offerings. With respect to the returns as early, this is a early-stage company investment so we don’t really have any track record inside this fund. We try to balance out… And these are high-growth strategies, some might refer to as high risk. So we try to balance out the riskiness of any one specific company by effectively investing in a portfolio of such companies. And we diversify that risk out through having this portfolio concept rather than a single asset concept. Again, we don’t have any track record on this. Except for the internal evaluations. We don’t have any track record on this particular fund. We do have a track record on making these kinds of investments.

The previous fund that we had to the Verte Opportunity Fund was a fund called the Verte Capital Fund, that fund started in 2015. So it’s now been out there for five or six years, that fund is closed, however, we are harvesting gains out of that fund. And that fund has returned to 27% to date. In our materials, we mentioned that we’re targeting 20%, we hope to do better, but we were mentioning 20% as our overall target portfolio returns for the Verte Opportunity Fund.

Jimmy: Those are pretty good numbers, Len, hard to disappoint there if you hit those, I’m sure. Well, Len, thanks for joining me once again today on the podcast, really appreciate you taking some time out of your day to spend with my listeners and me. Before we go, where can our listeners go to learn more about you?

Len: Yeah, so we have a website, verteoz.com. We do maintain a pretty active LinkedIn profile as well. You can also do that. In LinkedIn, you can search for that… I guess we might include my email address, I’ll give it to you here, [email protected]. And that’s the best way to contact us. We are looking for new investors and like-minded investors that are interested in this kind of program. And we’re also looking for like-minded companies. So anyone on both sides of the street, certainly love to hear from.

Jimmy: No, I’m sure you will, and I hope you do, Len. And for our listeners out there, as always, I will have show notes for today’s episode on the Opportunity Zones database website. You can find those show notes at opportunitydb.com/podcast and there you’ll find links to all of the resources that Len and I discussed on today’s show or be sure to link to verteoz.com. And I will also have a link to their LinkedIn page and Len’s email address as well if you wanna reach out to Len directly. Len, thank you for joining me today, appreciate it.

Len: Thank you so much, Jimmy, it was great catching up.