14 minute read
FINANCE
Cultivating Capital Long-term relationships and large-scale investments foster financial growth
By Tracy Barbour
Capital-intensive investments can help businesses enhance their operations, capture a larger market share, and boost revenue and profits. These distinctive types of investments—which are typically largescale, long-range, and high-cost in nature—encompass multiple facets and complexities.
Often, capital investments entail the acquisition of businesses, buildings, land, vehicles, and equipment, as well as major construction and maintenance projects. Regardless of the assets and intricacies involved, the key objective for investors is to grow capital and generate long-term value. The Need for Capital
Many projects need capital to acquire the assets or infrastructure necessary to begin or continue operations, but capital can be hard to come by in Alaska, according to Rob Gillam, CEO and chief investment officer of McKinley Capital Management. There are generally three sources of capital available to Alaska businesses: bank loans, small business loans, and private or public bonds. “Bank loans are generally based on asset and cashflow, meaning companies that qualify tend to need both a significant value of assets and cashflow production on those assets,” Gillam explains. “Bank loans, therefore, tend to only be available to the biggest and most well-financed companies and are not generally available to startup or distressed companies. And of course, in the recent pandemic, banks all across the United States tightened lending standards, making this capital more difficult to obtain.”
Continuing, Gillam says: “Small business loans from the SBA [Small Business Administration] or USDA [US Department of Agriculture] can provide smaller-sized capital. These loans typically require a personal guarantee and are usually capped out at about $7 million. These loans tend to have more
liberal lending standards, but they are small and not usually helpful to mid- or larger-sized businesses. A third option on the very high side of lending is issuing public or private bonds. These bonds are usually in the range of $500 million to $1 billion and higher, so they only apply to a small number of very large businesses and projects.”
What’s missing in Alaska, Gillam says, is funding between the high end of small business loans ($7 million) and the lower end of private and public bonds ($500 million). “There is little capital available in this gap, and it’s an obstacle for the economic growth and development of Alaska business,” he elaborates. “This is the space that McKinley Capital is trying to fill with both private equity capital and private debt capital available to qualifying Alaska businesses.”
Facilitating Investment Opportunities
Alaska businesses can partner with a variety of companies, including banks, private equity firms, and other financial institutions, to facilitate their capital investing activities. Entities like McKinley Capital, PT Capital, and Wells Fargo fill disparate roles to meet the needs of their clients. For example, McKinley Capital’s private investment business provides capital through the Na’-Nuk Investment Fund, which has invested in projects like Astra, a space company with a spaceport in Kodiak, and Peter Pan Seafood, a vertically integrated seafood company. McKinley Capital also finances projects such as Alaska Cargo and Cold Storage directly through direct private investments.
Recently, McKinley Capital added a Direct Lending Program to its roster of services. The program provides one-stop capital solutions for Alaska businesses needing financial investment to thrive and/or grow in the current, post-pandemic economy. Gillam says, “This program fills a known void in Alaska for corporate capital options that are greater than those offered by the Small Business Administration but less than those offered by the investmentgrade bond market.”
Another potential partner for investors is PT Capital, an Anchoragebased private equity firm. The company focuses on investment opportunities in high-potential markets in North America and Europe, including Alaska, the Pacific Northwest, Iceland, and Finland. “We tend to invest into private companies and work with management teams to grow the companies and create shareholder value,” says CEO, CoFounder, and Chairman Hugh Short.
Established in 2013, PT Capital invests in attractively valued companies in industries that are well-positioned to benefit from increasing economic activity in its target regions. Its portfolio includes successful investments in remote housing, scrap metal recycling, tourism, telecommunications, and, more recently, helicopter service providers. In the aggregate, the firm’s portfolio of companies has a combined enterprise value of more than $300 million and manages more than 950 employees across the United States, Iceland, and Finland.
PT Capital invests in companies that are looking to grow and are looking for additional growth capital. “We will invest in those companies and support their management teams to create more value in those companies,” Short says. “We look to exit the investment to another investor at some point. We currently hold ten companies in our portfolio.”
Wells Fargo provides investment banking solutions through its affiliate, Wells Fargo Securities. “Wells Fargo Bank provides commercial loans, lines of credit, asset-backed loans, letters of credit, treasury management services, depository services, and many other related financial services,” says Wells Fargo Alaska Commercial Banking Leader Sam Mazzeo, who is based in Anchorage. “Wells Fargo is a leader in arranging syndicated loans [offered by a group of lenders who work together to provide credit to a large borrower], bond issuances, and other financing structures.”
Advantages for Investing in Clients
Capital management and other financial companies provide a range of benefits to their clients. Wells Fargo, for instance, offers traditional bank financing, along with debt capital market financing solutions. More specifically, the bank offers debt capital market partners, investment banking solutions, asset-based loan solutions, interest rate risk management solutions, and other services that provide financial solutions for Alaska businesses. “Wells Fargo has a twentyfour-person, Alaska-based, middlemarket banking and mid-corporate banking team that provides customized credit and treasury solutions to Alaska businesses,” Mazzeo says.
After a great idea, access to capital is one of the biggest hurdles for growing a business, Gillam says. This is especially true in many technology, manufacturing, and natural resource projects where the costs to operate are typically front-loaded before the project can produce any revenue. However, private investors bring capital to projects to help them reach their operating potential.
Rob Gillam
McKinley Capital Management
Rob Gillam, CEO/Chief Investment Officer McKinley Capital Management.
Sam Mazzeo
Wells Fargo
A good example of this is McKinley Capital's investment in 60Hertz Energy. 60Hertz is a maintenance software designed to manage and monitor assets that are in remote, off-grid locations for sectors such as mining and rural electricity. “Microgrids are very important in Alaska, and the cost of power in rural Alaska is one of the greatest challenges to overcome, not just for the consumption of power but also for the basic human needs of food and shelter,” says Gillam, a secondgeneration Alaskan. “It is hard to afford such luxuries when the cost of power consumes most of a household's cash income for the year.”
As an early investor in 60Hertz, McKinley Capital supplied muchneeded money and continues to provide operations collaboration and connections to other potential investors and customers. “This company found and filled a gap in rural power-related challenges and costs around the globe, is providing a tangible benefit to Alaska and Alaskans, and met our disciplined methodology for providing a return on investment,” he says.
At PT Capital, team members execute on sourcing and placing investments, among other specialized services. Many companies cannot complete these services on their own because they lack the capital and/or the expertise, making PT Capital a vital resource. “We work with the management team on the operating day to day; we develop a strategy to develop a long-term plan,” Short says.
Large-Scale Investing in Alaska
So what types of large-scale investment projects have been consequential for firms in Alaska? They run the gamut. With a focus on Alaska and other parts of the world, PT Capital’s largest company is Nova, the dominant mobile phone company in Iceland. This venture includes significant investments in 5G technology and broadband over the phone. PT Capital also has an investment in Ice Services, which provides remote housing and utility management for large oil producers in Alaska. “Our team and our investment decisions are 100 percent made out of Alaska,” Short says.
McKinley Capital’s focus in Alaska typically falls into one of the following categories: Arctic and situationally relevant technology; transportation and logistics; energy, mining, and exploration; tourism; and seafood. A prime example of a largescale project that met the firm’s investment criteria is Alaska Cargo and Cold Storage—a joint venture of industrialist Chad Brownstein and McKinley Capital Management.
Wells Fargo has a substantial presence in Alaska’s major markets, ranging from natural resources to
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seafood and energy, according to Nick Williams, a leader within Wells Fargo’s corporate and investment banking team. Williams is based in Seattle and works directly with Alaska clients on equity investments, typically involving customers buying or selling businesses.
In his role on the investment banking side, Williams often works with companies seeking to tap debt and equity capital markets, as well as an advisor for merger and acquisitions. Currently, Williams says he is seeing more capital investing activity taking place in the seafood industry, including new ships being built to replace antiquated vessels. Another example of a significant capital investment is the new cold storage facility in the works at the Ted Stevens Anchorage International Airport. The 190,000-square-foot cold storage and climate-controlled air cargo transfer facility—slated to open next summer—will provide the seafood industry with enhanced options for cargo transfer cold storage and seafood processing.
Williams says that over the past decade he has noticed the growth of another form of large-scale capital investing: infrastructure funds. These specialized funds raise large amounts of capital to invest in infrastructurerelated assets in various sectors, such as utilities, cold storage container terminals, and railroads. “They’re looking for long-life assets with predictable cash flows; in return, they tend to be a cheaper source of capital,” Williams says.
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Capital Investing and Lending Terms
Wells Fargo typically provides cash flow-based and asset-based commercial financing. This normally includes a recourse to more than one cash flow stream or multiple assets. Wells Fargo develops long-term, deep relationships with its Alaska business customers to understand their financial goals and needs, Mazzeo says. “This enables us to develop large-scale commercial financing that is customized for each borrower,” he says. “Corporate clients with capital market access can also obtain general corporate-purpose and market-based credit with even more flexible terms.”
At PT Capital, the terms related to investing are typically deal-specific. In some cases, owners are looking to sell a small piece of their company to diversify their own balance sheet, Short says. In some cases, PT Capital invests in a minority position. And in other cases, the firm purchases 100 percent of the company, and the owner exits the business completely. Each scenario requires a personalized approach. Short says: “For investments in Alaska, there is no cookie-cutter approach because we’re a larger state but a small population… Relationships are really important here. So you need to be creative, transparent, and cater to the situation. You have to somewhat create a team around each of those investment pieces.”
Investments vary based on the amount of capital committed, the investor’s timeline, the investment entity, and the investor's specific goals. In general, private investments tend to have a longer investment hold time, with investors looking for a return after about seven to ten years, Gillam says.
Hugh Short
PT Capital
Hugh Short, CEO/Co-Founder/Chairman PT Capital
Private equity firms and other financial companies bring a variety of sources to bear to support large-scale capital investment. These companies have diverse methods and criteria for making investments. Some of the factors are internally driven (company process) while some are externally driven (client goals and mandates). “At McKinley Capital, we use a very disciplined and data-driven process for evaluating an investment that comes from thirty years of evaluating public equity stocks,” Gillam elaborates. “McKinley Capital uses a similar teambased approach to analyze potential private investments and identify those that meet the investment criteria.”
Most of PT Capital’s investors are comprised of institutions that include larger asset managers in the Lower 48 and life insurance companies. “I saw a unique opportunity in Alaska,” says Short, explaining the rationale behind PT Capital’s inception. “There hadn’t been an institutional private equity firm started out of Alaska when we launched back in 2013… When we formed, I went out and found investors in and outside Alaska. They were interested in our track record, our reputation. We were able to raise a substantial pool of money.”
Wells Fargo, on the other hand, has a different approach to facilitating investments for businesses. The bank funds loans from its balance sheet with its capital. “Wells Fargo is a national leader in arranging syndicated loan structures for its largest business clients,” Mazzeo says. “In addition, Wells Fargo Securities can underwrite and distribute bonds for its corporate clients that have access to public debt markets.”
Finding Places to Invest
Wells Fargo offers a variety of advisory services for mergers and acquisitions provided by its investment banking teams with Wells Fargo Advisors and Wells Fargo Securities. Mazzeo emphasizes that Wells Fargo combines the resources of a national bank with a focus on relationship building and the Alaska-industry expertise of its local commercial banking team. He says, “Wells Fargo has been the leading source of commercial and industrial financing, syndicated loan financing, asset-based financing, and treasury services for Alaska businesses for decades.”
Capital management firms are constantly seeking to identify potential new investments, which often requires an individualized approach, according to Short. “Alaska is not a place where you cold-call people,” he says. “You pick up the phone and invite someone out to lunch. It’s really relationship-based in Alaska. We believe our approach in Alaska—with our network, with word-ofmouth and being in the community—is super important.”
He adds, “In other places, like Finland, we have advisors and bankers who help identify potential investments.”
Gillam, as the head of a global finance firm, feels that the world has a keen interest in investing in Alaska. The reason: Alaska has an underdeveloped economy, rich natural resources, and the security of US law and the US dollar—and this makes for an attractive investment opportunity. “We opened our private investment business in 2019 because we believed that our public investment experience and discipline, combined with our Alaska knowledge and location, could help us effectively identify private investment opportunities and bring investment capital to Alaska,” Gillam says.
Gillam adds that he appreciates McKinley Capital’s long-term relationship with the Alaska Permanent Fund Corporation, which was the founding investor in the Na’Nuk Investment Fund through its Emerging Manager Program. “As of December 31, 2020, we have vetted more than sixty-six deals worth more than $750 million,” he says. “Through our private investment business, we have brought Peter Pan Seafood back to US ownership, helped Astra get its spaceport operating in Kodiak, and just announced a 55-year lease with the state of Alaska for a cold storage facility at Ted Stevens Anchorage International Airport—all while being singularly focused on providing a return for our investors.
“I believe Alaska’s best days are ahead. I am excited to be helping create jobs and infrastructure in our state while delivering returns for our clients.”
