Trillion-Dollar Jackpot Bypasses Small Biz, Says SBA
BY Hal Plotkin
A look at how a public pension fund came to the aid of one businessman, and how such a fund could help you.
When Michael Jensen needed a large chunk of capital to modernize and expand his iron foundry, he visited the usual suspects: banks and venture capitalists. "You look at some of these loan sharks and you have to either give up some of the company or agree to a loan where you don't know what the payments will be," says the owner of Aarrowcast Inc., a 300-employee, privately held business in Shawano, Wis. "I needed a basic business loan with predictable payments at an affordable price." Jensen found what he was looking for at the Wisconsin Investment Board. His $12-million note, fixed at 10% over 15 years, came with comparatively few strings attached.
With assets of more than $1 trillion, U.S. public pension funds are coming under increasing pressure to direct their investments toward activities that are deemed socially constructive, including supporting the small-business sector. But the vast majority of pension-fund investments remain destined for the more conventional financial vehicles: large-cap equities, mutual funds, real estate, and relatively stable bond markets. Only .6% of public pension funds are invested in small businesses like Aarrowcast, according to reports commissioned by the Office of Advocacy of the U.S. Small Business Administration. A relatively small increase in that percentage would translate into an enormous windfall for small businesses. If the 10 largest state pension funds raised their small-business portfolio to just .8%, for example, more than $2 billion would suddenly flow into small-business investments.
The studies' authors, Richard Fullenbaum and Mariana A. McNeill, along with the SBA Office of Advocacy's director of economic research, Bruce D. Phillips, are hoping that attention will be paid to three models of successful public pension-fund investments in small businesses. Those models, identified by the SBA, are Wisconsin, Massachusetts, and Virginia. While the practices vary in each state, the officials at funds in those states have found ways to profitably direct up to 5% of their cash hoards toward the small-business market. "There is an enormous amount to be learned from looking at how the leaders in small-business investments are making it happen," Phillips says.
Fullenbaum agrees but is agitated that additional progress, recommended by his report, has not yet been made. "There is an opportunity for the SBA to step forward and drive this issue," he says, citing the possibility of creating pilot programs that might draw some of the nonparticipating states closer to the small-business market.
Others are not so sure. Tom Herndon, executive director of the Florida State Board of Administration, manages $61 billion in state pension funds. (Florida's state pension funds ranked at the bottom of the SBA list.) He says he already scrutinizes the strategies of other pension-fund managers but may not be able to replicate them, given the size of his fund. "If we do the due diligence required for, say, a $250,000 investment," Herndon observes, "and even if it turns into a huge success, it would make a very tiny difference for our fund. It's not the best use of our time."
Meanwhile, Aarrowcast's Jensen expects to double his workforce, to about 600, within the next three years as a result of the infusion of pension capital. "The pension money comes right out of these municipalities," says Jensen. "The more they put back in, the more they get back."
AARROWCAST, Michael Jensen, 2900 E. Richmond St., Shawano, WI 54166; 715-526-3600 21
FLORIDA STATE BOARD OF ADMINISTRATION, Tom Herndon, P.O. Box 13300, Tallahassee, FL 32317-3300; 904-488-4406; fax, 904-413-1255 21
BRUCE D. PHILLIPS, Office of Advocacy, Small Business Administration, 409 Third St., SW--MC3112, Washington, DC 20416; 202-205-6530 21