State of Wisconsin Investment Board using a differentiated strategy to successfully partner with statewide banks
Since the 1960s, the State of Wisconsin Investment Board (SWIB) has partnered with hundreds of Wisconsin companies and their bankers to invest and grow their businesses, which ranged from small companies with just a handful of employees to large multi-billion corporations.
Over past 50-plus years, SWIB’s Wisconsin Private Debt Portfolio has provided over $2 billion in financing for companies headquartered, with operations in, or that intend to invest the proceeds in the state. While maintaining its fiduciary duty to the Wisconsin Retirement System (WRS), SWIB has found ways to invest meaningful capital directly into Wisconsin companies that not only provide market rate returns, but also lead to enhanced economic activity throughout the state.
The portfolio is unique in the world of public pensions because of the collaboration between SWIB and Wisconsin’s banks.
“There is no other public pension plan that is doing what we do,” said SWIB Portfolio Manager Chris Prestigiacomo. “We have always said that the Wisconsin Private Debt Portfolio is the portfolio that touches Wisconsin the closest because we are working directly with state businesses and banks.”
Approximately 80% of SWIB’s private debt investments are in Wisconsin opportunities. The Wisconsin Private Debt Portfolio’s mandate is to make long-term senior debt and subordinated debt investments in companies through private transactions. It allows SWIB to fill a specific need by making this type of direct financing available, especially to companies unable to get the attention of large investors. SWIB often collaborates with the company’s banks and other institutional investors, providing financing that complements and is in addition to the bank’s financing.
“We can provide some differentiated sources of capital that can be difficult to find elsewhere in terms of the dollar amounts or time horizon we are willing to lend,” Prestigiacomo stated. “I think that is extremely important.”
Loans are highly customizable and include senior loans as small as $5 million and subordinated loans as small as $3 million. Loans typically mature in five to 15 years and feature a fixed interest rate for the life of the loan. Additionally, loans can be unsecured or secured depending on a borrower’s credit quality.
Typically, staff works directly with companies to analyze information and negotiate loans. An investment banker or broker hired by the borrower may assist. Most Wisconsin borrowers do not have an independent credit rating, so SWIB prepares the underwriting and credit analysis and then proposes and negotiates a suitable financing structure.
The Wisconsin Private Debt Portfolio’s subordinated debt financing entails a higher level of risk because loans are subordinated to the company’s bank or other senior debt financing. To compensate, expected returns for these investments are higher than senior debt. Investments consist of a loan, and in some instances, equity.
Businesses that have benefitted from investments by the Wisconsin Private Debt Portfolio range from the healthcare sector to the agriculture/food sector and includes companies such as Kohl’s, Jockey, Harley-Davidson, and National Guardian.
Prestigiacomo stressed that the investments made by SWIB should not be seen as competition for Wisconsin banks: “We are not competitors to a bank. Many times we are coming in to help a bank’s client with a project that the bank for some reason cannot finance (legal lending limit or some other reason). We are a good partner for a bank and their clients.” For example, a company may be planning to build a new distribution center. In instances when this cost goes beyond a bank’s legal lending limits, SWIB can help finance the project. It’s a strategy that bodes well for both sides, according to Prestigiacomo.
“When we work with companies, we spend a lot of time up front to understand their business and getting to know their management team,” he stated. “The time we spend early on to really understand a company’s business pays dividends if and when a company may run into some type of a problem or issue. We want to be long-term partners if we can.”
Organic Valley, the nation’s largest farmer-owned organic cooperative, is just one of the many examples that Prestigiacomo refers to when discussing the success of SWIB’s Wisconsin Private Debt Portfolio. SWIB partnered with Organic Valley’s existing bank relationships to help the cooperative build a new storage and distribution center in Cashton. SWIB focused on utilizing a fixed-rate, more long-term strategy to help the company fulfill its financing needs.
Prestigiacomo, a Wisconsin native, uses his long-term relationship and knowledge of the Wisconsin market to investigate a potential investment. “Really having that Wisconsin touch and sense of community helps us find investment opportunities, especially over the long term,” he explained. “Wisconsin is a smaller market and as a result, we have been able to develop our network of relationships that, over time, have provided us with more opportunities.”
If an opportunity does not fit with the portfolio’s criteria, staff works to identify other potential sources of funding and frequently makes referrals on behalf of the borrower to other sources of capital, such as private equity funds or other alternative lenders.
“We do not want to give a customer or prospect an absolute ‘no’. We want to give them some options,” Prestigiacomo said. “At the end of the day, even though it might not work for us, we want to provide them with some solutions for what they might be looking for.”
In addition to partnering on loans, SWIB can also help businesses and banks with continuity and succession planning. “Over the next five to 10 years, we envision that privately held community banks may have some complicated succession plans to work through,” he noted. “Fortunately, SWIB can come in and provide tier-two capital for the bank, which provides liquidity for the shareholders.”
The success of the Wisconsin Private Debt Portfolio and the partnerships created have caught the attention of other public pension funds. “We have had other state pension plans contact us and inquire about learning more about what we do,” Prestigiacomo said.
As other public pension funds across the country struggle with underfunding, SWIB’s Wisconsin Private Debt Portfolio continues to generate reasonable returns and build lasting relationships that benefit the WRS, which over 632,000 current and former public employees rely on for a more secure retirement, and the entire state.
SWIB is a WBA Associate Member.