Friday, July 25, 2014

Rural Infrastructure Opportunity Fund: A Fund Launch That May Be More About Politics than Investments

Rural Infrastructure Opportunity Fund: A Fund Launch That May Be More About Politics than Investments 

Yesterday the White House announced the creation of a $10 billion rural infrastructure fund.  Here are the headlines from the U.S. Department of Agriculture’s press release, which many media outlets dutifully reported:

White House Rural Council Announces $10 Billion Private Investment Fund to Finance Job-Creating Infrastructure Projects in Rural America

CoBank Pledges Initial Multi-billion Commitment for New Rural Infrastructure Opportunity Fund; More Private Investments in Fund Expected; Capitol Peak to Manage New Fund; USDA to Identify Projects in Need of Investment through New Fund and Other Sources

In reality, there is no fund at this point.  Capital Peak Asset Management has to go out and raise the capital from institutional investors.   Good luck.  Throughout my career, I’ve seen one rural initiative after another that promised increased investment in upstate New York or eastern North Carolina.  Political operatives rather than policy experts tended to write the press releases.   The rural initiatives never reached their lofty objectives. 

In my view, the Rural Infrastructure Opportunity Fund is likely to be another unfulfilled rural initiative.  As a general matter, drawing institutional capital into rural areas is extremely difficult.  The USDA’s initiative appears to make this task even more daunting.  First, the proposed structure is rather complicated.    CoBank is a national cooperative bank that lends and finances agricultural loans and infrastructure projects.  It has merely indicated its willingness to co-lend up to $10 billion subject to sign-off on each proposed investment.   In other words, CoBank hasn’t made a $10 billion commitment to the fund.  Rather it has agreed to consider funding projects.  Those projects will be identified by the Department of Agriculture.  I’m betting that institutional investors will be wary of this model.

So who has to go out and raise the capital and explain this structure to prospective investors? Capital Peak Asset Management.   I figured I’d look them up on the SEC’s website to see how much money they have under management.  They aren’t yet registered.  I went to Capital Peak’s website, and it became clear that this firm had been formed to manage this fund. 

How did they get this mandate?  Capital Peak’s website provides very little detail. Six folks are listed, but only two people seem to be solely involved in Capital Peak.  The Executive Chairman, Leo Tilman, continues to run his strategic advisory firm in Denver.  The CEO, Alfred Puchala, Jr., is listed as a senior member of Tilman’s company and also runs his own firm called Puchala & Company located in New York.   Mr. Puchala seems to have a great deal of experience dealing with the sale of public assets and appears to have had the connection to the Obama Administration.

Capital Peak’s chief marketing officer, RuthAnne Dreisbach, heads the strategic communications practice at Tilman & Co and also runs her own firm called Dreisbach Group located in New York.  The managing director for investor and partner relations, Beverly Karns, heads strategy and analytics for Tilman & Co.

This leaves two fully dedicated employees.   The managing director for business development, Matthew Davis, has three years of investment banking experience after a previous career in nuclear engineering.  The managing director for portfolio management, Jason Tepperman, previously ran the Small Business Lending Fund (SBLF) for the US Treasury, a successor program to TARP.   SBLF was supposed to get community banks to increase lending.  A significant portion of the lending Congress authorized under SBLF simply went to banks in order to repay TARP.  In other words, SBLF was another government initiative that promised to increase investment in underserved areas; it delivered far less than it promised. 

This team has to raise billions of dollars in institutional capital without being able to put forward a verifiable track record.  I’m sure Mr. Puchala and other team members can point to specific investment banking transactions or deals, but there’s little in their backgrounds that would suggest that the team has experience managing institutional capital.

Although the goal is worthy, this initiative has a very convoluted structure that will be managed by a team that is only loosely stitched together. The White House can say that it’s done something worthwhile for rural America.   Capitol Peak may be able to generate some fees, although I’m not sure who is going to fund them.   Perhaps I’ve become too cynical, but the Rural Infrastructure Opportunity Fund seems to be the by-product of politics.    

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