ATRS ‘deal flow’ pipeline, investments benefit Arkansas companies, job prospects

Editor’s note: This is the first of two stories about the activities and financial position of the Arkansas Teacher Retirement System.
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As Arkansas communities deal with economic development opportunities, many are finding they have an asset at their disposal with the Arkansas Teacher Retirement System as it looks for investment deals.

In a recent interview with Talk Business & Politics, Arkansas Teacher Retirement System (ATRS) Executive George Hopkins talked about the increasing number of “deal flow” opportunities in Arkansas in which the retirement fund is involved that are not only great investments, but will benefit the state economy.

In the past, the ATRS was mostly known for its good and “not-so-good” real estate deals, but the system ratcheted up the number of new investments in Arkansas, ranging from startup funds to investments in multi-billion dollar industrial projects. The ATRS board recently decided to invest more than $125 million in two different projects that could help bring jobs to south Arkansas and help mid-level startup and emerging companies in Arkansas reach the next stage of development.

Hopkins said the ATRS staff held formal and informal talks with Highland Pellets of Boston and Sun Paper of China, who are at different stages of developing two paper mill projects that will bring more than $1 billion of new investment into south Arkansas’s vast timberland region.

“We own over 100 square miles of timber in South Arkansas and we are excited about Highland and Sun Paper and had regular discussions with them and we want to see both of them not only succeed but prosper and expand,” Hopkins said.

HIGHLAND PLANT DRAWS $25 MILLION FROM ATRS
To that end, the ATRS board invested $25 million in privately-held Highland Pellets, which is building a 600,000 metric ton wood pellet facility in Pine Bluff. Highland Chairman Tom Reilley said the $200 million project is on schedule to begin production in late 2016 despite spring showers that slowed progress.

“I think Highland pellet has a partner in ATRS they feel can help them navigate the political and cultural reality of Arkansas that people from out-of-state would not know,” Hopkins said.

According to company officials, Highland’s wood pellet manufacturing mills will convert tons of tree stem and waste wood into tiny pellets that are shipped to Europe and burned in power plants for what is being touted as a renewable form of electricity. A 2015 report by the U.S. Energy Information (EIA) report, U.S. wood pellet exports increased by nearly 40% between 2013 and 2014, from 3.2 million short tons to 4.4 million short tons. The U.S is now the largest wood pellet exporter in the world, overtaking former global leader Canada in 2012, the EIA said.

Hopkins said ATRS will not only become a Highland investor, but will also get a board seat with the Boston-based investment group. He said once in operation early next year, loggers will deliver more than 175 loads of unused forest dregs, logging leftovers, imperfect commercial trees, dead wood and other non-commercial trees that need to be thinned from crowded, unhealthy, fire-prone forests to the Highland manufacturing facility each day.

“We are really excited about Highland because it will put a lot of loggers to work, a lot of shop people to work and people who sell logging equipment,” Hopkins said. “From a climate change perspective, we are using Arkansas pulp wood in a unique way to fire boilers in the United Kingdom to reduce the usage of coal to reduce their carbon footprint.”

And although it does not plan to enter the wood pellet market, China’s Sun Paper announced in late April it will invest more than $1 billion to build a bio-products mill in Clark County. Although ATRS has not invested in the planned south Arkansas bioproducts paper mill, Hopkins said they will follow the development’s progress.

ATRS, STEPHENS LAUNCH $100 MILLION FUND
In July, the ATRS board also hired Little Rock-based Stephens Inc. and New York City-based Neuberger Berman Alternative Advisers to manage the newly created Arkansas Opportunity Fund, established to provide opportunities for companies seeking investment between $5 million and $12 million, Hopkins said. That fund is authorized to make investments up to $100 million, he said.

“We have regular deal flow now coming to ATRS telling us about these news ideals. But from a direct investment perspective, we sort of have a limit on what we can do,” said the ATRS chief. “That is why we engaged Stephens Inc. and Neuberger to do the Arkansas Opportunity Fund, which in essence we gave them a $100 million and we expect maybe some of the other Arkansas retirement systems may come in and put some money in besides ours.”

“It is not an Arkansas only fund, but clearly if people come to us and say we have this idea and need $6 to $10 million, we are going to send them on over to Stephens and Neuberger,” he said.

BIG RIVER DEAL BEGINS AEDC RELATIONSHIP
Hopkins, a Malvern native and former legislator, who took over as executive director of the $14.2 billion pension fund at the end of 2008, said the teacher retirement system also began developing a close relationship with the Arkansas Economic Development Commission before ATRS decided to invest up to $125 million in the Big River steel mill. He said before German-based financial giant, KfW IPEX-Bank, decided to invest $800 million to finance the production facilities for the Big River Steel in 2014, they had come to AEDC officials seeking reassurance that the political end of the deal could be completed with Arkansas Legislature.

To allay some of KfW’s fears, Hopkins said former AEDC Director Grant Tennille and Big River Steel’s John Correnti came to ATRS with the deal that one of the Arkansas retirement systems would help underwrite some of the senior debt for the complex financing arrangements to fund the $1.3 billion superproject.

“That led to a meeting in this very office and they started telling us about this steel mill and we started looking at numbers and financials, and before they left – I told them ‘why don’t we really try to make the German bank calm by us taking equity, meaning we would lose our money before they lose theirs,” Hopkins said. “That made KfW know that Arkansas would not harm them without harming themselves.”

The ATRS executive said the AEDC meeting happened almost a year before former Gov. Mike Beebe called a special session to make first use of the new superproject-focused Amendment 82 to approve $125 million in bonds to build the Mississippi County steel mill.

Hopkins said ATRS has a great relationship with AEDC officials where some industrial prospects interested in coming Arkansas, such as Highland and Sun Paper, are also sent to the retirement system to discuss investment opportunities.

“That (Big River) deal was a grand opportunity, and after that the AEDC started sending people over to us and now some of them are coming to us without going through the state economic development department,” Hopkins said. “And now we are also telling AEDC about some prospects. To that extent, we are part of state government and working as a team to have a favorable environment for investment for Arkansas.”

He added: “There are a lot of deals we look at that we don’t invest in but the point is we are eager to find great deals. And even when we don’t invest, we can point them to people they can go to.”