McKinstry aims to create a hive of green business; hedge fund wins pension-fund suit

Like kids who've pounded the final nails into a treehouse, executives at McKinstry have enthusiastic but still-evolving visions for their new clean-technology businessincubator.

The company invested $5 million in its Innovation Center, creatively filling the office space on top of a new two-story parking garage next to its headquarters in Seattle's Georgetown neighborhood.

McKinstry's main business of designing, installing and managing mechanical systems in buildings is going strong despite the economic downturn, said CEO Dean Allen. So with the incubator, "We get to make it up as we go along, to a certain degree."

The first two tenants — small-turbine developer Hydrovolts and General Biodiesel, which turns restaurant grease into fuel — moved in this month. Allen says a small software spinoff from McKinstry will join them shortly.

For General Biodiesel, the center is a major step up from its previous headquarters — above the rendering plant where its raw materials begin their transformation.

"We're basically glorified garbage collectors" who convert grease into diesel, said CEO Yale Wong. As the business grew stronger last year, he decided that when dealing with clients, "we just can't be bringing them to this smelly plant."

So General Biodiesel worked out of McKinstry's main offices for the past six months. Wong said about a third of his 29 employees will be based in the center.

Allen seems confident the incubator will become a hive of green business that will benefit McKinstry and help expand the clean-technology sector here.

He talks about it more like a community organization than a business proposition.

The incubator will "add to the overall energy and creativity that we have down here," he said. "It's a collaborative space we want our people spending time in."

The center's spare but eye-catching design includes some offices with garage-style roll-up doors made of glass panels, opening onto a large common area with conference rooms and other shared facilities.

"We're moving them from their garage to our garage," said McKinstry President Doug Moore.

It's also a showcase for McKinstry's capabilities. The wood trim was milled by the company from beams salvaged from the site's previous buildings. The shiny and complex "Innovate" sign that greets visitors to the incubator was made by McKinstry's architectural-metals unit, which is also doing custom work in copper, aluminum and stainless steel for the inside and outside of the Bill & Melinda Gates Foundation headquarters.

Chris Leyerle, the chief operating officer of Hydrovolts, said the incubator's attractions go beyond an aesthetic work space. "The key reasons we're in there are they have a (metal fabrication) shop, they're smart people, they're connected and savvy."

Leyerle said McKinstry has done some fabrication work on his company's compact turbine, which is designed to go into irrigation canals, rivers and even ocean settings to produce small amounts of electrical power.

But more important for the four-person company, which hopes to have a finished product later this year, was the opportunity to absorb some of McKinstry's expertise in funding, government-policy issues, and working with institutional clients such as cities and sewer districts.

With 15 offices and 1,600 employees — 100 added this year — McKinstry has grown from a mechanical contractor to a wide-ranging firm that also designs complex systems and keeps buildings humming efficiently.

New construction is down at the moment, said Dean, but McKinstry's work in retrofitting and managing buildings for energy efficiency means "2010 is a growth year for us." Revenues are expected to top 2009's $381 million.

Despite its size, McKinstry is entrepreneurial and inventive, Allen said. "We're kind of half propeller-head innovators and half solid business managers."

And it has played host or mentor to entrepreneurs before, said Allen: "It used to be, 'Hey, can I borrow a CFO for a couple hours?' "

Now, it has a formal incubator with room for 10 or more companies. Unlike some incubators that take an equity stake in their tenants, the Innovation Center only charges rent.

Allen said he's satisfied that the 20,000-square-foot center opened with just two tenants and "a really thick pipeline" of prospects, though he also hinted McKinstry may expand its parameters for who can get in.

He predicted it will be "more than full in a year," and there's room to double it.

"I suspect we'll be expanding."

Hedge fund wins

pension-fund suit

A federal judge has rebuffed the Seattle City Employees' Retirement System's attempt to pry more information out of an offshore hedge fund where $20 million in pension money has been invested since 2004.

The pension fund signed on with a hedge fund that "was, by design, shrouded in relative secrecy," and now it has to live with the consequences, ruled U.S. District Court Judge Richard Jones.

SCERS grew concerned about its investment because 15 months after the end of 2008, the Epsilon Global Active Fund II hadn't produced that year's audited financial statement. SCERS asked for its money back in February, but Epsilon's management suspended redemptions, explaining it couldn't cash out shareholders at the moment because most of the money had been invested, through a series of other hedge funds, into secured loans to four "distressed" companies.

Epsilon also said the audit wasn't complete because the Securities and Exchange Commission was investigating how one of those affiliated funds valued its investments.

SCERS sued Epsilon in March for breach of contract, seeking the audited financials and other information.

But Jones ruled May 11 that he couldn't order the hedge fund to hand over a document that doesn't exist: "No order of the court can cure that breach." He noted that, as agreed at an earlier hearing, the hedge fund did turn over other documents, including unaudited financial statements.

Epsilon also acknowledged that aside from SCERS's stake, which the hedge-fund managers now value at more than $24 million, the fund only has $1.2 million from four other investors.

But SCERS isn't entitled to know the identities of those other investors, or to details about specific investments, Jones wrote.

The pension fund "invested $20 million in a foreign investment vehicle that by its own terms provided for only minimal transparency," the judge wrote. The court can't "transform SCERS' investment into the investment it perhaps now wishes it had made."

The fund into which Epsilon first channeled the SCERS money, called Westford Special Situations Fund, was ordered into liquidation by a court in the British Virgin Islands in March because for about two years it hadn't paid about $29 million owed to two creditors.

Epsilon attorney Harry Schneider, of Perkins Coie, said in a statement that the Special Situations Fund "is far from insolvent, and our clients believe that it would be irresponsible and imprudent to sell its assets at fire-sale prices just to achieve some short-term liquidity." He said the order to liquidate that fund is will be appealed.

Schneider also said PricewaterhouseCoopers has resumed its audit of that fund, and expects to finish "within a matter of weeks." That could pave the way for Epsilon to provide an audited financial statement to SCERS.

SCERS Executive Director Cecelia Carter said an executive session of the pension fund's board this past Wednesday about potential litigation did not concern Epsilon. But she did not respond to several calls seeking further comment on the Epsilon case since the judge's order.

Comments? Send them to Rami Grunbaum: rgrunbaum@seattletimes.com or 206-464-8541