Investing in local startups not as lucrative as stocks
Back when commercial airlines were serving meals on all domestic flights, many passengers griped that the food wasn’t very good and the portions were too small. These days, the same can be said of New Mexico’s investments in small, in-state companies that are trying to grow.
As of today, the $35 million invested annually by the State Investment Council in New Mexico startup companies is not returning the same as a stock index fund placed with a big Wall Street adviser. Still, many argue that doesn’t mean the program should be discontinued. In fact, some say it needs to be expanded.
That seems to contradict the position of professional money managers who serve the State Investment Council, which is responsible for managing $23 billion from the Land Grant Permanent Fund and the Severance Tax Permanent Fund, dollars gleaned from managing New Mexico’s land and the natural resources and energy sold beneath it.
Despite what might seem like a fiduciary duty to gain the highest investment returns, the Legislature has set a target of placing as much as 9 percent of the Severance Tax Permanent Fund investments into New Mexico companies, though the percentage currently is closer to 5 percent. Some have estimated this has cost perhaps $40 million in lost earnings for the fund.
“If not for statutory authority, it would be detrimental,” State Investment Officer Steven K. Moise told members of the Investments and Pensions Oversight Committee last week.
Part of the conundrum is that private equity investments are by definition not passive; they have to be sought out by business professionals, analyzed and managed. The state has contracts with consultants to advise on these investments — Sun Mountain Capital in Santa Fe for New Mexico’s portion of its private equity portfolio. But these costs are higher than paying a firm to buy and sell stocks and bonds.
But unlike the early years of the program, Sun Mountain looks at its investments as more than economic development. The money has to be returned to the state “and then some,” Sun Mountain’s Sally Corning told lawmakers. And over the past decade, the results have gotten better and better, a 6.3 percent annualized return over the past three years.
But the past three years have been pretty good for just about every investment, and though the percentage meets national targets for private equity returns, it still lags other portfolios like stocks.
Lawmakers may soon have to take a closer look at the program and decide whether it is meeting its goals for job creation and economic growth in the state. One big concern has been that if New Mexico companies go public or sell out and leave the state, the job gains go with them — and that has happened.
Other risks are they can go broke — and that, too, has happened with Schott Solar, a highly visible public company that was located at Mesa del Sol in Albuquerque.
Among those who think the risks are worth it are Jason Espinoza, president of the Association of Commerce and Industry, and Thomas J. Stephenson, managing partner of the Albuquerque-based Verge Fund. Both men testified there would be very little venture capital in New Mexico today if not for SIC investments in local businesses.
Stephenson said two-thirds of states have some local investment policy, a way to place their dollars in local communities while ensuring a reasonable return.
Stephenson said it’s especially important to invest in early stage companies — those with a patent or an idea, but that are not yet ready to go to market. He said if those entrepreneurs can’t secure financial backing in New Mexico, they will go elsewhere, probably Texas or the West Coast.
“If they don’t raise money locally, investors will want them to move closer,” Stephenson said. The SIC has made a commitment to expand these investments with an early stage program called the Catalyst Fund.
But Stephenson urged lawmakers to do more by encouraging local investing by the two state pension funds — the Educational Retirement Board and the Public Employees Retirement Fund, which have combined assets of $25 billion. He also said the Legislature can encourage local investments from state university endowments.
Fiduciary obligations of fund board members and trustees, he said, means more than just getting the highest return. If a fund or endowment can deliver comparable returns with local investments, it can have a greater impact than just boosting the profits of Wall Street banks.
“There’s a lot of momentum in New Mexico now,” Corning said. “We feel New Mexico has a a lot to offer and there are broader avenues to back terrific companies. But they need capital.”
Lawmakers may soon have to take a closer look at the startup program and decide whether it is meeting its goals for job creation and economic growth in the state.