Increasing Local Investment of Public Pension Funds

State venture capital programs are an integral part of many state’s technology-based economic development portfolio. These programs can strategically target state investments towards promising high-tech companies at the critical early stages of business development and in areas where private capital is scarce. Venture programs, however, are not always easy to implement. By definition, they require a large fund of investment capital and sufficient manpower to assist and monitor their portfolio companies. Facing these difficulties, some states have turned to other methods of making state investment capital available to entrepreneurs. 

 

One option is to target a portion of public pension fund investments toward in-state businesses. Most retirement systems already dedicate some of their investments to venture capital. Placing geographic restrictions or considerations on investments occurs less frequently, however, in respect for “prudent person” rules for investment (e.g., finding the greatest return at least level of exposure) and the monies belong to future and existing retirees, rather than the public sector.

 

Few pensions contribute to separate funds that invest only in in-state businesses. The more common approach is to invest in other venture funds, which focus on regional investments. Indiana Investment Fund I, funded by the Indiana Public Employees Retirement Fund, is a $105 million fund managed by Credit Suisse, which invests in venture funds focusing on Indiana businesses. The fund targets its funds toward strategic industries, including manufacturing, distribution and logistics, information technology, business services and alternative energy.

 

Other public pension funds, including the California Public Employees Retirement System (CalPERS), do not have separate funds for this purpose, but frequently invest in local venture firms that specialize in regional investments. In 2005, CalPERS agreed to invest a total of $500 million in environmental technology and clean energy, industries seen as strategically valuable to the state.

 

Pension managers and policymakers frequently bristle at the idea of using pension funds for economic development purposes, since their primary goal must be profitable returns. In a recent review of in-state pension investment plans, SSTI found that all of these plans require in-state investments to meet the same standards as other investments.

 

Nevertheless, state leaders continue to look for opportunities to have pension fund investments work in tangent with state economic development goals. The governors of Michigan and Texas provide two recent examples of proposals to use public pension funds to help support companies in their state. Both the Michigan and Texas plans stipulate that any in-state investments would have to offer returns on the same level as the pensions’ other venture investments.

 

Michigan

In her State of the State address, Michigan Gov. Jennifer Granholm announced her plan to commit $300 million in capital from the Michigan Retirement system to the Invest Michigan! Fund, which will invest in in-state entrepreneurs. An initial investment of $150 million would be made this year, with the remaining $150 million to come over the next three years. The governor expects other state institutions, including universities, foundations and local governments to contribute to the fund as well. Invest Michigan! would be managed and underwritten by an outside investment manager, and additional support for its portfolio companies would be provided by an advisory board. This would include entrepreneurial mentoring and matchmaking with other sources of capital.

 

Eighty percent of the fund will be dedicated to co-investments in in-state companies, while the remaining 20 percent will be invested in venture firms that support Michigan firms. The governor believes that the fund will help close the investment capital gap between Michigan and coastal hotbeds of venture capital activity.

 

Read more about Governor Granhom’s plan at: http://www.michigan.gov/documents/gov/Invest_Michigan_223205_7.pdf