Wednesday, August 28, 2013

Cozying Up to Entrepreneurs: State Pension Plans

Cozying Up to Entrepreneurs: State Pension Plans

I don’t know if it is coincidence or not, but a week ago two of the nation’s sole fiduciaries announced plans to increase their public pension plans’ exposure to local venture capital.  In New York, Comptroller Thomas P. DiNapoli is promoting Silicon Alley, New York City’s concentration of Internet and new media start-ups, through the pension’s In-State Private Equity Program.[1]  The Comptroller touted two investments, RebelMouse and CoopKanics, as signs that his program is leading to positive results for the State and the pension plan.

On the same day, North Carolina’s State Treasurer Janet Cowell talked about launching a second Innovation Fund and pushing North Carolina into the top five among entrepreneurial states.[2]  The first Innovation Fund[3], which seeks out a variety of in-state investment opportunities, will soon be fully committed.
 
Business Divisions Part 2 (1999)
I’ve had personal thirty years of experience with this kind of endeavor.  In the early 1980s, as part of New York Governor Hugh Carey’s administration, I worked with Comptroller Edward Regan on this type of proposal.  Then in the 1990s I discussed these kinds of initiatives with North Carolina Treasurer Harlan Boyles.  In 2001, I became responsible for overseeing the effort to put some small additional money to work in North Carolina venture capital and consulted with my counterparts in more than a dozen states.   While this type of investing makes for good press releases, it doesn’t do anything for public pensions, and it doesn’t stimulate economic development in meaningful way.  To be fair, as long as the pension plan doesn’t sink too much money in this kind of activity, it won’t produce any lasting damage.  However, it is a big waste of staff time, legal fees, and resources.

Nonetheless, generation after generation of comptrollers, treasurers, and pension trustees have pursued the dream of creating the next Silicon Valley in their state.  Moreover, it’s been in their political interest to rub elbows with the local venture community and entrepreneurs.  As a result, these kinds of initiatives will persist.

So what would it take for North Carolina to be ranked 5th when it comes to entrepreneurial investing?  According to the National Venture Capital Association, NC is currently ranked 15th for the first six months of 2013, and 13th since 2010.[4]  The 5th position is currently held by Washington State, which has seen 400 deals completed for an investment of $2.3 billion.  In the same period, NC has seen 166 deals completed at a value of $1.1 billion.  In order to match Washington State, NC would have to increase its annual investment in all sorts of venture, from early through late stage, by about $350 million per year and more than double the number of deals from 47 to about 100 per year.  It isn’t going to happen, because there simply aren’t enough deals out there. The rankings since 2010 are set out below.
 Here’s some unsolicited advice to our politicians.  First, those who spend their time carping about taxes (and I’m not speaking of the NY Comptroller or NC Treasurer) should look at the three most highly rated states.  They have the highest tax rates in the country and 69% of the venture capital.  While state taxes need to be reasonable and balanced, low taxes don’t create economic development.  Even in Texas, which doesn’t have an income tax, entrepreneurship is largely centered around  “keep it weird” Austin.

Second, investment capital, while necessary, is the least important ingredient in the entrepreneurial soufflé.  The money will find the deals, and it doesn’t require state pension money to get it done.  Since 2010, $57 billion has been raised for venture type deals alone.  Of course, local would-be entrepreneurs would say otherwise, but that’s probably because their business plans haven’t attracted any interest from the VCs.

The entrepreneurial environment exists where higher education, corporate and government R&D, and creative sorts of folks meet.  New York has a lot of these ingredients in Manhattan, and California enjoys them both in Silicon Valley and around Los Angeles. North Carolina might have a shot at moving up the rankings a bit if it weren’t intent on underfunding its schools, universities, and infrastructure.

Pension officials would love to play their part in pursuing exciting new investment opportunities for their states.  Frankly, they’d best help to foster the right economic climate by sticking to the big issues that drive the wellbeing of their pension plans.  On the other hand, the proper management of the pension plan doesn’t generate press releases or ribbon-cutting ceremonies.



[1] http://dealbook.nytimes.com/2013/08/20/new-york-state-comptroller-to-promote-investments-in-silicon-alley/
[2] http://www.bizjournals.com/triangle/news/2013/08/20/cowell-says-nc-considering-new.html?page=2
[3] The NC Innovation Fund is $232 million, most of which has been committed.  It is managed by Credit Suisse on behalf of the state’s pension plans, and invests in a variety of growth and venture opportunities in the state.  The actual allocation of funds and performance are undisclosed.  The Treasurer stated (see fn 2) that the fund has earned 15% thus far.  For more information, see http://www.ncinnovationfund.com/index2.htm
[4] http://www.nvca.org/index.php?option=com_content&view=article&id=78&Itemid=102

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