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Investment Council still awaiting exits

ALBUQUERQUE, N.M. — State Investment Council investments in venture funds and startup companies in New Mexico have yet to produce any home runs, but many SIC-backed firms are on a sharp growth curve.

“A number of companies are really breaking out this year in sales growth and market recognition,” said Brian Birk, managing partner at Sun Mountain Capital, which advises the SIC on investments in local venture funds and manages the state’s direct investment in companies. “I fully anticipate some major exits coming in the next year or two.”

Since the private equity program began in 1993, state money has benefitted 62 firms, either through direct investments, or through SIC-backed private venture funds that committed money to those companies.

Of the total, the SIC and its venture partners have lost money on 17 startups, or 27.4 percent of the companies with state investment, while seven others have earned positive returns, according to Sun Mountain’s latest report, presented to the SIC on June 26.

The losses are typical of venture investments. Nationally, about half of all venture-backed companies fail and investors lose money, according to a study by Sand Hill Econometrics that’s frequently cited by the National Venture Capital Association.

Only one in five venture startups end up going public or being acquired in highly successful exits that produce substantial returns. Venture investors rely on those exits to produce profits for the overall portfolio.

Waiting for home runs

But New Mexico is still waiting for those home runs to materialize, thanks in large part to the recession.

“The market hasn’t complied,” Birk said. “There haven’t been many IPOs (initial public offerings) or mergers and acquisitions nationwide in recent years.”

The number of IPOs in the U.S. plummeted from 87 in 2007, before the economy collapsed, to just 6 in 2008 and 12 in 2009, according the National Venture Capital Association. Mergers and acquisitions dropped from 382 before the recession to 273 by 2009.

The market has rebounded, but exits remain below pre-recession totals. The association reported 53 IPOs last year, or 35 less than in 2007. Mergers and acquisitions climbed to 467, but they only earned $24 billion, or $5.5 billion less than the $29.5 billion earned in 2007.

Still, the investment council portfolio has benefitted from some out-of-state exits.

Psilos Group, which received council money for a fund that made investments in New Mexico and elsewhere, earned a ten times return on the sale in May of portfolio company Extend Health, a private Medicare exchange firm that the global professional services company Towers Watson bought for $435 million.

“(Extend Health) isn’t a New Mexico firm, but we’re invested in the Psilos fund that put money in that company,” Birk said. “It generated a very substantial return to the SIC program.”

Good N.M. candidates

As the exit market continues to rebound, venture investors expect local firms to attract lucrative offers from potential buyers, given that many of the 38 companies still in the Sun Mountain portfolio are building substantial value.

“I think we have a group of companies in New Mexico getting very much to the point where they’ll be good candidates for exits,” said Tom Stephenson, managing partner of the Verge Fund, which has received SIC money.

That’s critical to raise more public and private capital for new funds in New Mexico.

The SIC has not made any new investments in local venture funds since before the recession, and while council members have not said they won’t invest more, many want to see more returns from the program.

“I think if we’re going to do venture capital in New Mexico, then we need to do it with the same return expectations we would have with investments outside the state,” said SIC member Mike Martin.

And, until the SIC starts investing again in local venture funds, it will be difficult for venture investors to attract more capital from private sources.

“We need the participation of existing investors like the SIC when we raise subsequent funds, because potential investors will otherwise ask why the government is not investing,” Stephenson said. “There’s no question it hurts efforts to raise more money.”