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SIC approves creation of $100M recovery fund

As much as $100 million from one of New Mexico’s permanent funds will be made available for business loans under a New Mexico Recovery Fund approved Tuesday by the State Investment Council. Pictured is the Nob Hill area in Albuquerque. (Roberto E. Rosales/Albuquerque Journal)

Copyright © 2020 Albuquerque Journal

SANTA FE – The New Mexico State Investment Council voted unanimously Tuesday to immediately pump up to $100 million from one of the state’s large permanent funds into a newly formed New Mexico Recovery Fund, which will provide discounted, short-term loans to businesses struggling to stay afloat during the coronavirus crisis.

Gov. Michelle Lujan Grisham, who chairs the investment council, urged the SIC to act quickly, saying many businesses are reaching the “breaking point” due to state-mandated closures in an attempt to slow the spread of the novel coronavirus.

“We’re besieged by calls,” Lujan Grisham said during Tuesday’s meeting, which was conducted by phone. “… None of us know how the next days and weeks will look, but we need to act on two fronts: to protect our citizens – which we’re doing as much as we can to mitigate the consequences from the coronavirus – and to recognize our obligation to do all we can to support our businesses.”

“They and their employees are in an incredible situation,” she added. “They’re in dire straits.”

The new loan program, funded by the roughly $5 billion Severance Tax Permanent Fund, is one of several economic relief initiatives being crafted by state leaders in an attempt to help businesses stay afloat during the COVID-19 outbreak.

A federal aid package is also being debated in Congress, though it’s unclear how much money New Mexico might receive, Lujan Grisham said Tuesday.

Meanwhile, the money for the new fund will be channeled through the SIC’s private equity investment program, which currently can spend up to 9% of the Severance Tax Permanent Fund for investments in venture funds that invest in local businesses, and for direct investments in startup companies in New Mexico.

The state Legislature approved an increase this year to 11% for spending on the private equity program, making more money available for initiatives like the new recovery fund.

But it’s the first time the SIC has approved money for a loan, or debt-based, fund rather than for venture investments in companies, reflecting the gravity of the crisis and the urgency to act immediately.

Sen. Pete Campos, D-Las Vegas, who sponsored this year’s bill, said lawmakers had economic diversification, not economic relief for New Mexico businesses, in mind when they voted to approve the legislation.

“That wasn’t the plan, but it really seems like it’s going to be valuable,” Campos told the Journal. “This gives us another opportunity to offer something to the public.”

Sun Mountain Capital in Santa Fe, which manages the SIC’s direct private equity investments in companies, will also manage the new fund.

It will draw up the statutes and guidelines for the fund in the next two weeks, including the size of companies that will be eligible for loans, the requirements they must meet to receive money, and all terms and conditions, such as interest rates and repayment time frames.

Loans will be targeted at medium-size and large companies, probably those with 40 to 50 employees and up that are already generating about $10 million to $15 million in annual revenue and are likely to survive the crisis if they get immediate cash assistance, Sun Mountain Managing Partner Brian Birk said.

Loans will be made at “differential,” or discounted, below-market rates, although those rates and other terms must still be approved by the council in another vote in two weeks.

Concerns raised

While the proposed new recovery fund was approved on a 10-0 vote, some council members raised concerns about the plan’s details.

Specifically, some SIC members asked if the proposed 6% to 12% interest rates were too high and wondered about whether $100 million was enough to mitigate the impacts of the crisis.

SIC member Linda Eitzen, a retired financial consultant, questioned whether it’s the investment council’s job to react in economic crises, citing a fiduciary duty to protect the funds for future generations.

“We don’t even really know what the terms are yet because it’s a work in progress,” Eitzen said.

“I’m concerned about setting precedents,” she added “… We can’t continue chopping away at the permanent funds for economic benefits rather than returns for beneficiaries.”

However, Eitzen ultimately voted in favor of creating the new fund, saying it could benefit businesses and their employees during an unprecedented time.

In addition, SIC member Leonard Lee Rawson of Las Cruces expressed concern the new fund could become essentially “corporate welfare” if not properly targeted.

The governor said she and all other council members share those concerns, but the current crisis calls for emergency measures.

“(It’s) the urgency of this incredible disaster, which is worldwide,” Lujan Grisham said. “… This will be an incredibly difficult year. We need to do the right things at the right time to make a difference.”

Small businesses

New Mexico’s permanent funds will distribute more than $1 billion this year to public schools and other beneficiaries.

While the money from the largest fund – the $17 billion-plus Land Grant Permanent Fund – is required to be targeted at beneficiaries, there is a different mandate in place for the smaller severance tax fund, and the Legislature has authorized some of that fund be spent on economically-targeted investments.

In addition to the new Recovery Fund, there’s also a separate effort by the Small Business Investment Corp., a nonprofit that also receives a 2% allocation from the Severance Tax Permanent Fund, to make loans to small businesses through local microlending organizations.

The SBIC expects to offer some of that money to microlenders at just a 1% interest rate to immediately channel near-zero-cost loans into the hands of struggling businesses, said State Treasurer Tim Eichenberg, also a member of the SIC.

“(The SBIC) is setting returns to literally nil,” Eichenberg said. “Let’s get money out there and if we even just break even on the loans, we will have done a service to New Mexico.”

Overall, most permanent fund growth comes from royalties and revenues from the oil and gas industry, and from income on SIC investments in stocks, bonds and hard assets like real estate.

But with stock markets spiraling downward and the economy rapidly heading into recession, the value of the permanent funds could eventually plummet, depending on how long the coronavirus crisis persists and how long it takes markets to recover when the situation subsides.

“The council is committed to investing prudently and effectively, while also recognizing the difficult circumstances we’re all facing,” State Investment Officer Steve Moise said after Tuesday’s meeting.

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