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SIC approves $40M for venture investments

ALBUQUERQUE, N.M. — Nearly a dozen startups with new technologies in health care, energy and other fields will get a financial leg up in the next three years, thanks to the New Mexico State Investment Council’s approval Tuesday of another $40 million for venture capital investments in local companies.

mb01_jd_20jan_1sicThe allocation will grow the New Mexico Co-Investment Fund, established in 2007 for direct investments in startups, from $110 million to $150 million. That will allow Sun Mountain Capital, which manages the fund, to maintain its current pace of venture investments through 2016, said Sun Mountain Managing Partner Brian Birk.

“We’ve been making, on average, about one investment per quarter from the co-investment fund,” Birk told the Journal. “These new funds will allow us to continue at that pace. We’ll likely invest in about 10 more companies from this tranche of capital.”

The co-investment fund is part of the SIC’s private-equity investment program, through which the council can spend up to 9 percent of the state’s severance tax permanent fund on venture capital activity in New Mexico. That includes financial contributions to private venture funds that commit money to local startups, plus direct state investment in companies through the fund managed by Sun Mountain.

Since the program began in 1993, the SIC has committed $392 million, including $282 million in contributions to venture funds, and the rest for direct investments in companies. That’s led to venture backing for dozens of local firms over the years, including 19 that directly received money from the co-investment fund, Birk said.

In February, the council agreed to allocate, on average, about 5 percent of the severance tax permanent fund to the private equity program between 2014 and 2016. That works out to nearly $40 million in new SIC commitments per year during the next three years.

The $40 million approved Tuesday marks the first step toward meeting that 5 percent investment target, Birk said. By 2016, the council is expected to have approved another $75 million for commitments to independent venture funds, starting with $20 million later this year.

The 11-member council voted 9-1 to approve the new co-investment fund allocation. Council member Scott Smart opposed it, and Gov. Susana Martinez, who chairs the council, was absent.

The vote reflects growing support for the private equity program and for Sun Mountain, which advises the SIC about investments in venture funds in addition to managing the co-investment fund.

The council had halted new allocations for the program in 2008 because of losses on SIC investments during the recession, which substantially cut the value of the severance tax permanent fund and reduced money available for private equity commitments.

But even after the recession ended, the council had hesitated to commit more money because of fallout from pay-to-play scandals at the SIC and because members wanted to see more returns from investments before restarting the program.

Nevertheless, program performance has improved immensely in recent years. In a new report this month, Sun Mountain cited a 4.3 percent rate of return since 2004.

That compares to a negative 18.2 percent performance during the 11-year period from 1993 to 2004, before the state started contracting professional managers such as Sun Mountain to assist the program.

Returns have been boosted by the recent sale of some portfolio companies. That includes biometric identification firm Lumidigm Inc., which the Swedish company Assa Abloy bought for more than $60 million in February.

In addition, investments are generating good-paying jobs. Nearly 500 employees now work at the 16 firms still in Sun Mountain’s portfolio, with wages generally about 78 percent higher than average New Mexico salaries.

“The program is doing terrific,” said council member Harold Lavender. “It’s putting money into the economy and creating jobs while earning positive returns. That’s a double win for New Mexico.”

More frequent and detailed reporting by Sun Mountain about its investments also has reinforced confidence among council members.

“We’re seeing some improvement in returns, we’re getting more accountability from Sun Mountain, and we have better oversight of the program in place,” council member Lee Rawson told the Journal.

Rawson — a strong critic of Sun Mountain and the private equity program in the past — voted for the new $40 million allocation, although he said the program still needs to produce higher returns.

“In general, things are getting better and moving in the right direction,” he said. “But I still want to see more improvement. We’re not there yet, but we’re getting there.”

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