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F I S C A L I M P A C T R E P O R T

SPONSOR Robinson

ORIGINAL DATE

LAST UPDATED

2/10/07

HB

SHORT TITLE

Severance Tax Fund Investments

SB 865

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

NFI

(Parenthesis ( ) Indicate Expenditure Decreases)

Relates to SB 739

SOURCES OF INFORMATION

LFC Files

Responses Received From

State Investment Council (SIC)

Department of Finance and Administration (DFA)

SUMMARY

Synopsis of Bill

Senate Bill 865 allows the State Investment Council (SIC) to invest a maximum of nine percent

in New Mexico private equity investments, raising the cap from the current six percent.

FISCAL IMPLICATIONS

The fiscal impact is indeterminate. While the return on private equity assets can be higher than

traditional investments in equity and fixed income, the risks are much higher as well. The SIC is

currently authorized to invest up to six percent of the STPF in a program that targets NM

investments. One method is to invest in NM-based private equity funds with a focus on NM-

based opportunities. The New Mexico Co-investment program, however, directly invests in NM

companies with other private equity funds. This second NM program is considered an

“economically targeted investment" or ETI.

The NM Private Investment Program (NMPEIP) has committed $300 million, $175 million of

which has been invested. Last year the program lost its $7 million investment in TCI Medical

when that company failed. Eclipse recently received FAA certification and has begun delivery

Senate Bill 865 – Page

2

on aircraft to clients, giving the program a significant boost. One exit strategy is for Eclipse to

take the company public.

SIC (note: MM refers to millions and IRR is “internal rate of return"):

Currently the SIC has invested $175MM in NM companies through NMPEIP, not including

additional commitments and follow-on investments of approximately $125MM. To

approach allocation targets for the program, the SIC uses a multiplier to help reflect the lag

between commitments and actual funding of companies or private equity funds, which

commonly invest over several years, with the life of the investment relationship between

limited partner and fund lasting a dozen years or more. This multiplier also helps account for

return of investment through distribution triggered by various forms of investment exit (i.e.

IPO, buyout, etc). The program is nearing its maximum total investment under the current

6% cap.

As of 9/30/06 the SIC has seen $25MM in return of capital from this program, and based on

current valuations has an annualized IRR of 8.31% over the life of the program.

It is very difficult to compare private equity investments to other types of investments since the

value is based on an appraisal rather than being determined by the market as is the case with

stocks and bonds. There is only one way to definitively assign a value to a private equity

investment: when the position is liquidated either by sale or by failure. 8 of 38 companies listed

in an SIC report to the House Appropriations and Finance Committee on February 1, 2007, have

been liquidated or acquired. This means that only 20 percent of the number of investments

through the NM private equity program (NMPEIP) can be definitively quantified.

Private equity investments are long term investments. A typical investment does not show any

return for several years due to the nature of the investments. They are typically start-up

companies or struggling companies that will not have any revenue in the beginning. Additional

investments will come from more liquid assets whose returns are also more transparent. It is

unclear where the additional funds to increase the portfolio allocation to nine percent will come

from but presumably the more transparent and more liquid assets such as stocks or bonds will be

the source. The severance tax permanent fund already has a 12 percent target for private equity

(six for NMPEIP and six for national programs). Adding in hedge funds and real estate and the

total allocation to alternative investments makes up a quarter of the portfolio.

PERFORMANCE IMPLICATIONS

SIC:

The NMPEIP is classified as an economically targeted investment, or ETI. Like all ETIs, it

has dual mandates of returning profit on its investment while also assisting with economic

development, industry building and job creation efforts here in NM. While the bulk of

investments under NMPEIP have come in the last five years, and taking into consideration

that this is significantly a young program, it appears to be having success on both sides of the

equation.

Senate Bill 865 – Page

3

The SIC’s new advisor for the NMPEIP, Sun Mountain Capital, produced the following

economic impact estimates, on a conservative basis, as of 12/31/06:

• The NMSIC has invested, directly and indirectly through NM Private Equity/Venture

Funds, in 38 NM Companies:

o Those companies have hired 1,928 employees

o Have annual payroll of almost $130MM

o Make annual NM purchases of $49MM

o Have raised more than $1 Billion from investors

o Pay an average salary of $67,295 (almost X2 NM Avg.)

o Have an annual economic impact of $179MM on NM

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

SB 739 increases the amount SIC can invest in film projects.

NF/csd