As NYS Common commitment shows, in-state programmes help support local economy

Many states and regions lack the access to capital found in major metropolitan areas. In-state private equity programmes help bridge that gap while also providing returns for beneficiaries.

New York State Common Retirement Fund announced in June it made a $350 million commitment to two funds in its in-state investment programme, which intends to steer capital to businesses based in New York State.

New York State has invested $1.6 billion into 522 New York companies to date, with over half of that capital sent to firms located in upstate New York regions, which traditionally lag in development when compared with the New York City metropolitan area, according to a press release.

The commitment was an example of the kind of resources many state pension systems are putting behind their local economies. In-state programmes have grown over the years as state officials seek to recycle money back into their own economies and help support the growth of private small businesses in their own backyards.

The trick, as always with pension investing, is to make sure the programmes pay off for beneficiaries as well as the local communities.

“In many ways, these types of funds were an earlier version of impact investing funds. And what we have found is that private markets and private capital are really useful ways to invest for return and impact,” said David Helgerson, the co-head of impact investments at Hamilton Lane, which manages many in-state funds throughout the county.

Act locally

The Los Alamos National Laboratory, the Sandia National Laboratories and well-regarded research and tech-focused universities call New Mexico Home – all good building blocks for the state to have a vibrant community of start-up, tech and energy businesses.

New Mexico lacks access to the capital, which is largely concentrated in coastal metropolises, to develop these industries.

To combat this issue, New Mexico State Investment Council created an in-state investment programme, which commits money to private equity managers who invest in companies located in the Land of Enchantment.

“This started as a way for New Mexico to assist with the technology
commercialisation coming out of our national labs, military bases and universities. We looked at those as resources that could use some help to get to the next level,” said Charles Wollmann, the director of communications, legislative and client relationships, for New Mexico SIC.

New Mexico’s in-state investment programme has $482 million in NAV with 113 New Mexico companies receiving money, which has resulted in hundreds of millions in impact for the state’s economy, according to Wollmann.

New York, Florida State Board of Administration, California Public Employees’ Retirement System, Public Employees’ Retirement System of Nevada and North Dakota State Investment Board and others also have in-state investment programmes.

“Many of these companies have been employing dozens of people for more than a dozen years. Good, high-paying jobs are the target for these kinds of programmes,” Wollmann said.

Funding the programmes

Each state runs its private equity programme differently.

For example, New Mexico can commit up to 11 percent of its Severance Tax Permanent Fund, which collects severance taxes from oil and natural gas drilling that occurs within the state, to the in-state programme.

New Mexico’s in-state programme originally started in the 1990s with an initial strategy built around co-investments, Wollmann said.

Since 2017, the programme commits to different regional and national managers already making investments who believe they can find more deals in New Mexico, Wollmann said.

A recent example of how its programme works comes via a $10 million commitment New Mexico made to Scout Ventures IV, which targets deep-tech and hard-tech companies in government and commercial markets.

Wollmann added that the state also has a smaller New Mexico Catalyst Fund, a fund-of-funds vehicle managed by Sun Mountain Capital focused on making seed and early-stage investments in New Mexico-based start-ups.

Indiana also operates a similar fund-of-funds approach through its $250 million “Next Level Indiana” programme, managed by 50 South Capital.

By comparison, New York and Florida have launched their own funds, all managed by Hamilton Lane.

Since its inception in 2009, Florida has committed $1 billion to three funds that invest in private equity funds, growth and technology companies and credit opportunities, according to a 2021 report from Florida’s Office of Program Policy Analysis and Government Accountability.

Through the programme, Florida has invested $827 million across 43 private equity funds and 62 technology and growth companies, and created 20,000 jobs through these funds, the report said.

One source who asked not to be quoted said that these types of funds do have one potential stumbling block. Possible conflicts-of-interest are very possible, with echoes of past scandals still lingering throughout the industry.

“It might be easy for an in-state fund to invest in a business owned by a family member of a prominent politician, for example,” the source said.

Think globally

At the end of the day, the work of in-state investing is much the same, if not more challenging, as that of traditional private fund managers, Helgerson said.

Helgerson said developing a locally focused portfolio requires “on-the-ground” and global perspectives, as many potential investments can fly under the radar.

“We do the traditional due diligence we would do elsewhere like competitive analysis and risk/return assessments. But there is an additional layer of due diligence and evaluation for these funds to make sure we are partnering up with the right management team. We want to make sure we are supporting a good story,” Helgerson said.

But the bottom line for any public pension plan is to receive returns for its beneficiaries. In-state programmes have more than held their own against traditional private market funds, according to Helgerson.

For example, the Florida Growth Fund has brought $540 million in distributions to the state’s retirement system with net returns on its various tranches ranging from 5.1 percent to 15.8 percent, according to the OPPAGA report.

“I would say that there has been a close proximity between returns for state-based programmes and traditional global PE activity. It’s closer than you would expect,” Helgerson said.