The New Mexico State Investment Council outlined a general blueprint to restructure its private equity program to make it a more effective asset class for the $26 billion portfolio.
The propositions of the restructuring include expanding the amount of funds and capital commitments in the program. This includes increasing the program’s pacing plan to an annual aggregate commitment amount of $75 million to $125 million, ideally in a “steady state environment,” meaning capital distributions and contributions are at roughly the same levels.
Notably the council wants to focus on boosting the local economy by forming an emerging manager program that would allocate capital to in-state investors, ensuring local entrepreneurs have access to multiple sources of financing across different stages.
The emerging manager program would be illustrated as such:
Pre-Seed / Seed Stage | • ~$100k-500k per deal • Highest economic impact at this stage (most opportunity for job growth from low base) • Highest risk (two-thirds of VC deals fail to return capital) • Pro rata optionality (to invest in later rounds if companies prove successful) • Potential for early stage return multiples for “winners” • Seed and early-stage investments account for majority of the gains in VC asset class |
“Feed” / “Core” Stage Deals | • Generally those companies that have met key milestones established during earlier stage financings (likely only 20-25% of seed deals) • ~$1 million-$2 million per deal to maintain pro rata ownership • Seed managers typically need access to some follow-on capital in order to fund successful companies and have a reasonable prospect of earning returns; difficult to have strategy solely focused on high loss ratio seed deals |
Later Stage Deals | • ~$2 million-$4+ million in later-stage deals (often companies from early-stage deals from prior funds), proven “winners” • Potentially also some investments in later-stage strategies such as buyouts and growth equity • At this stage, companies often looking for more than capital, may need help expanding / scaling their business • More risky from an economic development perspective – at this stage, there is a higher likelihood that businesses are using capital either (i) to fund expansions into other states / regions or (ii) to bridge to a sale; SIC has had mixed success with these investments |
The council would allot a maximum initial commitment of $5 million and put a cap on aggregate commitments towards one manager of $25 million, with the key principle that no fund commitment would exceed 20% of the total capital of any fund. The fund says this “creates incentive for managers to raise outside capital, which follows best practice for this type of economic development program.”
Emerging manager commitments wouldn’t exceed 30% of the total commitments made by New Mexico during a calendar year, and the program is recommended to have an absolute return benchmark of 5%.
The overall private equity program will have a 9% allocation pursuant to the new pacing model, with an upper and lower range of +/- 2% (11% or 7%).
A snapshot of information on New Mexico’s private equity program performance for their active commitments is below (all monetary values are in USD millions):
Strategy | # of Funds | Commitment | Net Contributed | Net Distributed | Total Value | Net IRR (3/31/2019) |
Venture Capital | 11 | $181.5 | 179.4 | 166.9 | 181.6 | 0.2% |
Growth | 18 | 788.1 | 498.2 | 254.8 | 704.0 | 9.8% |
Buyout | 63 | 3,022.3 | 2,045.7 | 1,561.5 | 3,191.5 | 12.1% |
Special Situations | 22 | 921.2 | 661.4 | 549.4 | 876.8 | 7.6% |
Subtotal | 114 | 4,913 | 3,384.7 | 2,532.5 | 4,954.9 | 9.6% |
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Tags: Emerging Managers, New Mexico, New Mexico State Investment Council, Private Equity, Venture Capital