New Mexico LP backs in-state, early-stage micro fund

The New Mexico State Investment Council, a $20 billion sovereign wealth fund, is the primary backer of a new micro fund of funds intended to fuel investment in the state’s startup community.

The Micro Fund of Funds, which falls under the umbrella of the SIC’s private equity program, will back funds focused on seed and early-stage investments in-state. New Mexico SIC backed the Sun Mountain Capital-led vehicle with a $10 million commitment, according to SIC spokesman Charlie Wollmann.

Sun Mountain manages about $20 million through the new vehicle and participating GPs must match its commitments, Wollmann said.

“We’ve got an interesting structure we’ve put together,” Wollmann said. “We think it’s going to fill a gap that’s been identified here in New Mexico, in terms of the early-stage [demand],”

The Micro Fund of Funds is the result of discussions between the State Investment Council, the U.S. Treasury and New Mexico’s economic development and finance agencies, according to SIC documents. In the second half of 2015, New Mexico’s Economic Development Department and Sun Mountain, which manages the SIC’s existing in-state private equity program, assembled a proposal to divert unused federal grant money to early-stage companies in such cities as Albuquerque, Las Cruces and Santa Fe.

New Mexico had roughly $5 million remaining from the $13.2 million it obtained through the State Small Business Credit Initiative, a federal program that provides funding for local small business lending. In January, the Treasury Department approved New Mexico’s plan to transfer its remaining $5 million to a micro fund of funds managed by Sun Mountain. The SIC’s commitment added another $10 million to the fund of funds, which also circled $5 million from a group private investors.

Private investors could include the Santa Fe Community Foundation, local university alumni, a New Mexico health care organization and out-of-state grantmakers, according to State Investment Council meeting materials.

The State Investment Council is optimistic about the new fund’s prospects, Wollmann said. In addition to its twin goals of stimulating the local start-up community and netting a market return, New Mexico Micro Fund of Funds will also look to partner to larger, out-of-state venture capital firms interested in backing New Mexico startups, according to state documents.

“Right now, New Mexico has about five or six very active incubators,” Wollmann said. “Albuquerque’s developed an innovation district. They’re putting money behind these projects. The universities are participating through their endowments”

The new micro fund of funds adds another facet to New Mexico’s existing in-state private equity program, which began backing late-stage businesses and venture funds in 1993. Though active for more than 20 years, the in-state program has changed considerably since inception.

In its first decade of activity, New Mexico SIC managed the program internally and through a “hodgepodge” of outside firms, Wollmann said. Its primary goal was to stimulate the local economy, which often came at the expense of returns.

Deals completed prior to 2004 netted a negative 18.2 percent IRR and are $56.5 million in the red, according to New Mexico documents.

The State Investment Council hired Sun Mountain to manage the portfolio in 2004 and returns began to stabilize. Through Sept. 30, the program’s post-2003 portfolio netted a 4.8 percent IRR with $139.6 million of distributions. To date, the program has committed $442.1 million to 30 funds, including several co-investment vehicles. New Mexico valued its in-state holdings at $264 million as of Sept. 30.

“The Council is seeking benefits of the double bottom line. We are going to focus on financial returns and also take into consideration job and industry creation,” Wollmann said. “That’s similar to what we do currently, but obviously with seed and early stage there’s a little more volatility. You either hit a home run or you strike out, and we’re aware of that going in.”

Beyond its new micro fund of funds, New Mexico SIC also re-upped $100 million to Green Equity Investors VII at its January meeting. The sovereign wealth fund committed $10 to Phoenix Venture Partners II as well.

The State Investment Council set a 12 percent long-term target for private equity and was roughly four percentage points short of that target, according to state documents.