New Mexico SIC, facing flood of cash, slashes PE target on oil and gas tax fund

New Mexico's surging energy industry gives the state’s second-largest permanent fund more money – and challenges.

New Mexico State Investment Council reduced its interim target allocation to private equity for the second largest fund it manages to 7 percent from 12 percent as it balances massive cash inflows.

New Mexico’s Severance Tax Permanent Fund has received an injection of cash over the past three years due to increased revenue from oil and natural gas production. A state law enacted in 2023 will add even more money to the STPF to manage over the next several years.

However, the sovereign wealth fund’s investment staff is challenged in how to put this increased cash to work, resulting in changes to the STPF’s asset allocation policy.

New Mexico State Investment Council approved the changes to the STPF’s asset allocation at its April 23 board meeting, which was viewed by Buyouts.

In June 2023, the council set the STPF’s interim target to private equity at 12 percent. The STPF currently allocates 3.4 percent to private equity, according to board documents.

“The inflows from the severance tax have just been huge. It made our forecast of getting to 12 percent pretty aggressive,” said New Mexico chief investment officer Vince Smith.

New Mexico collects severance taxes from oil and natural gas produced in the state and allocates a certain amount to be invested through the STPF. In turn, STPF returns annual distributions to the state’s budget.

Skyrocketing energy prices along with increased energy production in New Mexico have dramatically increased the amount of money now available in the STPF.

In 2022, the STPF received contributions from the state in excess of $1 billion followed by $898 million the next year. The STPF has received $1.05 billion in inflows from the state to date in 2024, board documents said.

For comparison, inflows to the STPF averaged $55 million annually between 2002 and 2021, according to information from the state legislature.

“There’s just so much capital going in. We could not get it into private asset markets that quick,” Smith said.

Smith told the board he believed the STPF could reach the 7 percent target over the course of the next year.

The board increased the STPF allocation to core fixed income from 9 percent to 14 percent.

“Core fixed income is where the money is right now,” Smith said.

Inflow trends

New Mexico State Investment Council manages nine separate funds, each with different allocation targets and strategies. Combined, these funds have a NAV of $52.7 billion.

The largest of these funds is the $30 billion Land Grant Total Fund, which is primarily funded by royalties earned from energy and mineral production conducted on land owned by the state of New Mexico, according to the state legislature.

With a current value of $9.6 billion, the STPF was created in the 1970s, based on funding that comes from severance taxes charged on oil and natural gas production.

However, the state government first uses the collected severance taxes for the repayment of capital project bonds, with any surplus sent to the STPF, according to a state legislature report.

This has historically capped inflows to the STPF, the report said.

Recent changes to the energy market led to the rapid increase in the state’s contributions to the STPF.

According to the US Energy Information Administration, New Mexico’s oil production boomed over the last decade. The state now ranks as the nation’s second-largest oil producer, trailing only Texas.

New Mexico is also one of the nation’s 10 largest producers of natural gas, according to the EIA.

A steep rise in oil and natural gas prices added even more inflows to the STPF, according to board documents.