Oregon is the latest state to invest money into indigenous or nearby private equity groups with the goal of spurring local business development in its region. The Oregon Investment Counsel initiated the program in September, hiring Credit Suisse First Boston to spearhead the effort, which through the recently formed Oregon Investment Fund will dedicate $100 million to buyout and venture capital groups and as much as $25 million toward co-investments directly in companies. CSFB, meanwhile, will also contribute an additional $5 million on top of Oregons commitment.
In the initial round of distributions, CSFB and Oregon have settled on four groups to receive a total of $34 million. Buyout firms Evergreen Pacific Partners, with offices in Seattle and Portland, and the Portland-based Riverlake Partners were among this first group to receive disbursements, joining venture firms Buerk Dale Victor and Cascadia Partners.
These are simply the first four that weve identified in the process, said CSFBs David Almodovar, a vice president in the customized fund investment group. There are going to be others that follow.
In earlier reports, Almodovar had indicated that CSFB had sent out 120 applications to firms that would fit the profile of what Oregon is looking for, and he added that there were also 50 applications that had been downloaded from the Oregon Investment Funds Web site.
Oregon, in its application, cited a number of objectives in starting the fund. The pension aims to foster the creation and growth of companies in Oregon and the Pacific Northwest, encourage the development of a vibrant Oregon-based private equity community, attract other regional and national PE funds to invest in the region and facilitate public and private partnerships within the state.
The pension also identified four particular industries that it wants to focus on, given that it believes those particular sectors represent the emerging clusters of innovation in the Pacific Northwest market. The areas that the pension identified would seem to favor the venture capital crowd, and encompasses the high technology, microtechnology, advanced textiles and healthcare industries.
Overall, the program received 27 submissions that met the November 15th deadline, and Almodovar indicated that more commitments will be made in the coming months.
While the initiative is designed to spur development in the Oregon area, CSFBs primary mandate is to find funds that will generate the best possible returns for Oregon, according to Almodovar. Our foremost responsibility is to get the best returns we can, he said. There needs to be a commitment to this region, but were not requiring firms to make all of their investments here. There just needs to be an attempt on the part of the general partner to look at all of the opportunities in the region on a best-efforts basis.
However, he noted that it is important for the candidates to have a prior track record in the state and a reputation throughout the region.
Almodovar would not breakdown how much of a role buyout investments would play in the initiative or if there is a particular allocation to the asset class. He noted that he expects there will be a few more VC funds that receive commitments, but he said CSFB intends to develop the program dynamically, so that could change.
In this part of the country, in the Pacific Northwest and Oregon, there are a lot of small to medium sized companies that are not necessarily VC candidates, Almozodar said. He specified that in the case of Evergreen and Riverlake, each of those funds target the middle and lower middle-market, respectively, and help fill the void just above the venture capital reach.
Evergreen recently closed its inaugural fund, Evergreen Pacific Partners, LP, which was able to corral $275 million in its debut. The funds industry focus covers manufacturing, packaging, consumer products and media. Riverlake, meanwhile, according to Form D filings with Securities and Exchange Commission, has been raising its inaugural fund, Riverlake Equity Partners, LP, since 2003. The firm had set a target of $50 million at the time of the filing. Calls to Riverlake were not returned by press time.
The State of Oregon has roughly $61 billion under management, according to its Web site, and the State Treasury manages the Oregon Public Employees Retirement Fund (OPERF), the State Accident Insurance Fund (SAIF) and other smaller funds. According to the most recent Directory of Limited Partners, published by Thomson Venture Economics, as of 2004, the state had allocated 9.7% of its capital to private equity. In the past, the pension has invested in Leonard Green & Partners, Providence Equity Partners, and Oaktree Capital Management.
Others Trying For The Same Results
While Oregon is already investing in its home state, lobbyists are hoping other pension funds will follow suit.
Maryland Governors Commission on the Development of Advance Technology Business is pressuring the State Retirement and Pension System of Maryland to get the double bang of good returns and local development. However, Frank Adams, managing general partner of Grotech Capital Group, and a member of the commission board said so far Maryland is not listening.
Indeed, State Retirement and Pension System of Maryland has committed about $85 million, none of it locally. It committed $16 million to London-based Alchemy Partners, $13 million to London-based Apax Partners Apax Europe VI, $40 million to Boston-based Audax Groups Audax II and $15 million to Seattle-based Frazier Healthcare Ventures Frazier Healthcare V.
According to Steve Huber, chief investment officer with the Maryland system, theres no planned changes in the way funds are chosen. Huber points out that for most of its investments the system uses consulting firm Altius Associates to make private equity investments indirectly and has only recently begun direct private equity investments as an LP. Any Maryland deals that come up we make sure to get those in front of Altius to make sure they have the chance to make the case, says Huber. There is not currently a policy to target just Maryland-based funds. Our strategy is national and international on private equity. Adams did not return calls seeking comment.
Up the coast in the Commonwealth of Massachusetts, State Treasurer Timothy Cahill has proposed an ambitious plan that would see pension funds used to power economic development in the Bay State. The proposal is one of several the Treasurer made public on May 4 and stems from recommendations of the Treasurers Job Growth Task Force. The proposal would use up to an additional $600 million of pension investments in economically targeted investments to promote affordable housing and economic development in Massachusetts.
According to the State Treasurers office, almost half of Massachusetts $36 billion pension fund is managed by Massachusetts-based firms.
However, keeping pension fund money instate could be a big error, according to Professor Josh Lerner, who specializes in private equity at the Harvard Business School. Lerner warns that taking a local focus for purposes of economic development is bad for public pensions and public university endowments. [Localized private equity investment] is very much a function of the highly intense political pressures that public institutions face in many cases to invest locally, says Lerner, who is the lead author of a study on differences in practices and returns of various private equity limited partners. In a lot of cases, once this pressure is brought to bear to invest locally, it becomes a free for all. There are pressures to invest in certain politically connected funds. Even if theres not that pressure, theres a sense that the standards are considerably lower.
Much of the country does not fall within the epicenters of private equity, which Lerner describes as being Silicon Valley in California and the Boston area for venture and the Northeastern corridor for buyouts. Lerner says that using pension funds for economic development presents an easy road for politicians. There is no need to raise taxes to fund entrepreneurial activities to create high tech clusters and the negative effects of lower pension returns wont be felt for a while. The problem has become more intense rather than less intense as states face the challenges of tight budgets and desires to enhance revenue, says Lerner. Its not a temptation to want to fall into.