SIC private equity investments battered by down markets

The prolonged domestic stock market crash has hit the State Investment Council’s private equity investment program hard, with overall returns dropping over the past year, according to the latest quarterly report from SIC’s private equity advisory firm Mercer. is pushing down nearly 7%.

The loss reflects the decline in the value of private companies as well as the decline in the value of public companies in SIC’s venture portfolio.

But record oil and gas tax revenues continue to underpin the state’s permanent fund, managed by the SIC, a venture fund that funnels money into local start-ups despite a downturn in the stock market. provides significant capital to continue investing in

“It’s a tough time in New Mexico and elsewhere right now,” SIC spokesman Charles Wollmann told the WSJ. “For now, at least, the happy days of a few years ago are gone, and that’s reflected in the program’s return numbers.”

SIC is permitted by state law to invest up to 11% of the value of the retirement tax perpetual fund in committed venture funds. SIC.

However, under Council policy, SIC limits its total commitment to its private equity program to 9% of its retirement tax fund and maintains reserves for market volatility.

“Markets go up and down, so you need a little wiggle room,” Wolman said.

And despite the current economic uncertainty, with today’s high oil and gas prices, plus a surge in production in the state’s oil patch in southeastern New Mexico, more Funds continue to flow into retirement tax funds.

“That’s about the same $1.08 billion that has flowed into retirement tax funds over the last 20 years,” Wollmann said.

As of October 31, total retirement tax funds reached $6.64 billion.

Under SIC’s 9% policy cap, that means the council could commit up to about $600 million to private equity investment programs. But as of June, Mercer reported that net deployed capital under the program totaled just $450 million, less than 7% of its retirement tax fund at the time. rice field.

That prompted the council in November to set up a “venture studio” in New Mexico to commercialize emerging technologies from the state’s national laboratories and research universities. We were able to approve a $100 million commitment to the national venture firm America’s Frontier Fund. dollars), significant funds for private equity programs are still available in retirement tax funds.

In recent years, SIC’s venture investments have generated returns in line with expectations, with the ‘Internal Rate of Return’ or IRR, a key 10-year metric, peaking at 6.8% in 2019. In the first year of the pandemic, it slowed to 4.6%, but started to recover in 2021, returning to 5.2% that year.

However, due to the current stock market crash, the 10-year IRR plummeted to just 3.8% as of June 30th. This reflects a sharp drop in the value of publicly traded companies in the SIC portfolio, as well as declining valuations of startups that remain unlisted. said Brian Birk, his partner managing Sun Mountain Capital, which manages his $200 million fund for his SIC direct investments in local businesses.

In fact, the 1-year IRR of SIC’s “co-investment fund,” the money pool managed by Sun Mountain, declined by 12% in FY22, lowering the overall 1-year rate of return for all SICs. New Mexico-focused private equity investments totaled him down 6.6%.

“Public market declines are showing up in co-investment portfolios,” Burke told the WSJ. “But it’s not just the co-investment fund, it’s across the SIC portfolio. All funds are down, reflecting that market correction.”

Still, venture capital investments are inherently operating with a long-term view of building corporate value for the long term, and the market will bounce back.

Additionally, by law, private equity programs focus on “economically targeted investments” that generate significant social benefits, so SICs often offer lower returns than other investments such as stocks and bonds. can accept. And over the course of the program, New Mexico has enjoyed significant benefits.

According to Mercer’s latest report, as of June, the program had helped 3,300 jobs at 55 companies, delivering an annualized $137 million in salaries and spending on goods and services in New Mexico. There was an annualized spend of $144 million.

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