A prolonged decline in the nation’s stock markets is taking a significant toll on the State Investment Board’s private equity investment program, causing total returns to decline by about 7% over the past year, SIC private equity advisory firm Mercer said in its latest quarterly report. in the report.
The losses reflect the impairment of publicly traded companies in SIC’s venture portfolio, as well as lower values for private companies.
But record oil and gas tax revenue continues to fuel the state’s permanent funds, which are managed by the SIC, providing significant capital to continue investing in venture funds that pump money into local startups despite the stock market slump.
“It’s tough right now in New Mexico and elsewhere,” SIC spokesman Charles Wallman told the Journal. “The happy days of a few years ago are gone, at least for now, and that’s reflected in the program’s return numbers.”
The SIC is allowed by state statute to invest up to 11% of the value of the Permanent Fund of the Tax Tax in venture funds that commit to invest, or cause others to invest, at least as much money as they receive in local companies. SIC.
In accordance with Board policy, however, SIC has capped its total commitment to the private equity program at 9% of the compensation tax fund to maintain reserves for market volatility.
“We need that wiggle room because markets go up and down,” Vollman said.
And, despite the current economic uncertainty, much more money has continued to flow into the severance tax fund over the past year, thanks to today’s high oil and gas prices and an influx of production in the oil sector of southeastern New Mexico. That created an unprecedented $1.03 billion boom in the 2022 fiscal year, which ended in June.
“That’s almost the same as the $1.08 billion that has flowed into the severance tax fund over the past 20 years combined,” Wollman said.
As of October 31, the total amount in the severance tax fund was $6.64 billion.
Under the SIC’s 9% policy cap, that means the board can commit about $600 million to its private equity investment program. But as of June, Mercer reported just $450 million in net deployed capital under the program, representing less than 7% of the compensation fund for the period, giving SIC more “headroom” to continue investing in venture funds. : Wolman said:
That allowed the board in November to approve a $100 million commitment to the newly formed American Frontier Fund, a national venture capital firm that plans to establish “venture studios” in New Mexico to commercialize technologies emerging from the state’s national labs and research universities. And, given that SIC has committed that capital to the AFF over 10 years, meaning up to $10 million will actually be deployed annually, significant funding for the private equity program is still available in the exemption tax fund.
In recent years, SIC’s venture capital investments have delivered returns in line with expectations, with a key 10-year “internal rate of return” or IRR of 6.8% in 2019. During the first year of the pandemic, it slowed to 4.6%, but it began to recover in 2021, climbing back to 5.2% that year.
With the current decline in stock markets, however, the 10-year IRR has fallen to just 3.8% as of June 30, reflecting a steep decline in the value of publicly traded companies in the SIC portfolio, plus lower valuations of startups that remain are in private hands. , said Brian Birk, managing partner of Sun Mountain Capital, which manages a $200 million fund for SIC direct investments in local companies.
In fact, the one-year IRR of SIC’s “co-investment fund,” which is the money pool managed by Sun Mountain, fell 12% through fiscal year 2022, dragging down the one-year total rate of return for all of SIC’s earnings. New Mexico-focused private equity investments rallied 6.6%.
“The decline in the public markets is reflected in the co-investment portfolio,” Birk told the Journal. “But it’s not just the mutual fund, it’s in the SIC portfolio. All currencies are falling, reflecting that market correction.”
However, venture capital investments essentially work for the long term to create value in companies over time and the markets will bounce back.
In addition, according to the statute, the private equity program is heavily focused on “economically targeted investments” that deliver significant social benefits, allowing the SIC to accept lower returns than other investments such as stocks and bonds. And throughout the program, New Mexico has reaped significant benefits.
As of June, the program supported 3,300 jobs at 55 companies with $137 million in total annual payroll, plus $144 million in annual spending on New Mexico goods and services, according to a recent Mercer report.
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