Oregon Diluted Investment Bill Pleases Some Skeptics

A legislative proposal to convert a small portion of state employee pension funds into venture capital for Oregon startup companies has been diluted by compromise. Proponents still say the amended bill, if enacted, will aid Oregon’s emerging growth businesses by directing $100 million to $340 million from the Oregon Public Employees Retirement Fund to venture capital firms for investment in Oregon.

By:
Robert Goldfield
Portland Business Journal

A legislative proposal to convert a small portion of state employee pension funds into venture capital for Oregon startup companies has been diluted by compromise.

Proponents still say the amended bill, if enacted, will aid Oregon’s emerging growth businesses by directing $100 million to $340 million from the Oregon Public Employees Retirement Fund to venture capital firms for investment in Oregon. Early critics, however, seem reassured by recently added language that gives the fund’s overseers, the Oregon Investment Council, the flexibility to ignore such instructions if Oregon investment opportunities seem too chancy.

"They just put fiduciary duty back on the table, which is healthy," said Gerry Langeler, a general partner in venture capital firm OVP Partners, who had opposed the original version of the bill, in part because it interfered with the ability of the state treasurer’s office and the Oregon Investment Council to manage the fund purely for the benefit of retired state employees. With the amendments now planned for the bill, "it sounds like a directive, not an edict," Langeler said.

Supported by the Associated Oregon Industries and many economic development proponents, House Bill 3613 originally instructed the investment council to place up to 1 percent of OPERF assets with venture capital firms specifically for investment in Oregon companies. Under existing practices, the council already places up to 13 percent of the fund’s assets in the risky but potentially lucrative category called alternative equity investments–primarily venture capital funds, bill supporters noted. As a means of aiding Oregon ventures and creating jobs, they reasoned, the council should ensure that a fraction of such investments end up benefiting Oregon startups.

State Treasurer Randall Edwards and OIC Chairman Gerard Drummond objected to any legislative interference in the council’s investment decisions. And some state employee unions worried that the proposed requirements could limit the total return on investment for the fund, which already is in crisis due to value lost in the past two years. OVP Partners, apparently a lone voice among venture capitalists, also criticized the bill as interfering with the council’s need to manage the fund without arbitrary restrictions and as potentially flooding the state with more capital than could prudently be invested.

"This is perhaps the most critical economic development bill we’re going to face [this session]," said Democratic Rep. Mitch Greenlick, HB 3613’s chief sponsor. "One of the real hindrances on economic development, especially in growth of startup companies, is [Oregon] just isn’t a venture capital center."

The new language, agreed to April 29 by Greenlick and union representatives, tells the investment council "to look first at opportunities for investment diversification in Oregon unless, under the circumstances, it is not prudent to do so." It states that at any given time, up to 1 percent of the market value of investment funds–but at least $100 million–be invested "in emerging growth businesses in Oregon unless, under the circumstances, it is not prudent to do so."

Greenlick said the amendments would be added to HB 3613 when it reaches the Senate.

"There is nothing in this bill that would force the council to select less attractive Oregon investments, simply to look first to Oregon investments," Greenlick assured fellow representatives in remarks on the House floor April 30.

In those remarks, Greenlick also cited a 2002 report issued by the Oregon Council for Knowledge and Economic Development, which analyzed the performance of a past $20 million Oregon seed fund that provided capital to 50 in-state companies over a period of close to 10 years. The report said the seed fund helped create more than 3,000 jobs, building companies that obtained $798 million in revenue, and leveraged more than $570 million of additional investment.

Extrapolating from those figures, the minimum $100 million in capital targeted by HB 3613, with matching funds from the investors, will lead to 30,000 new jobs, $7.9 billion in revenue and $5 billion of additional capital for Oregon companies, Greenlick said, repeating figures originally put forth by the Associated Oregon Industries.

Despite the amendments, Greenlick said he expects the OIC will eventually follow the spirit of the bill.

The new language suggests that the council must make Oregon investments if they are prudent, even if they are not the most productive ones that could be made, said OIC Chairman Drummond, who still opposes the bill.

"Our exclusive obligations are to the beneficiaries of the fund," Drummond said. "Anything that would mandate a part of that money being diverted, in effect, for economic development purposes would be a violation of that exclusivity."

If the bill passes, the investment council will want to obtain an Oregon Supreme Court ruling on whether or not the council would be violating its obligations to fund beneficiaries by following the bill’s requirements.

0Meanwhile, Drummond said, the council has indirectly placed pension assets at the disposal of Oregon startups by investing in the venture funds operated by OVP, which emphasizes Northwest companies and has backed several Oregon businesses.

In 2001 the investment council placed $40 million in OVP’s current venture fund. It previously invested a total of $50 million in three earlier OVP funds. According to the council, OVP reaped a return on investment of 48 percent on those three earlier funds.