Drawing in the dollars – What would be the best way for the state to foster economic development in Montana?

And just how deep and detailed should the state’s involvement be in trying to fuel investment and job growth beneath the Big Sky?

The next Legislative session might be eight months away, but lawmakers from across the state are already preparing for January, talking about bills and possible investments that would be aimed at helping the Montana economy.

By JOHN HARRINGTON – IR Business Editor

At a meeting last week, the Economic Affairs Interim Committee, consisting of four senators and four representatives, heard from several investment managers from around the country who shared ideas on how states can invest — for return, for jobs and for economic development.

It’s not that the state hasn’t tried its hand at growing the economy before — more than 55 statutes currently on the books deal with economic development. Yet Montana remains mired in the last decile in the country in personal income.

Much of the discussion centered around venture capital, and the difficulty of attracting venture capital to Montana.

Venture capital is money provided by wealthy individuals, banks, finance companies or funds that helps businesses get started, reach the next level or go public. In return for their investments in the businesses, venture capitalists typically get in return some form of equity, royalties or profits from the company.

"Venture capital isn’t the solution to economic development, however, it’s a very important piece of the pie, and right now we do not have an active venture capital infrastructure in Montana," Dave Gibson, chief business officer in the Governor’s Office of Economic Opportunity, told the committee. "We need to develop that infrastructure, and what solution you ultimately decide on doesn’t matter."

Adams Street Partners, a Chicago-based private equity investment firm, has invested money from the state pension fund for years, with good success. Investing in venture capital firms as well as buyouts, partnerships and other investments, the firm has turned $99 million of Montana’s pension money into $148 million. But very little of the firm’s investing is done in Montana.

Bart Holaday, an Adams Street board member who has worked with Montana’s investors for many years, said it’s hard for investors to justify spending in Montana, because of the state’s remote location and small, spread-out population. Finding high returns is simply easier in places thick with high-tech start-up firms like Silicon Valley, Boston and Austin, he said.

"The sole motivation for venture capitalists is to get the highest rate of return," Holaday said. "They want to go where they can get the highest rate of return, and it’s just much harder to find the companies that will bring that rate of return in Montana."

He noted that if the state is serious about attracting venture capital, rate of return needs to be the overriding consideration. Any time another goal is introduced — even the old political standby of "creating good jobs" — the potential for high returns is diminished and attracting venture capital becomes harder. Create a climate where good returns on investment are possible, he said, and the jobs will follow.

In particular, Holaday said the goals of venture capital and economic development are not the same, and that many states have been stung when trying to establish their own venture capital funds for economic development purposes. He noted that venture investing is inherently risky, the risk increases dramatically when geographic constraints are placed on where the money can be invested; managers of in-state funds tend to have less experience; and it’s difficult to insulate those making the investment decisions from short-term political pressure.

Committee chair Rep. Joe McKenney, R-Great Falls, noted that even if firms are helped to succeed here, they often pull up stakes once reaching a certain size. He cited a Great Falls insurance company and a Bozeman-based video gaming manufacturer, both of which fled Montana.

"How do we keep these fast-growing companies in the state once they reach a critical mass?" he asked. "We nurture these companies, they’re succesful and then they’re gone."

Representatives of another investment firm, Credit Suisse First Boston, told the committee that ensuring successful venture investing involves more than just writing checks and hoping for the best.

"There is no substitute for being on the ground," said Michael Arpey, managing director of CSFB Private Equity. "When we work with a state, we require a firm to open an office in the state and make a firm time commitment."

CSFB works with pension funds in Oregon, Indiana and other states, and Arpey echoed Holaday’s contention that the best chance at success comes when rate of return gets the highest consideration.

"None of these programs are going to work if there isn’t a return element and that’s not the highest goal," he said.

Robert Heard, managing director of USPSI, an Oklahoma-based private equity firm that’s created investment programs for that state and Arkansas, said the fast paced of business today has made access to capital even more important.

"The speed of the entrepreneurial economy is driving demand for this type of capital," he said. "Our parents had time to grow their businesses on their own. Increasingly, if you have a great opportunity today, that method doesn’t work."

At the end of the day, the committee made no decisions, but members did ask for draft legislation for a couple of forms of arms-length investment boards the state could use to attract capital and retain firms in Montana.

John Harrington can be reached at 447-4080 or [email protected].


Capital vs. Development

By IR Staff

Venture capital may be a key to economic development, but the objectives of the two aren’t necesarily the same. In a presentation to the Economic Affairs Interim Committee, Adams Street Partners board member Bart Holaday spelled out the differences:

Venture Capital Objectives:

– Single objective: seek highest rate of return for investors

– Equity investing (investing in exchange for a share of ownership) is the primary vehicle

– Liquidity in three to seven years, either via sale of company or initial public offering

– Venture capitalists seek rapidly growing markets and rapidly growing businesses within those markets; not technology or start-ups or small businesses per se.

Economic Development Objectives:

– Job creation is the primary objective

– Aims to bring new businesses to the state or keep businesses in the state

– Equity may not be the appropriate security for the investment — many companies that are good for economic development are family-owned and shouldn’t sell or go public

– Liquidity is difficult

– Sale or initial public offering may not be in state’s best interest: increases chances of company restructuring and/or moving out-of-state

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