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Florida State Employee’s Pension Fund to allocate $300 Million to venture capital

To diversify, Florida fund administrators will set aside $300-million for relatively high-risk venture capital investments.

By KRIS HUNDLEY, Times Staff Writer
© St. Petersburg Times

Bureaucratic delays sometimes can be a blessing.

Nearly three years after technology entrepreneurs urged Florida to put some money into venture capital investments, the state employees’ pension fund has taken their advice. And since the dot-com boom has gone bust, the money is far less likely to end up in the long-shot companies that were being funded just a few years ago.

The Florida State Board of Administration says it will allocate $300-million, or less than 0.4 percent of the fund’s total assets, to relatively high-risk venture capital investments. It is soliciting applications from managers who have relationships with multiple funds, rather than dealing directly with individual venture capital funds. The managers are expected to distribute the state’s money over the next several years.

Frank Fernandez, senior portfolio manager of alternative investments for the Florida pension fund, said Wednesday the decision to put money in venture capital investments is a long-term move.

"The money is not going out the door anytime soon because it takes years to put the commitments and investments out," he said. "We’re doing this with the intention of building a more diversified portfolio that includes venture capital, rather than having no venture capital program."

Nationally, 37 government pension funds are already active in the venture capital market, according to Venture Economics in New York City. The largest is the California Public Employees’ Retirement System, known as CalPERS, which has more than $1.8-billion invested in the category.

Florida’s pension administrators will select managers after considering their track record and their funds’ rates of return. The board’s solicitation does not indicate a preference for Florida-based funds or ones that invest in Florida businesses, but Fernandez said his group has taken that into consideration.

"Though our first and most important priority is to serve as fiduciary and manage the assets, we have on all occasions attempted to come up with ways to work with Florida-based venture capital firms and make sure they’re given the opportunity to win the business," he said. "We’re just trying to work out the kinks."

Area venture capital executives say that is the way it should be.

"I live here so I’d love to see more venture capital spent in Florida," said Tate Garrett, senior vice president of Advantage Capital Partners, a 3-year-old venture fund in Tampa. "But on the other hand, the state pension fund is not an economic development agency or tool."

Garrett added that he doubts Advantage would qualify for the state’s venture capital allocation because it is a fairly new fund with a limited track record.

The Florida pension fund, the fourth largest in the country, had a market value of $85.4-billion as of Dec. 3. About 67 percent of the fund is invested in stocks, 24 percent in fixed income instruments, 4 percent in real estate and 3.5 percent in alternative investments. The new venture capital allocation will be made under the alternative investment category, which to date has been funneled to buyout funds involving more mature companies. Venture financing typically goes to earlier stage companies.

Coincidentally, the amount the state will be devoting to risky startups is the same amount lost by the fund last year on a company once considered a sure bet: Enron Corp.

By dragging its feet on a move into venture capital investing, the pension fund has probably saved itself considerable grief.

Venture investments in private startup companies were at an all-time high in January 2000 when tech executives were pushing the state to get into the game. Dozens of public pension funds jumped into the venture capital market in the mid to late 1990s. And they were reaping bonanza rewards with venture capital returns averaging 40 percent a year.

Then came the crash. Tech spending evaporated and the market for initial public offerings, once a profitable exit for early investors, dried up. Venture capital funds, which had traditionally made up for a high number of losers with one home run, started reporting losses. For the period ended June 30, one-year returns on venture capital funds were down 27 percent.

Fund managers, stung by losses and seeing their portfolio companies collapse at an unprecedented rate, have become much more selective investors. The National Venture Capital Association said the country’s 700 funds are sitting on $90-billion that has been committed by limited partners, but not yet invested. With a surplus to spend, funds have cut back on raising new capital. Some are even returning uninvested cash to its partners.

Scott Miller, managing director of Tampa venture capital company Lovett Miller, said he won’t be trying to get any of Florida’s pension money, though he thinks the state would be a good partner.

"We’re not in the market right now because we’ve got about $70-million that’s uninvested," said Miller, who has $175-million under management. "But I would think that many quality funds would view Florida as an attractive potential partner. Funds want people who have deep pockets."

The pension fund’s Fernandez is confident that Florida’s money will find some takers, despite the changed environment.

"There will still be a great deal of competition with respect to getting access to the top-tier funds," he said. "But there will be the appetite and ability to place that money over the next two or three years. This is a very good time to be starting a venture capital program."

— Kris Hundley can be reached at [email protected] or (727)892-2996.

http://www.sptimes.com/2002/12/05/Business/Pension_fund_to_add_v.shtml

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