Illinois to invest $60M

State governments are not known for their swing-for-the-fences investment styles.

But as capital dries up for technology companies that helped drive state economies in the 1990s, at
least one state has warmed to the idea of backing venture capital and private equity firms in a
non-traditional way.

by Tyson Freeman The

Illinois Gov. George Ryan, a Republican, is expected within days to sign legislation passed in May
that would authorize $60 million from the state treasury to be invested in such funds. While state
pension funds frequently steer small percentages of their capital into private equity, state treasuries
normally park cash into more liquid stock and bonds.

"Like most major industrial or technology states, we are looking for an innovative way to keep the
flame of the 1990s moving forward even though there has been a significant slowdown," said Sen. Kirk
Dillard, a Republican from Hinsdale, Ill. and Senate sponsor of the bill.

At the end of 2001, there were at least 21 states considering legislation to support venture capital
investing, according to the National Venture Capital Association in Arlington, Va. But Mark Heesan,
association president, said the initiative is the only one that he knows of that allots treasury money to
venture capital.

Illinois’ Technology Development Act will let the treasury allocate 1% of the general revenue fund to
Illinois venture and private equity firms such as LaSalle Investments, Bank of America Capital
Investors and Prism Opportunity Fund, over three years.

The Illinois legislature struck down a similar initiative floated by Ryan in 2000. Dillard said that at the
time many legislators were wary of expanding the power of the state treasurer and others balked at the
risky nature of venture capital investing.

But as state treasurer Judy Baar Topinka drew more support and as the local venture community
began to suffer from the downturn, opposition to the bill softened. "This treasurer now has a proven
track record of being extremely conservative [in her investing decisions]," Dillard said. "And as the
venture capital scene continues to sag, we feel that we needed to help ourselves jumpstart ourselves."

Heesan said that selling venture capital to conservative politicians, especially while the most recent
data from Venture Economics shows returns for venture funds were an average negative 27.8% for the
one-year period ending Dec. 31 — is tough. "Legislatures must be convinced that venture capital is an
appropriate investment," Heesan said. "Right now, short-term returns are negative, so they have to be
able to look out 15 years. The reality is that a legislature’s perspective centers around the two- or
six-year election cycles."

Jim Downing, president of the Illinois Venture Capital Association in Chicago, said the bill provides an
opportunity to convince legislators of the benefits of venture capital investing and that it may lead to a
larger allocation.

"One percent of the state’s [general fund] is not that much, but it gives the industry the chance to show
the state that this is a good investment that delivers solid returns," Downing said.

The bill doesn’t outline many details, such as who decides which venture funds will receive money.
The money will flow to funds with either a majority of its employees in the state or at least one
resident managing partner with significant investments in Illinois-based companies. Once signed,
Dillard said, the treasury office will fine tune allocation rules.

Still, some observers are not convinced. "The real challenge right now for most venture capital firms is
trying to figure out what to do with all the capital," not to raise more, said James Hart, a partner in the
Venture Capital Advisory Group of Ernst & Young International in New York. "There is still
consolidation ahead for the high tech sector and investing is a pretty risky proposition."

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