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Illinois will invest $50MM in venture capital

The state of Illinois is ready to invest $50 million, or about 1 percent of its investment portfolio, in high-risk venture capital funds.

Gov. Ryan signed a bill Monday that allows the state, for the first time, to invest in venture funds, which in turn buy into fledgling companies. The
legislation caps Illinois’ total exposure to such investments at no more than 1 percent of the state’s investments in a calendar year.

By:
Tammy Williamson, and Howard Wolinsky
Chicago Sun Times

"Our desire is to make the best possible yield for whatever our investments are," state Treasurer Judy Baar Topinka said Tuesday in announcing details
of the investment plan.

"We’re talking about new companies, new jobs and more people working," she said.

The program will not invest tax funds that the General Assembly has appropriated to specific programs or state services. Rather, the investment into
venture funds would be part of the state’s overall annual investing. Illinois, like many governments, also invests in stocks, mutual funds and bonds to
meet pension and retirement benefits for its present and former employees. The state’s portfolio totals about $5 billion in assets.

Backers of the legislation justify the venture-capital investment decision as a way it can help create jobs in Illinois, and said it’s catching up to other
states that have had such programs in place for years.

"We’re going to invest this money one way or another," Topinka said. "Up to this point, one of the problems we’ve had in having all of these wonderful
schools who have been turning out tremendous students–they’re bright, they’re ready to go, they’re just dying to do it–but there was never enough
money in the state to do it, to be able to start venture capital businesses, and they [the graduates] would wind up in New York or California. And we had
a brain drain here in the state of Illinois."

George Middlemas, co-managing partner at Apex Venture Partners, agrees: "This will help stem the loss of graduates who get on airplanes and go
someplace else to get high-tech jobs. In the long term, it also should increase state revenues."

Added Warren Holtsberg, corporate vice president and director of venture investing for Motorola Ventures, the tech company’s investment arm, said,
"This is a very positive step. It will increase the capital available for entrepreneurs in Illinois. We not only want companies to start here, but to stay here."

Start-up companies can be a risky investment because they are young companies–or, in some cases, not much more than an idea–and many fail. But
some investments can pay off handsomely, which is what keeps some venture capitalists investing in start-ups.

In the year ended March 31, venture capital funds lost 24.4 percent of their net assets, according to Thomson Venture Economics and the National
Venture Capital Association, which jointly monitor the quarterly and annual performance of more than 1,400 venture capital and buyout funds. By
comparison, the Standard & Poor’s 500 Index eked out a positive return of 0.1 percent.

Over the longer term, however, such start-up funds have performed well. Venture capital funds returned 41 percent over three years ended March 31,
according to the Thomson data. The Standard & Poor’s index rose 10.3 percent over that period.

The average rate of return for money invested by the Illinois treasurer for all of 2001 was 4.61 percent, while the Standard & Poor’s 500 index lost 19.5
percent.

"It’s not a short-term investment," said Jim Downing, president of the Illinois Venture Capital Association.

Added Timothy Ghriskey, founder and hedge fund manager of Ghriskey Capital Partners in Greenwich, Conn., "For a large portfolio like a state portfolio,
for part of their assets, it makes total sense. These are long-lived assets and provide nice diversification" of investments.

But the long-term nature of the investment also is a drawback, because investors can’t just pull out money whenever they want.

But the upsides are "huge potential returns," he added.

Topinka said Illinois’ investment will be safeguarded because the state won’t invest in individual companies, but rather venture capital funds, where the
risk is spread among multiple companies, and where investment managers have expertise in picking winners.

"We don’t want to lose money on this," she said.

The state will invest in funds that have "significant" investments in Illinois firms, giving the fund managers incentive to look more closely at Illinois
companies.

Professional investors cautioned against turning the fund into a political plum for friends. Middlemas of Apex Venture Partners, said, "Generally, this a
good thing. The issue is how the money gets allocated.

"Some other states that have done this have allocated the money politically. The state [of Illinois] needs to give the money to firms that have produced
good results."

Topinka said the state will hire an investment adviser to help it decide which funds are most effective. Additionally, she’ll appoint a review committee of
state officials, venture capitalists and academics to advise the state on investment possibilities, and investments will be made only in venture funds
recommended by the oversight committee.

Said Middlemas: "There are some pretty good high-tech companies to be invested in here. That wasn’t the case 10 years ago.

http://www.suntimes.com

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