VC tax credits on rise

A controversial, state-sponsored venture capital investment bill, signed Wednesday, June 26, by Gov.
Mike Foster, R-La., is seen as the latest victory not only for states but for a growing number of venture
capital firms known as Certified Capital Companies, or CAPCOs.

by Vyvyan Tenorio The

State planners see this little-known economic development tool as leverage to raise bigger venture
dollars from private sources to boost economic development. Under the program, insurance companies
can claim tax credits for qualified investments in CAPCO funds that in turn must invest in local

The concept, pioneered by Louisiana in the early 1980s, appears to be finally catching on. Nine states
so far, including New York, Missouri, Wisconsin, Florida and Colorado, have in recent years
implemented CAPCO programs. Alabama and Georgia both approved programs in the spring, Texas
put the wheels in motion for this year and next and Rhode Island and several others are proposing

"We’re seeing more and more states looking very seriously into this," said Mark Heesen, president of
the Washington-based trade group National Venture Capital Association. And venture firms are
likewise increasingly attracted to the opportunities.

"By attracting capital from insurance firms that would otherwise go into fixed income allocations, the
states get a portion of capital that otherwise would not be available to venture capital," said Andy
Paul, founder and CEO of Enhanced Capital Partners, a CAPCO participant with offices in New York
and New Orleans.

Paul said the insurance companies have been getting an average annual return of about 7% in recent
years, about double the return from five-year Treasury bills, and said the program is a "win-win for

For now, Paul’s firm, which manages $50 million, is one of perhaps a dozen investment funds, with
about $1.4 billion total, and are now aspiring to have national scope under the CAPCO aegis. New
Orleans’ Advantage Capital Partners is perhaps the largest, with more than $500 million under
management, followed by Stonehenge Capital Corp. of Baton Rouge, La. and Newtek Capital Inc. of
Garden City, N.Y.

For Louisiana, the program founded years earlier didn’t take off until the late ’90s, and hasn’t yet
reaped its broader benefits. The cash-strapped state was recently ranked 48th among states in
information technology jobs, according to a policy think tank at Case Western Reserve University.

Louisiana let the program, which had issued $560 million in tax credits, lapse in 2000, because of
criticism that the CAPCOs had not invested the money quickly enough or that the investments were not
targeted for broad economic benefits.

However, Don Hutchinson, secretary of Louisiana’s Department of Economic Development, said the
revisions in the new law addressed the prior program’s shortcomings. He said his office has outlined a
new economic development plan that defines specific investment areas, such as minority and
women-owned businesses, as targets for CAPCO investments.

To ensure against abuses, the law instituted new requirements, such as timeframes on investments and
curbs on the CAPCOs’ returns. The law requires that 30% of a fund must be invested within three years
and 50% within five years.

Profits may not be realized by a CAPCO until 100% of the fund has been invested. The state gets 25%
of any profits above 10%, and the state’s share goes up further if the CAPCO fails to meet the

The new law allows the state to grant $84 million in dollar-for-dollar tax credits to insurance
companies over a 10-year period.

With the recently approved Louisiana law, executives now expect mergers and acquisitions and VC
deal activity to gain momentum. Paul said his firm is working with 12 or 14 states on similar efforts.
"This is definitely a start," Paul remarked.

Although the amounts raised by CAPCOs are relatively small, the impact on states like Louisiana "can
be very meaningful," said Scott Zajac, managing director at Advantage Capital. "In these challenging
times particularly for underserved markets, these types of investments are really important."

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