Pension fund urged to help startups
BYLINE: Robert Elder AMERICAN-STATESMAN STAFF
Last year, Gov. Rick Perry persuaded lawmakers to put $200 million into a new Texas Emerging Technology Fund that invests in startup companies and public research projects.
Although the program is too new to judge its success - the fund has spent only a quarter of its appropriation - Perry wants the state to up its bet.
He has asked the Teacher Retirement System, Texas' largest pension fund, to consider investing up to $600 million in young companies that receive money from the emerging technology fund.
Many of these companies have little or no revenue and uncertain prospects.
But Perry and other backers of the tech fund say the state money is needed to boost Texas companies in industries of the future, such as medical devices and nanotechnology.
Perry's request is part of a national debate over the role of big public pension funds: Should they invest some of their billions of dollars to boost economic development - and give politicians something to brag about - at the possible expense of the members they serve?
Greg Poole, a teacher fund trustee and a school superintendent in Mont Belvieu, east of Houston, said focusing on investments to Texas startups seems "completely arbitrary," considering that the fund invests globally with the goal of producing the best returns.
"At the very least, this sends up some yellow flags," Poole said. "Are we getting pitched this first and foremost because it will increase returns, or is it because it's limited" to Texas companies?
The $100 billion teacher fund has a $13 billion shortfall and hasn't increased benefits for retirees since 2001.
In light of that, "the greatest benefit to the state of Texas is to be able to give enhanced benefits to our constituents," Poole said, and putting more money into startups might limit the fund's returns.
"These are all very speculative or research-stage companies," said John Graham, a trustee and financial advisor in Fredericksburg. "I don't see the opportunity for profits."
Trustees took no action on Perry's request at their meeting Friday and will discuss the issue again at their next meeting, scheduled for December.
The teacher fund already invests in startups as part of its successful private-equity investing program. As of June 30, the fund had invested $2.2 billion in private equity, a category that includes venture capital. But the retirement system doesn't restrict those investments to certain industries or only Texas-based companies.
If the teacher fund votes to invest in the state-funded startups, Phil Wilson, Perry's deputy chief of staff, said the governor will ask other state investment funds to follow suit.
The emerging technology fund is part of a state plan to help grow companies in emerging industries. Such companies don't attract a lot of private investment.
When it invests in a company, the state receives rights to later buy stock in the companies.
So far, the state fund has invested between $500,000 and $3 million each in companies in such fields as heart devices, animation, robotics and nanotechnology. The state considers those amounts seed funding and wants the teacher fund to invest a lot more in follow-up funding.
A memo from the teacher fund's legal staff to trustees said Perry's office contemplates bringing the fund 35 to 45 possible investments over the next two years. Each investment would be between $5 million and $15 million.
Wilson said that regardless of the teacher fund's decision, Perry will request at least another $200 million for the emerging technology fund in the upcoming legislative session.
The fund's track record is too new for the teacher retirement system, at least, to get involved, said Don Baylor, a senior analyst with the Center for Public Policy Priorities, an Austin-based advocate for low-income Texans.
The fund "doesn't have a track record to really look and say whether it has been set up appropriately and whether it's identifying the most proper investments to make," Baylor said.
Wilson broached the idea Aug. 7 at a dinner in Houston with Jarvis Hollingsworth, a Houston lawyer who is chairman of the teacher pension board, and Houston investor James Lee, another trustee. Perry appointed both men to the board.
A few weeks later, Wilson met with Ronnie Jung, executive director of the retirement system, and other Texas Retirement System officials.
Wilson said investing "is at the complete discretion of the TRS."
"They can choose to invest or not to invest," he said. "There is no pressure being exerted at all. We're just offering them to be part of an emerging market opportunity and to invest in that."
Hollingsworth said the teacher fund would examine each startup's potential, regardless of how much money the emerging tech fund invested.
More states are having similar debates, said George Lipper of the National Association of Seed and Venture Funds.
"People are recognizing that job creation and economic growth are dependent on getting promising early stage companies up and running," Lipper said. "Everyone looks around to find where the money is and says, 'Look at the pension funds, they have all this money.' "
The just-concluded Iowa governor's race featured fierce volleys over winning Democratic candidate Chet Culver's plan to invest more of the state's public employee pension money in high-tech and manufacturing startups.
U.S. Rep. Jim Nussle, the Republican candidate for governor, likened the plan to "playing craps" with the $20 billion pension fund. Part of Nussle's criticism focused on Culver's idea to create a separate board to scru- tinize investments in startups, a body Nussle said could be subject to political manipulation.
Those concerns are near the surface in the Texas debate.
Perry appoints all 17 members of the emerging technology fund's advisory committee and has appointed a majority of the teacher fund's board of trustees. The advisory committee consists of high-tech leaders, entrepreneurs and research experts, who recommend projects for funding to Perry, Lt. Gov. David Dewhurst and House Speaker Tom Craddick.
Only a handful of state pension funds invest specifically by region or in certain industries, and those narrowly focused funds haven't been around long to compile a meaningful record.
The pension fund for California public employees launched a $475 million initiative in 2001 to invest in "traditionally underserved markets" that don't typically receive much private investment. The initiative, managed through outside private equity firms, had invested in 83 companies, primarily in California, as of July 2005.
The California employee fund has about $1 billion invested in the initiative and other emerging industry investments, spokesman Brad Pacheco said, a small slice of the $20 billion invested in private equity.
relder@statesman.com; 445-3671