SIC private equity investments hit by bear markets

The prolonged slump in domestic stock markets is significantly affecting the private equity investment program of the State Board of Investment, causing overall yields to drop nearly 7% over the past year, according to the latest quarterly report from the SIC private equity advisory firm, Mercer.

The losses reflect the devaluation of listed companies in the SIC’s risk portfolio, as well as lower values ​​for private companies.

But record oil and gas-related tax revenues continue to prop up the state’s permanent funds, which are managed by the SIC, providing significant capital to continue investing in venture funds that pump money into local startups, despite the recession in the stock markets.

“It’s difficult right now in New Mexico and elsewhere,” SIC spokesman Charles Wollmann told the Journal. “The halcyon days of a few years ago are long gone, at least for now, and that’s reflected in the show return numbers.”

State law allows the SIC to invest up to 11% of the value of the Severance Tax Permanent Fund in venture funds that commit to invest, or cause others to invest, at least as much money in local businesses as they receive from the SIC. Background. SIC.

However, per board policy, the SIC has limited its total commitments to the private equity program to 9% of the severance tax fund to retain reserves for market volatility.

“We need that leeway because markets go up and down,” Wollmann said.

And despite the current economic uncertainty, much more money has continued to flow into the severance tax fund over the last year, thanks to current high oil and gas prices, plus breakneck production in the oil-rich area of ​​the state in southeastern New Mexico. That generated an unprecedented boom of $1.03 billion in new severance taxes during the 2022 fiscal year, which ended in June.

“That’s about the same amount as the $1.08 billion that has flowed into the severance tax fund over the past 20 years combined,” Wollmann said.

As of October 31, the total money in the severance tax fund was $6.64 billion.

Under the SIC’s 9% policy cap, that means the council could potentially commit up to around $600 million to its private equity investment program. But as of June, Mercer reported a total of just $450 million in net capital deployed under the program, representing less than 7% of the severance tax fund at the time, giving the SIC more “headroom.” ” to continue investing in risk funds. Wollman said.

That allowed the council to approve a $100 million commitment in November to the newly formed national venture firm America’s Frontier Fund, which plans to set up “venture studios” in New Mexico to commercialize emerging technologies from the state’s national laboratories and research universities. . And, since the SIC committed that capital to AFF for 10 years, meaning only up to $10 million per year will be deployed, significant funding for the private equity program is still available in the severance tax fund.

In recent years, SIC’s venture investments have delivered returns in line with expectations, with the key 10-year metric for rolling “internal rate of return,” or IRR, peaking at 6.8% in 2019. During the first year of the pandemic, that slowed to 4.6%, but it started to pick up in 2021, rising again to 5.2% that year.

However, with the current decline in stock markets, the 10-year IRR plummeted to just 3.8% as of June 30, reflecting sharp declines in the value of publicly traded companies in the SIC’s portfolio. , plus lower valuations for startups that remain in private hands. said Brian Birk, managing partner at Sun Mountain Capital, which manages a $200 million fund for direct SIC investments in local companies.

In fact, the one-year IRR for the SIC “co-investment fund,” which is the pool of money managed by Sun Mountain, fell 12% in fiscal 2022, dragging down the overall one-year rate of return for all SIC funds. New Mexico-focused private equity investments combined 6.6%.

“The decline in the public markets is showing up in the joint venture portfolio,” Birk told the Journal. “But it’s not just the joint venture fund, it’s the entire SIC portfolio. All funds are down, reflecting that market correction.”

Still, VC investments inherently operate on a long-term perspective to build value in companies over time, and markets will go back up.

Also, by law, the private equity program focuses heavily on “economic objective investments” that yield significant social benefits, allowing the SIC to accept lower returns than other investments in things like stocks and bonds. And, over the life of the program, New Mexico has reaped significant benefits.

As of June, the program supported 3,300 jobs at 55 businesses with a combined annualized payroll of $137 million, plus $144 million in annualized spending on New Mexico goods and services, according to the latest Mercer report.