Local Startup Investment Not Profitable as Stocks

Published on: 25 Oct, 2017

Investments made by New Mexico in small companies located in the state are not showing the desired results. Startup companies funded by New Mexico's State Investment Council are not giving back the same returns as stock index funds managed by Wall Street. The Council now invests about $35 million every year.

Funds and lost earnings

The New Mexico Legislature has set the target of placing nine percent of the investments from Severance Tax Permanent Fund into various New Mexico companies. In reality, however, the actual percentage is nearer to five percent. A few have estimated that this has cost the state approximately $40 million in terms of lost earnings for this fund. Steven K. Moise, the State Investment officer put it bluntly that if it was not a state authority, such a condition would be detrimental. This assessment was presented to Investments and Pensions Oversight Committee members during the second week of October.

The State Investment Council is managed by professional money managers. They manage a corpus of $23 billion derived from Severance Tax Permanent Fund and Land Grant Permanence Fund. Money also comes from managing the land of New Mexico and also its natural resources. Energy below the soil is also being managed by the same organization.

The problem is that private equity investments are not passive. Business professionals must search them out, manage them, and analyze them. The state has contracted a few consultants to advise on such investments. To give an example, Santa Fe's Sun Mountain Capital advises on a portion of it- the private equity portfolio slice. These costs, however, are steeper than paying any firm to purchase and then sell bonds and stocks.

Economic development and risks

Sun Mountain, however, regards these investments as much more than an economic development. This money must be given back to the government along with extra chunks of cash. The results, as per Sally Corning of the company, has only been better over the years. The past three years have shown a yearly return of about 6.3 percent.

Lawmakers may soon give the program a closer look. They will then decide whether these programs are satisfying their targets for economic growth and job creation in New Mexico. A big concern is if the companies presently based in the state relocate to another state, the benefits of job creation also goes with them. Another risk is that the companies may go broke and cease to exist.

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Steven Liao

Email: Steven@financialinsiders.com

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