Making the case for one of Colorado’s best investments.
What makes Colorado PERA comfortable with the claim that it is “One of Colorado’s Best Investments?” Is it the secure retirement provided to Colorado’s hard-working public sector employees? Is it the multiplier effect of the retirement benefits on Colorado’s economy? Is it skilled, low-cost internal asset management provided by PERA staff? Or, could it be the investments made by PERA, on behalf of 500,000 current and former public employees, in innovative and growing companies? To both PERA’s members and to the Colorado public, it is all of the above.
In prior postings, PERA has discussed the first three aforementioned benefits provided to the state. This posting will delve into the last one, the actual investments made in Colorado companies. While myriad local economic benefits are achieved from large companies held within PERA’s stock, bond, and real estate portfolios, parsing the impact from these holdings is no small task. Instead, this post will focus on the strategic investment program that not only expects strong relative performance, but also supports economic innovation in Colorado.
Colorado has historically offered a stable private equity market, with 150-200 transactions each year. Most of these have been venture capital deals, wherein an investor provides capital to a promising business/entrepreneur in return for a meaningful equity stake in the company. Venture capital is a high-risk, high-reward endeavor involving relatively smaller investment stakes. In-state venture investments in 2014 totaled approximately $900 million. Although smaller in absolute number than venture capital, leveraged buyouts accounted for a much larger portion of Colorado-based investments in 2014 ($1.9 billion in total transactions). Not unlike venture capital, these control-oriented deals provide companies with patient, transformational capital aimed at enhancing company value. Find more details on Colorado’s venture capital and private equity markets.
In order to participate in the strong potential returns available at home, Colorado PERA created the Colorado Mile High Fund. The fund was initiated in August of 2012 as a $50 million co-investment vehicle for businesses with a nexus in Colorado. In cooperation with financial sponsors, the fund makes mezzanine, buyout, or growth capital investments. Through the end of the first quarter of 2015, approximately $20 million has been drawn from the fund, and mostly invested in growth capital projects. The rate of commitments is slightly slower than the five-year investment period that was envisioned at the outset and here’s why.
The modestly slower rate of capital commitments reflects the exhaustive underwriting process. Each investment must meet the same exacting criteria as the rest of the PERA private equity portfolio. To put some quantitative parameters around this statement, of the hundreds of potential deals screened by Colorado Mile High Fund investment professionals, five ultimately received a capital commitment, so far. The standards require interested companies to have a significant presence in the state of Colorado, the companies must generate positive cash flows (earnings before interest, taxes, depreciation, and amortization (EBITDA) is used as a proxy for cash flow), and other financial sponsors must join in the same funding round. Furthermore, the fund targets investments in any one of the following industries: business services, clean technology or renewable resources, biosciences, information technology and communications, aerospace, manufacturing, infrastructure or energy.
The fund will not consider investments outside of the mandate or those that are specifically prohibited. Prohibitions include pre-revenue companies, grants, real estate investments, investments in deals that are not at the market (meaning, economically comparable to others being proposed), and direct investments (or those without a co-investor).
To date, two of the investments have concluded, resulting in strong returns. One of the companies is the largest privately-held spinal health companies in the world, and the other is a wound care and disease management firm. The two exited companies generated a blended multiple of invested capital of 1.7x, with a gross internal rate of return (IRR) of 34.4 percent.
These strong results compare well to almost any private equity investment. Add to that the more than $550 million (excluding the Colorado Mile High Fund) that Colorado PERA has invested with companies or partnerships that have located their corporate headquarters in Colorado. This total offers a bit more support for PERA’s claim that it is it “One of Colorado’s Best Investments.”