United States Small Business Administration
Office of Advocacy
RS 164
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Purpose
This study extends an earlier research effort, "Pension Funds
and Small Firm Financing" (See Research Summary no.153 February
1995), which explored public pension fund investment in small
business in 1992 by state. The earlier study indicated that only
0.6 percent of all U.S. public pension funds were invested in
small business.
Focusing on those states where public pension fund investment
in small business was identified as significant in 1992, this
additional study, Pension Funds and Small Firm Financing: Models
of Successful Small Business Investment Programs, attempts to
develop models of successful small business investment programs
undertaken by public pension funds that may be adopted by other
states' public pension fund operations.
The underlying goal of both research efforts is to increase the
amount of capital available for small business startup and expansion
through greater investment by public pension fund managers.
Scope and Methodology
In this report, successful programs are defined as those that
make relatively substantial direct and/or indirect investments
(that is, through venture capital funds) focused on the small
business sector of the U.S. economy. A goal of this study is
to develop a profile of characteristics that defines a successful
program and that could be replicated by other states' public pension
fund operations.
The study closely examines those public pension funds identified
in the earlier study as having significant small business investments.
It also builds on the data sources of that effort, which included
the results of surveys on direct small business investment and
venture capital fund investment, recurring publications containing
up-to-date information on public pension fund investments, annual
pension fund reports, phone interviews with individual fund managers,
and other literature focusing on small business investment programs
of individual states.
Additionally, this study relies on three other data sources: (1)
Economically Targeted Investments, A Reference for Public Pension
Funds (by the Institute for Fiduciary Education, July 1993), a
comprehensive survey from which small business investments and
the characteristics of the funds that make them can be derived;
(2) the Directory of Pension Funds and Their Investment Managers
(Money Market Directories, Inc., 1995), covering government plans
with assets of at least $1 million, and Investment Specialties
Guide (Money Market Directories, Inc., 1995), which is used to
identify state pension funds with venture capital investments;
and (3) phone discussions with selected fund managers that focused
on a standard set of questions on background, determinants of
the decision-making process, fund management, and performance
characteristics of the investments.
The funds that were selected as case studies for this report are:
Colorado--Public Employees' Retirement Association of Colorado;
Illinois--Illinois Municipal Retirement Fund, Illinois Teachers'
Retirement Fund, Chicago Municipal Employees Annuity/Benefit Fund,
and the Policemen's Annuity and Benefit Fund of Chicago; Massachusetts--Massachusetts
State Employees' and Teachers' Retirement System and MA Pensions
Reserve Investment Management Board; New York--New York State
and Local Retirement System, New York State Teachers' Retirement
System, and New York City Employees' Retirement System; Pennsylvania--Pennsylvania
Public School Employees' Retirement System, Pennsylvania State
Employees' Retirement System, and Philadelphia Municipal Retirement
System; Virginia--Virginia Retirement System; Washington--Washington
State Investment Board; West Virginia--West Virginia State Board
of Investments; Wisconsin--State of Wisconsin Investment Board.
Highlights
The following characteristics were generally associated with public
pension funds that invested in small businesses:
Conclusions
Successful funds have operated within an environment in which
their investment options are not limited and where alternative
investment initiatives have not been mandated by the states.
Three types of successful small business investment "models"
were observed in the public pension funds surveyed for this research
effort. The first model is an approach like that of the Wisconsin
Investment Board. The investments have a heavy in-state focus
and are primarily direct loans. Unlike most other pension funds,
there is an extensive internal direct loan mechanism that allows
evaluation of small business investment opportunities. Successful
replication of this model would depend on the loan officers' expertise
in the needs of small business.
The second approach is typified by the Massachusetts Pension Investment
Management Board. Also with a focus on in-state investments,
this model relies primarily on outside expertise of venture capital
funds to do the investing. Its primary objective is to maximize
returns to the fund. This model demonstrates that significant
investments can be committed to the small business sector without
significant internal administrative support. The success of this
model depends on finding good venture capital funds whose managers
(like the loan officers in the first model) understand the unique
needs of small businesses.
In the third model, represented by the Virginia Retirement System,
a significant portion of fund dollars is in early-stage investments.
This is unlike other funds that are more heavily invested in later-stage
venture capital.
To promote successful approaches, policymakers should embark on
aggressive efforts to provide information on successful alternative
investment strategies. Obstacles to small business investment
are often created by the lack of information.
Ordering Information
Both studies are available from:
National Technical Information Service
U.S. Department of Commerce
5285 Port Royal Road
Springfield, VA 22161
(703) 487-4650; (703) 487-4639 (TDD).
Order Number: PB96 146477 (to order the earlier report,
Pension Funds and Small Firm Financing, PB95 199105)
Cost: A03/$17.50; A01/$9.00 Microf.
*Last Modified 6-11-01