State pension fund arm aids private LI firms
A little-known source of money for private companies has ramped up its activity on Long Island, investing $27.5 million in two years to quadruple its commitment here.
The source is an arm of the state pension fund: the In-State Private Equity Investment Program. It buys stakes in New York businesses to earn profits for the Common Retirement Fund -- not make handouts to companies.
In the program's dozen years, $36.3 million has been invested in eight businesses in Nassau and Suffolk counties. Mattress retailer Sleepy's and circuit-breaker manufacturer PACS Industries were among those getting support.
The cash has fueled expansion projects and comes with business advice from investment firms that join the pension fund in every transaction.
Experts said this combination of capital and know-how is needed as Long Island tries to create high-paying jobs in technology to replace those lost in defense factories.
"We need to diversify our economy by supporting small companies that have innovations and high-skilled jobs," said David L. Calone, a venture capital investor and chairman of the Suffolk County Planning Commission.
"Banks and other traditional funding sources don't fund these types of companies," he said. "We need more sources of capital that are willing to take more risk, and then we can start more companies and create more jobs."
Long Island receives far less from outside investors than New York City or the upstate region.
The $36 million coming to Nassau and Suffolk from the pension fund is just 5 percent of the $684 million it has invested in 252 private businesses across the state. In contrast, the Island is home to 15 percent of New York's population.
"I think it's terrible that we're only getting 5 percent of the money," said Peter S. Goldsmith, president of the Long Island Software & Technology Network (LISTnet), a Mineola-based business group. "We have companies that would make good investments, but most don't know about this program."
Another source of funding, venture capital, also is scarce here. Venture capital is a type of investment that goes to companies in earlier stages than many of those supported by the pension fund.
There were 15 venture-capital deals, totaling $81 million, for local businesses in the 2½ years ended June 30. Statewide, there were 857 deals, at $5.4 billion, according to the MoneyTree Report from PricewaterhouseCoopers accountants and the National Venture Capital Association.
Given the trickle of investment dollars coming to Long Island, the pension fund's growing commitment here is welcome, experts said. They attributed the move to an improving local economy -- and prodding by the fund's sole trustee, state Comptroller Thomas DiNapoli, who lives in Great Neck Plaza.
In an interview, DiNapoli responded to complaints about the small number of area investments, saying, "The [In-State] program is not meant to divvy up the money based on population numbers . . . Our first priority is growing the pension fund."
However, DiNapoli also said he wants to support more Long Island companies. He said he would "aggressively promote" the In-State program, particularly to technology startups.
"One of our biggest challenges is most people don't know about it," he said. A website, http://bit.ly/JtO3Zt, contains information for businesses interested in the program.
Since becoming state comptroller in 2007, DiNapoli has more than doubled the amount of money his two predecessors earmarked for the In-State program. Nearly $400 million is now available, and once that's exhausted, he said, he will likely allocate more.
A Newsday analysis found the In-State program outperformed the pension fund's overall private-equity portfolio for the one-year and five-year periods ended Dec. 31, 2012. In-State also had better results than the Standard & Poor's 500 stock index: 16 percent compared with 8.6 percent in the five-year period, for instance.
In-State lost less in the recession than the pension fund's public stock holdings, which DiNapoli blamed for a 26 percent drop in fund assets in the year ended March 31, 2009. That loss led to big hikes in contributions for local governments.
"The vast majority of investments in this [In-State] program have either been successful when we exited or are still active," he said, "and we think they are on track to provide a rate of return that meets our expectations."
On Long Island, the pension fund has exited three companies -- one profitably, two at a loss. It earned about $3.6 million on electronics distributor Tri-Ed of Woodbury, but lost a combined $7 million on Innovative Stone International of Hauppauge and Election Services of Garden City, both of which closed. (The latter company is not related to Election Services of Ronkonkoma.)
Such losses do not put at risk the retirements of 1 million current and former state and local government workers, investment experts and union officials said. The In-State program valued at $1.1 billion, is less than 1 percent of the pension fund's $160.4 billion in assets.
The largest local investment was in Sleepy's, the Hicksville-based chain of 920 mattress stores in 16 states.
Adam Blank, the retailer's chief operating officer, said it sought outside investors to expand. In the year since the pension fund investment, the company has opened nearly 100 stores, adding markets such as Chicago. It employs more than 3,000 people, 1,050 of them locally.
Blank said Sleepy's received more than cash from the transaction, which the S&P debt-ratings agency valued at $156 million including $12.9 million from the pension fund.
He said the lead investor, Calera Capital, a private equity firm in San Francisco, has provided crucial advice.
"We do not shy away from outside influence," Blank said. "We welcome it, because anyone's ideas, strategies, improvements can help us to be a better company."
This attitude was one reason why private equity investment manager Hamilton Lane recommended the pension fund back Sleepy's through the Hudson River Co-Investment Fund, which Hamilton Lane runs.
Hamilton Lane is among 18 managers hired by the pension fund to establish separate funds for investing exclusively in privately held New York businesses.
Each fund includes money from the pension fund, an investment manager and, in some cases, other parties. The managers identify companies to back, scrutinize their financial statements, execute a transaction and decide when to cash out, which can range from three to 10 years.
The pension fund plays a passive role: Investments are monitored by the state comptroller. He also approves the investment managers.
"This isn't a giveaway program," said David Helgerson, managing director at Hamilton Lane. "This is about achieving very good returns for the pensioners that are above what you can achieve in the public equity markets or the fixed-income markets."
About 16 states have in-state investment programs. Two of the four pension funds similar in size to New York's have them.
The New York State Common Retirement Fund and California Public Employees' Retirement System (CalPERS) began their in-state programs the same year (2001), devoted similar resources ($1 billion) and supported roughly the same number of companies (more than 200).
However, the annualized rate of return over 12 years was markedly different: 30 percent for New York and 15 percent for CalPERS. The S&P 500 index gained 36 percent in the same period.
CalPERS, citing poor returns, stopped making in-state investments last year and announced plans to wind down its program over the next five years. The decision roiled the world of state pensions, because CalPERS is the biggest, with $267.8 billion in assets.
Keith Brainard, research director at the National Association of State Retirement Administrators, said, "What we see is diminished attention or effort to require in-state or economic-development-type investments."
Not so in New York.
"I think we should be more aggressive in allocating capital so that we can maximize that double bottom line of making money for the pension fund -- our first priority -- and contributing to economic growth and job creation," DiNapoli said.
He is looking for investment managers who specialize in technology startups.
The In-State program put $1.1 million into drug developer Coferon Inc. of Stony Brook last year and $2.4 million into Work Market Inc. of Huntington Village in June.
Work Market co-founder Jeffrey Leventhal said the pension fund money, part of a $10 million infusion, will pay for salespeople to boost the number of employers using Work Market's online tool to manage relationships with freelancers.
Work Market expects to add 70 people by the end of 2015 to its current workforce of 38.
"We're going to treat it like it's our last dollar," Leventhal said, referring to the pension fund investment. "It has special meaning, because this is the policemen, the firemen, the civil servants' money that is being invested."