HI. TECH
ERS' position on Hawai'i technology venture funds driven by business, not charity

By John Duchemin
Advertiser Staff Writer

Those wondering why Hawai'i's largest institutional investors have not put their millions into local technology venture funds need look no further than Abbott Capital Management.

Abbott, a New York City venture capital investment firm, is a fund manager for the State of Hawaii Employees' Retirement System.

With more than $7 billion under management, ERS controls one of the largest investment portfolios in the state. Most of this money, which pays for government workers' pensions, is socked in property, cash accounts, and stock and bond funds.

But since the late 1990s, ERS has set aside a couple hundred million dollars for venture capital. The entire venture allocation went to Abbott.

This has not sat well with local venture-fund managers, high-tech industry lobbyists and state legislators, who have attempted to cajole, pressure, use guilt, shame and legislate ERS into committing a substantial chunk of its venture budget to local technology funds.

These advocates see ERS as a cow ready for the milking. Even a modest ERS allocation of $50 million would dwarf, many times over, the money now available for investment by Hawai'i venture funds. Tech backers thus argue that ERS is being a poor Hawai'i citizen by not also using local venture-capital firms, especially since the pension fund has invested hundreds of millions of dollars in local properties and mortgages, and regularly uses local stock portfolio managers.

ERS venture money would doubtless benefit Hawai'i's high-tech scene by helping startup companies obtain the money necessary to test their dreams.

It's questionable, however, what benefit the retirement system would derive.

Abbott provides ERS with amenities no Hawai'i fund could possibly match. Abbott has $5 billion under management — several hundred times more than the biggest Hawai'i firm. With so much money at its disposal, Abbott disdains investing in individual companies, instead acting as a "fund of funds," putting money into blue-chip venture funds around the world.

That means ERS has its venture capital money in an amazingly diverse array of hundreds of companies, personally picked by fund managers at Blackstone Partners, Warburg Pincus, New Enterprise Associates and other venture-capital power brokers. Abbott's fund includes not only venture funds, but also corporate acquisition specialists and "opportunity funds" that seek to resuscitate failing companies.

And the retirement system has done well by Abbott. According to an April 14 report to the retirement systems' trustees, Abbott has returned 26 percent of ERS' initial investment and has outperformed most venture-fund managers over that time.

In other words, asking ERS to redistribute money from Abbott to a local venture fund, in order to support high-tech Hawai'i, is like asking Donald Trump to trade in his Porsche for a Dodge Neon to support the American automobile industry.

The most a Hawai'i venture fund could offer ERS is the opportunity to invest in a handful of risky startups. Granted, that's exactly what Abbott does on a larger scale. But Hawai'i venture funds have neither Abbott's track record of profitable investments nor its ability to spread ERS' risk geographically or economically.

Maybe Hawai'i venture funds can eventually compete for ERS dollars much as local equity managers C.M. Bidwell, Pacific Century and Bishop Street have won management of a fraction of the pension fund's stock portfolio. But at this stage, a major ERS shift into Hawai'i venture funds would be a charitable donation instead of a smart investment decision. That's not a move that ERS trustees are about to approve given their fiduciary duty to preserve the pensions of 93,000 beneficiaries.

ERS' mindset is probably little different from that at Kamehameha Schools, the local banks, or any other Hawai'i institutions that would like to see high-tech Hawai'i succeed, but aren't about to stick major money into local venture funds.

If Hawai'i high-tech advocates believe additional money is a necessary ingredient to stimulate local technology development, they would be wise to look somewhere else.

Reach John Duchemin at jduchemin@honoluluadvertiser.com or at 525-8062.