Posted on: Tuesday, March 15, 2005

Venture capital initiatives advance

By Sean Hao
Advertiser Staff Writer

Lawmakers yesterday pushed ahead with two bills aimed at addressing a need among local high-tech companies for venture capital money.

Senate Bill 1695, passed by a House committee would create a $120-million State Private Investment Fund, or SPIF, that would provide money to venture capitalists for investing in local companies. Separately, the House Economic Development & Business Concerns committee passed SB 1696, which attempts to encourage institutional investors, such as the Employees' Retirement System, to invest a small portion of assets in local companies.

Both incentives are meant to fill a projected need for venture capital among Hawai'i companies of $233 million over a five-year period, according to an Enterprise Honolulu study. Lawmakers last year created SPIF, but did not allow any investments to occur without additional legislative authorization.

At $120 million, the level of funding in the current version of the bill exceeds the local technology community's goal of a $100-million program.

"Anything above that is great. This is a major priority for us," said Ann Chung, executive director of the Hawaii Technology Trade Association. "We have companies right now that need this investment money so they can stay here."

Modeled after a similar program started in Oklahoma during the 1990s, SPIF is hailed by proponents as a low-cost way to boost the level of venture capital investment in Hawai'i for local businesses looking to grow. The program's approach would differ from the state's seed capital, or "angel" investment, incentives created under Act 215.

Under the proposed program, the state would borrow up to $120 million over numerous years. That money would be placed with a fund manager in a venture capital fund. The venture capital funds then would leverage the money with private capital and invest in startup companies or established companies looking to expand.

Those investments would create tax credits, which would provide a guarantee on repayment of the state's loan. The tax credits would allow the lenders to be compensated in the event the state could not repay the loan. That could happen if the investments in the companies lost value.

Historically, such venture capital funds have generated annual returns of 15 percent to 20 percent, according to proponents.

In an effort to provide more capital for local companies lawmakers also want to provide a "safe harbor" for institutional investors when investing up to 2.5 percent of their available funds in local companies. The bill would not require pension funds to invest locally, but would encourage them to do so by relaxing requirements that they be "prudent investors."

It's estimated the bill could open up up to $250 million in investment money for local companies, however, institutional investors still would be required to exercise due diligence before investing.

"It does not say you must invest (locally)," said Ted Liu, director for the Department of Business, Economic Development and Tourism. It provides a "free pass. You can do this or think about doing this" and not be in breech of prudent investor laws, Liu said.

Both Senate bills now go to the Consumer Protection & Commerce Committee. A House version of the SPIF bill, House Bill 1723, is scheduled for a hearing today at 1:15 p.m. in conference room 225 in the State Capitol.

Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.