The $11.6 billion state Employees' Retirement System is moving closer to setting up a venture capital program that could provide millions of dollars to promising local companies that need money for expansion.

The trustees of what is Hawai'i's largest pension fund have approved ERS staff sending on a request for information from potential managers of a fund, and have approved the criteria for determining how much money they will devote to the effort.

"We are getting closer to establishing a venture capital program," said Rod June, ERS chief investment officer. "We're hoping we get a nice number of responses."

Legislators and others have long pushed the ERS to invest in local companies, but trustees have resisted for a variety of reasons, including the need to reach an 8 percent rate of return on its billions of dollars of investments. The ERS tries to take a diversified approach to investing, looking at both U.S. and international stocks and bonds. It's portfolio also includes real estate and so-called alternative investments that can produce higher payoffs but also are riskier. Venture capital investments fall into this last category.

Some state pension funds, including Oregon and Idaho, have taken steps to devote venture capital to in-state companies. The current push to devote some of its investing in local technology companies comes after Gov. Linda Lingle last year proposed the ERS carve out $100 million to invest in startup companies in Hawai'i.

The Legislature didn't approve Lingle's proposal but did request the ERS, a pension fund that covers state and county workers, look into investing in local private companies and conduct a study of the venture capital market here. Successful venture capital funds can return 20 percent or more to investors.

A report for the Hawaii Institute for Public Affairs earlier this year found Hawai'i was ranked 15th in the nation for "surviving start-ups" and "young growing firms" but that it was among the bottom 10 nationally in venture capital and small-business loans per $1,000 of gross state product.

It determined there was a need for $49 million of venture capital annually over the next three years and that local venture capital fund managers had been unable to provide some second- and third-round financing to local companies in the past because of the size of the investments needed.

"This points to a well-documented and much-commented-on 'gap' in financing for local companies requiring expansion capital," the report said, noting at that point they must seek investments from non-Hawai'i venture capitalists who may be reluctant to fund someone here.

"When capital is forthcoming from non-Hawai'i venture capital funds, companies have often been forced to relocate in order to satisfy investors who wish to have portfolio companies close at hand."

A number of technology companies that have started here have moved to the Mainland, including networking company Firetide, which moved to Silicon Valley after receiving an investment from Menlo Ventures.

June said the ERS hopes to attract a "fund of funds" or manager of funds that would distribute ERS money to other venture capitalists to make investments locally.

He said more information is needed before the trustees can decide whether opportunities exist for the ERS and how much it can invest. First it wants to determine how big the funding "gap" is and then decide how much of this it wants to fund so it invests in the best and most promising companies.

"I suspect we're going to find some deals here in the Islands," June said.

Reach Greg Wiles at gwiles@honoluluadvertiser.com.