$230 Million Innovation Fund Will Divert Pension Money Into Tech Firms

State Treasurer Janet Cowell has named Credit Suisse to manage a new $230 million investment for the state’s pension fund in businesses with significant operations in North Carolina.

The money will be invested over three to five years and will target high-growth industries such as life sciences, technology, and clean energy. The fund could invest in start-up companies and existing firms.

“We have to shoot for high-growth, high-return businesses,” Cowell said at a press conference in Durham at the Golden Belt Campus, a converted textile mill in downtown Durham now housing art studios, offices, and apartments.

Cowell initially had said the fund would be up to $250 million when the treasurer’s office sought requests for proposals in November. She scaled that back to stay within guidelines set by the General Assembly limiting the percentage of the $67 billion pension fund that can be placed in alternative investments. The selection of the fund manager, originally set for December, was delayed amid questions about how the program would be run.

Public pension funds in North Carolina and other states have been criticized for chasing higher returns with risky investments while private pension funds have been putting their money into more conservative investments like bonds.

To meet its obligations to retirees, the state assumes that the pension funds will earn 7.25 percent from its investments. But the state Teachers’ and State Employees’ Retirement System has met that goal in only seven of the last 12 fiscal years.

At the press conference, Cowell was flanked by UNC System President Erskine Bowles and Durham Mayor Bill Bell.

The fund “can have a phenomenally strong impact on North Carolina,” Bowles said. He said research produced by the university system could help the companies assisted by the fund create jobs.

Cowell chose Credit Suisse after receiving proposals from eight firms. She said the Swiss financial services company runs similar programs in six states, including New York, Michigan, and Indiana.

The investments, known as “economically targeted investments” (ETIs), are common in other states but have a mixed track record. Kansas repealed a requirement that the state make ETIs after the pension fund lost money in a steel mill and a savings and loan. The Connecticut Retirement and Trust Funds lost $20 million after buying a large part of a firearms company that subsequently went bankrupt.

Critics also contend that to the extent pension managers place a priority on investing locally — or pursuing any goal other than delivering the highest return on capital — ETIs can hurt the overall performance of the fund.

Cowell said North Carolina is the 30th state with a program to encourage local investment. She hired Credit Suisse as an armslength administrator to reduce the potential that political influences would affect investment decisions.

Ed Macheski, a retired New York money manager and Alamance County resident who has been critical of the pension system, said the program sounded like a good idea.

“Why send the money outside the state when we need it here?” Macheski asked. “Help ourselves. Help our own companies.”

But programs that are designed to funnel money to state businesses don’t always keep the money close to home. A Michigan program intended to bolster the state’s economic health, the Venture Michigan Fund, is run by Credit Suisse. Eleven of 16 venture capital companies included in the fund are based outside Michigan. North Carolina’s new fund, known as the Innovation Fund, encourages but does not require investments to be made in North Carolina.

Credit Suisse employees did not return phone calls and emails from Carolina Journal.

Edward Siedle, a former attorney with the U.S. Securities and Exchange Commission, said performance track records in this area are highly suspect.

“Some studies have shown that the return is not commensurate with the heightened risk in these portfolios,” said Siedle, now the president of Benchmark Financial Services in Ocean Ridge, Fla.

Siedle questioned whether the treasurer’s office can oversee the investment with Credit Suisse effectively after a recent State Auditor’s report found that the treasurer’s office made million-dollar and billion-dollar mistakes in reporting its investments during the most recent fiscal year.

“Given the recent audit reporting fundamental performance reporting weaknesses, one would caution in migrating to additional riskier nontraditional investments,” Siedle said.

Credit Suisse already manages two private equity funds for North Carolina that the state has invested a total of $500 million in. The one-year performance for 2008, the most recent year available, for an investment made in 2006 was 0.82 percent. An investment return for the other investment, made in 2008, was not available.

North Carolina paid $938,899 to Credit Suisse for the 2006 investment and $2.9 million for the 2008 investment. The firm will receive management fees of 0.75 percent for the new investment and will also be eligible for fees based on the fund’s performance.

Credit Suisse has also acted as the placement agent for several investments North Carolina has made with other firms, but figures for the fees Credit Suisse received are not available.

Michael Arpey, a Credit Suisse employee, has donated money to the State Employees Credit Union Family House, a Chapel Hill nonprofit, in honor of Patricia Gerrick, the state’s former chief investment officer. Gerrick is a former board member of Family House, which provides accommodations for people connected to patients at the nearby UNC Hospitals. Arpey also has not returned phone calls seeking comment.

Sarah Okeson is a contributor to Carolina Journal.