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F I S C A L I M P A C T R E P O R T
SPONSOR Harden
ORIGINAL DATE
LAST UPDATED
02/03/06
HB
SHORT TITLE Aerospace Investments Without Agreements
SB 742
ANALYST Geisler
REVENUE (dollars in thousands)
Estimated Revenue
Recurring
or Non-Rec
Fund
Affected
FY06
FY07
FY08
Unknown
(Parenthesis ( ) Indicate Expenditure Decreases)
Duplicates: HB 835
SOURCES OF INFORMATION
LFC Files
Responses Received From
State Investment Council (SIC)
SUMMARY
Synopsis of Bill
Senate Bill 742 adds language to 7-27-5.15 regarding New Mexico private equity funds and
business investments. The language would allow the State Investment Council (SIC) to make
investments from the Severance Tax Permanent Fund (STPF) in an aerospace business that has
received a government award of at least $100 million. The award must be at least ten times the
investment of the SIC, and must be ďfor the purpose of stimulating commercial enterprises.Ē
Under current statute, the SIC cannot make investments in NM businesses or private equity
funds without a qualified co-investor. SB 742 expands the statute to allow NM aerospace com-
panies that have received a large federal contract award to also qualify for SIC investment with-
out SIC having an investment partner.
FISCAL IMPLICATIONS
The fiscal impact on the SIC is difficult to quantify, as it depends on the size and number of po-
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Senate Bill 742 Ė Page
2
tential investments. The economic impact of even one such investment and its related funding
could be very significant to New Mexico.
As a baseline however, due diligence & vetting of potential investments will cost approximately
$25 to $60 thousand per company.
SIGNIFICANT ISSUES
SIC notes that the reason the current statute requires the state to have a qualified and experienced
co-investor when making direct or private equity investments in New Mexico companies or
funds, is to ensure the viability of the investment is recognized by other experts who have a stake
in the investmentís success.
While SB 742 would allow investments without that stipulation, it supplants the requirement
with a very sizeable government commitment to an aerospace business. A government award of
$100 million+ is simply not awarded without a substantial amount of due diligence, notably on
the technical side, where the governmentís expertise often exceeds that of typical investors. In
addition, the government award money would be not be expected to be returned, and would be
subordinate to any equity investments made by the State or other investors, in both terms of
profit share and cash flow, and in the alternative, recovery of assets should the business be forced
to liquidate.
SIC notes that while SB 742 would expand the possible investments allowed under 7-27-5.15, it
would not remove additional requirements currently in place, including extensive due diligence
of the SICís private equity advisors, the recommendation of the SICís Private Equity Committee,
a vote of approval from the members of the State Investment Council, and negotiation of final
terms and conditions.
PERFORMANCE IMPLICATIONS
The SICís New Mexico Private Equity Program is statutorily approved to invest 6% of the STPF,
which is currently about $235 million. To date, commitments the SIC has made to NM funds
and direct investments through the NM Co-investment fund are also $235 million, however, only
$141 million has been drawn down to investments in the program.
Because of the several year period typically taken by private equity funds to invest, the SIC ap-
plies a 1.6x multiplier when estimating funds available for investment in this program. The SIC
anticipates being able to commit $20-$30 million per year to direct and private equity invest-
ments for the next three to four years without running out of capacity.
ADMINISTRATIVE IMPLICATIONS
The SICís NM direct and private equity investment program is very active and growing, as deal
flow and investment environment in NM has improved significantly over the past few years.
Additional investment prospects & deals could potentially require reworking of existing con-
tracts with the SICís NM Private Equity Advisors.
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Senate Bill 742 Ė Page
3
CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP
House version of this bill is HB 835.
WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL
SIC states that in trying to attract new industry to New Mexico, the State is certainly in a better
position to bargain if it has a full complement of tools and incentives to negotiate with compa-
nies. Not passing this bill leaves the state with one less instrument to be competitive with in this
area.
GG/mt