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No leg-up? TCRS pension-assets 'Set-aside' for TN firms uncertain
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Michael Brakebill
THE NOTION of creating allocations of Tennessee Consolidated Retirement System (TCRS) assets expressly for investment by in-state private-equity firms remains an idea with few, if any overt champions.
 
Talk of creating a TCRS program that might improve the odds of in-state VC/PE firms winning TCRS investment has mildly bubbled-up, once again, triggered by word of the TCRS PE Director Lamar Villere's scheduled departure, reported in a related VNC story today.
 
Asked for comment on the perennial set-aside idea, TCRS Chief Investment Officer Michael Brakebill told VNC, "We actively engage private equity managers and have an open-door policy for any Tennessee firm who would like to meet with staff."
 
"We do not have a targeted, or ‘setting-aside’ program. TCRS is always interested in engaging with Tennessee firms," said Brakebill, adding that all comers may seek a role in the program and all will be assessed in the same manner.
 
VNC is told that in-state VCs and private-equity fund managers continue periodically to engage with TCRS officials, as they have done for many years; however, no TCRS asset commitment to a Tennessee-based firm has yet been announced.
 
Willingness of VCs to engage publicly on the in-state set-aside issue has waxed and waned. In 2008, when the legislature voted to allow TCRS to make alternative-asset allocations to improve returns, the homegrown VC community's interest intensified.
 
In a 2008 VNC story on in-state VCs' interest in TCRS, Tennessee firms were forthright in expressing concern they would be "crowded-out" of the program by large out-of-state firms, and some asserted that some in-state firms had probably earned sufficient stripes to qualify. In that same story, a TCRS official, since retired, rejected the notion of "earmarks" for in-state firms as imprudent.
 
Eric Cromwell
Also in 2008, former LaunchTN (then, TTDC) CEO Eric Cromwell reported he was in touch with TCRS officials about creating an avenue for Tennessee firms' participation, as VNC reported at the time.
 
Since then, the Great Recession, the advent of Gov. Bill Haslam's INCITE co-investment program (capitalized using federal Stimulus funds) and other factors have served to take the VC spotlight off TCRS, focusing attention instead on such things as changes in tax laws -- and, of course, upon the launch of the solo TNInvestco round, around which both applause and controversy have swirled since its conception in 2009.
 
Several times in recent years, a few key members of the Tennessee General Assembly have been asked by industry stakeholders to sponsor legislation that would formally encourage TCRS to consider creating a targeted in-state PE allocation. But, the legislators have, according to sources, been persuaded to rely on TCRS and its Investment Committee to make such decisions, in their fiduciary roles.
 
Bill Hagerty
"Capital formation," of course, has never been totally off the radar. LaunchTN Chairman Bill Hagerty, who is also the Haslam Administration's Economic & Community Development (ECD) commissioner, has often stated publicly that he is targeting private-equity firms and other sources of capital for increased investment in Tennessee.
 
No details regarding the fruits of ECD's PE-oriented efforts have yet been forthcoming from ECD, though the ECD-administered INCITE program's attraction of private-sector co-investment is oft-cited. (Prior to joining the Haslam team in January 2011, Hagerty was active in the merchant banking and private-equity firm he founded, Hagerty Peterson.)
 
More recently under Hagerty's leadership, LaunchTN's former Tennessee Capital Formation Board, conceived as a large and semi-autonomous body, was succeeded by a smaller Investor Committee within LaunchTN's board of directors.
 
Frank Williamson
The Investor Committee is chaired by Frank Williamson of FourBridges Capital Advisors, with members Stuart McWhorter (LaunchTN vice chairman and co-founder of Clayton Associates and Bullpen Ventures) and Andrew Seamons (Pittco Management). Non-board Investor Committee participants include Sid Chambless (Nashville Capital Network), Vic Gatto (Solidus, Jumpstart Foundry, Venture Incite, SouthernAlpha.com, SeedHatchery, etc.) and Joe Cook III (Mountain Group Capital, Limestone Fund, etc.).
 
McWhorter joined the LaunchTN board shortly after the appointment of Charlie Brock as LaunchTN CEO. As reported earlier, McWhorter previously chartered a nonprofit pro-investment group, Tennessee Venture Council. The group's business charter and its TNVentureCouncil.org domain remain registered, but the Council has not yet become active and its initial web content has disappeared.
 
Most fund managers queried for this story either declined comment or spoke on condition of anonymity.
 
Jim Phillips
Only Jim Phillips, a partner in the Nashville office of Pharos Capital Group, offered his brief comment on-the-record, saying that "as long as the retirement's system did not give up quality of the managers," his firm would like to see Tennessee become a "nexus for the ancillary benefits of available investment funds, [including] value creation in underlying portfolio companies or the investment firms, and the associated jobs."
 
Another venture-capital executive, speaking on background, said that in what he described as "an incredibly difficult fund-raising environment," such as prevails today, he is "empathetic" toward fellow investors who are struggling to reach their objectives. However, he said, given the need for TCRS fund managers to "get the best returns for pensioners," he also worries that "segregating" assets for potential commitments exclusively to in-state managers "creates too much room for [TCRS] focus to drift," and could make fund managers' comparative performance more difficult to gauge. 
 
A third institutional investor said flatly, "I think it is a bad idea to use State pensions for economic development. [With few exceptions, such approaches have shown] it is hard to serve two masters. How do you explain to teachers, state employees or other workers that they get less on their pensions because the board was forced to pick local firms versus the best in the country? ...Using pension mandates to prop-up my industry sounds like a free lunch, but it is not."
 
A fourth was equally direct, saying: "Any pension fund needs to make its funding decision solely on the basis of long-term verifiable performance. Otherwise, you have the opportunity for political rascality, cronyism, and the support of local firms that are unable to attract institutional funds elsewhere..."
 
Some respondents suggested that the priority question isn't whether or not to induct Tennessee firms into the ranks of TCRS managers; rather, as one executive put it, the State should in a holistic manner "look at the 'infrastructure' around innovation and economic growth," taking a five-, ten- or even 20-year view of "what it wants to be in the future." Adopting that longer-term perspective will lead decision-makers back to issues of education, job opportunities, types of jobs being created and the "availability of capital" and other factors, he said. "The shorter the focus, the more diluted the results," he warned.
 
Several others responded in a disinterested manner. Said one: The TCRS program "doesn't affect most of the VCs in the state, since they are too small to be considered for an investment. I've heard both sides and appreciate their points of view," said the institutional investor. VNC
 

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Tags: Andrew Seamons, Bullpen Ventures, Clayton Associates, early stage, economic development, Ed Hennessey, Eric Cromwell, FourBridges Capital Advisors, Frank Williams, General Assembly, government, INCITE, investment, Jim Phillips, Joe Cook III, Jumpstart Foundry, Lamar Villere, legislation, Limestone Fund, Michael Brakebill, Mountain Group Capital, Nashville Capital Network, pension, Pharos Capital Group, Pittco Management, private equity, Seed Hatchery, Sid Chambless, Solidus, SouthernAlpha.com, startups, Stimulus, Stuart McWhorter, TCRS, Tennessee Capital Formation Board, Tennessee Consolidated Retirement System, TNInvestco, venture capital, Venture INCITE, Vic Gatto


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