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Advocates: 'Protection' could derail TNInvestco locomotive
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'Spirit of Tennessee'
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The Tennessee Budget Express may soon barrel down the tracks, but some key players worry TNInvestco may be sidetracked or derailed.

Facing an extraordinary economy and election season, the General Assembly seems poised to highball-it through annual budget rites, having already delivered a education-reform and -improvement package many view as epochal.

When it comes to legislating expansion or other changes in TNInvestco, however, some legislators are keeping a hand near the brake.

Among other things, stakeholders are awaiting a Davidson County Chancery Court ruling, expected tomorrow, on a petition from venture-capitalist Larry Coleman, who demands access to TNInvestco documents.

In addition, opposing camps are plying Capitol Hill with arguments pro and con proposed changes in the TNInvestco law, including expansion of monetizable tax-credit allocations that would breath life into as many as four additional TNInvestco funds; and, an apparently lobby-driven initiative that would freight TNInvestco with a "recapture" requirement that was tossed from TNInvestco well before the legislation crossed the finish line, last spring.

State Rep. Beth Harwell (at left) told VNC Friday, "I think the legislature must proceed with caution, because we have not had a chance to evaluate" TNInvestco's performance thus far.  Harwell added that she believes legislators want to understand what "longer-term commitments" are packed aboard the new capital-formation program that was enacted less than nine months ago.

Meanwhile, several persons close to the process, who spoke on condition of anonymity, told VNC that while bill sponsors have introduced Advantage's bill for discussion, they are presently not strongly committed to the provision's passage and are working to hear from all sides.

Friday also, State Revenue Commissioner Reagan Farr was more specific, saying that a "recapture" amendment (initiated by lobbyists from St. Louis-based Advantage Capital Partners, which lost-out in the recent TNInvestco competition for funding) would undermine TNInvestco.

Responding to a VNC query, Farr (at right) said Feb. 19, "In 2009, during discussions and the subsequent votes on Public Chapter 610, known as the Tennessee Small Business Investment Company Credit Act, members of the General Assembly made it very clear the tax credits issued by the legislation should go to funds whose investment goals and strategies clearly aligned with economic development goals of the state of Tennessee.  We worked very hard, with lots of input from stakeholders to develop a program that would benefit transformational Tennessee companies and truly diversify our state's economy. Our concern with SB3898 is that it would revert the TNInvestco program back into more of a traditional CAPCO program.  Both [ECD] Commissioner [Matt] Kisber and I feel that would be a step backward for Tennessee and would present significant legal challenges to TNInvestco as currently established."

Recapture is being pushed in Tennessee mainly by Advantage, who say they believe the State should be able to retrieve its tax credits from any errant or underperforming TNInvestcos.  TNInvestco funds sell to insurance companies tax credits the funds have been allocated from the State, through a competitive process.

However, opponents of recapture say the insurance industry would probably view any such amendment as substantially increasing the risk of involvement, which would keep some insurers on the sidelines, create deeper discounts on tax credits sold, and drive-down capital realized by the TNInvestco funds.

One result could be that TNInvestco funds hoping to attract insurance-industry participation would have to secure insurance to "wrap" around the funds, as a way to mitigate the cost of making investors whole if the State retracted tax credits the fund had sold to investors.

Critics of recapture say adding such cost to the program would reduce benefits to the State's economy and tilt the program unfairly toward large funds like Advantage and its peers.  Advantages was among the firms that had originally introduced "CAPCO" legislation that would probably have been more lucrative for them.

One observer explained to VNC that Advantage and its peers are thought likely to be "large enough to self-insure," or may gain other advantage through such forms as "pre-existing insurance relationships, pre-negotiated wrap agreements, or even umbrella wrap policies already in place."

Explaining the recapture rationale, Advantage lobbyist Scott Zajac told VNC Feb. 12
, "The legislative sponsors are simply proposing a material technical correction in the law that allows the state to recapture credits if the TN investments are not made as promised. This protection is in every other capital formation tax credit program including state and federal New Market Tax Credit Programs. TN taxpayers deserve the same protections. Eliminating the state's ability to recapture credits if money is misappropriated, just to make Fundraising 'easier' is not good public policy. We want TNVESTCO to be successful and problem free. Money should be flowing to TN businesses now but apperently something is stalled in the process. The legislative sponsors had this requirement in the initiial legislation but it was later removed. No qualified firm should have any trouble whatsoever raising money with this provision."

VNC research indicates Advantage Capital is a leading member of a National Coalition for Capital (NCC), a trade association, which shortly after Gov. Phil Bredesen signed TNInvestcointo law in June praised Tennessee for passing what NCC called "one of a kind" TNInvestco legislation, which had no recapture provision. It was five months later that Advantage learned it had failed to win a TNInvestco berth.

Both Advantage and former ally Enhanced Capital Partners are currently lobbying in Minnesota and other states for legislation modeled on the firms' standard CAPCO model.  Neither firms' representatives responded to VNC's most recent queries.

Pittco Management Vice President Andrew Seamons, based in Memphis, offered a seemingly balanced view, when asked Saturday, Feb. 20, to comment on the matter.  The Pittco firm is closely related to MB Venture Partners, which is competing for a share of the proposed TNInvestco expansion via Memphis Biomed Ventures Tennessee I.

Seamons, a Duke University engineering grad and Harvard MBA, told VNC, "The two most important design goals of the State’s investment program have been to (1) most efficiently translate state tax credits into dollars that get invested into Tennessee companies and (2) ensure that the most qualified investors are chosen and that they follow the investment strategy they put forth."

He continued: "While I agree that there should be a means for the State to ensure that TNvestco winners do follow the rules of the program and stay true to the investment strategy they espoused, there are more efficient ways to add accountability. Stiff direct fines on TNvestco firms or increased profit participation by the State for infractions would be two examples.
"While the proposed change," Seamons said, "does not directly stipulate an insurance wrap, no insurance company is going to risk forfeiture of tax credits for which they pay due to actions of an investment group they do not directly control.  As a result, they will require an insurance wrap or some similar mechanism in order to invest.  The practical reality is that the proposed change would reduce the dollars that get invested in Tennessee companies for every dollar of tax credit granted.  We as a State need to be every bit as concerned about the efficiency with which these tax credits are translated into investable dollars as we are about the efficiency of current budget items – these tax credits are real Tennessee taxpayer money."

Seamons concluded, "I do not believe that the Tennessee legislators are so naïve as to see any of the groups spending furiously on lobbyists and lawyers and think they are altruistically looking to protect Tennessee taxpayers.  I think we should all suspect that any of the groups vying for TNvestco funds are jockeying in some manner to make it more advantageous for themselves."

Seamons added he believes the General Assembly should in considering changes to TNInvestco look to Tennessee Technology Development Corporation, which Seamons oversees as a member of the TTDC board of directors.

He said TTDC "should be a resource for legislators to get facts and analysis on these types of issues – after all, they created [legislatively chartered TTDC] to provide that advisory function." ♦ 

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Tags: , Advantage Capital Partners, Andrew Seamons, Beth Harwell, CAPCOs, Enhanced Capital Partners, insurance, MB Venture Partners, Memphis Biomed Ventures Tennessee, Pittco Management, Reagan Farr, recapture, Scott Zajac, TNInvestco, venture capital

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