College Illinois fund to take bath on car investment
By Steve Daniels | September 21, 2012 9:06 am
The Illinois Student Assistance Commission, which runs the state’s prepaid college savings plan, expects to lose more than half of its $10 million investment in luxury hybrid-car startup Fisker Automotive.
The commission, which runs the $1.1 billion College Illinois fund backing the college savings plan used by more than 30,000 Illinois families, disclosed the bad news at its Sept. 14 meeting, spokesman John Samuels said.
The Fisker loss is the most recent ISAC has disclosed. The commission, which embarked on an investment strategy featuring private equity and hedge funds under previous Executive Director Andrew Davis, lost nearly $13 million it invested in Chicago-based urban lender ShoreBank when that bank failed in August 2010. A few months after the ShoreBank failure, ISAC plowed $10 million into a private equity venture backing Fisker, a federally subsidized startup firm making the luxury hybrid Karma, which since has endured numerous mechanical problems.
ISAC's Fisker investment, currently valued at $14 million, is expected to lose about two-thirds of that value once Fisker finishes raising new equity to make up for the loss of more than $500 million in promised federal loan guarantees earlier this year after the car maker failed to meet expected employment and other targets, Mr. Samuels said. ISAC staff notified commissioners at the meeting.
That would put the value of ISAC's stake in Fisker at less than $5 million.
"Since the capital raise is still in progress, we don't know exactly what the dilutive effect will turn out to be," Mr. Samuels wrote in an e-mail. "It wouldn't be a surprise to see something in the neighborhood of a two-thirds reduction in value."
He said the fund backing Fisker had given ISAC the option of increasing its investment. But the agency opted not to, since it changed its investment policy in June to forbid future direct investments or co-investments in private companies, believing they are not appropriate for a public fund like College Illinois.
The program allows parents to buy contracts covering future tuition for their children at Illinois universities and colleges. The fund backing those contracts has a 30% shortfall, and the state isn't obligated to cover the difference if the program runs out of money.
Mr. Davis, ISAC's previous executive director, reworked the fund to invest nearly half its assets in alternative investments, like real estate, private equity and hedge funds, in a bid to try to boost returns and keep up with rampaging tuition inflation in Illinois.
The fund netted a 3.3% return in the fiscal year ended June 30. But the fund's balance declined to $1.08 billion from $1.13 billion the year before because tuition payments for beneficiaries outstripped returns.
Under a new commission, appointed last year by Gov. Pat Quinn, ISAC moved to reduce the exposure to alternative investments and make its decisions more transparent.
After a one-year halt to selling new College Illinois contracts, ISAC will begin marketing the program again on Oct. 1.
But the commission still is working on a long-term solution to the investment fund's shortfall. It has said it's in discussions with the state's colleges and universities on ways to keep tuition increases manageable for College Illinois participants.
Steve Daniels is a writer for Crain's Chicago Business, a sister publication of Pensions & Investments.