New Mexico State Investment Council approves guidelines for recovery fund

New Mexico State Investment Council, Santa Fe, on Tuesday approved guidelines and a structure for its new $100 million New Mexico Recovery Fund, designed to provide loans to in-state businesses affected by the COVID-19 crisis.

The fund will be managed by Sun Mountain Capital, which is the $23.9 billion council's in-state private equity manager. A council committee will be set up to oversee the fund. The council is expected to be the sole limited partner in the fund, said Steven K. Moise, state investment officer.

The council's $100 million commitment will be made from the endowments' $5.3 billion Severance Tax Permanent Fund under a private equity structure designed to seek below-market rates of return.

The final structure of the fund differs from the original proposal, which the council approved in concept at its March 24 meeting.

The purpose of the fund is to provide differential rate loans to New Mexico businesses that have been affected by the coronavirus, allowing them to retain employees and to satisfy cash needs early on when the need is most severe, said Brian Birk, managing partner of Sun Mountain, told the committee. New Mexico-based companies have the same definition as the councils in-state private equity programs: The company's headquarters need to be in New Mexico and at least 50% of its employees are required to live and work in the state.

The recovery fund will target medium-sized and larger New Mexico businesses with a minimum of 40 New Mexico-based employees. The original design was for larger companies. Also, the interest rates are lower, starting at 3% based on a set of factors related to the company and its credit worthiness, Mr. Birk said.

The loans will also carry covenants to use the loan proceeds to support employees rather than such things as dividends or executive compensation and bonuses exceeding pre-pandemic levels, he said. Companies will also have to spend at least 80% of the loan proceeds in New Mexico.

The term of the loans will be between two and four years. Most loans will also include a one-year period of cash interest and principal deferment. Mr. Moise said that unlike the federal Coronavirus Aid, Relief, and Economic Security Act, there is no mechanism for forgiveness of the debt.

The fund terms have been changed from the original design. Sun Mountain will no longer earn carried interest. Originally, the fund included 7.5% carried interest. The interest and payments made by the borrowers will be distributed to the limited partner rather than redeployed, Mr. Birk said in response to a question from a council member. The life of the fund has been shortened to five years from seven years. There will still be a one-year investment period.

In light of the speed in which the fund is moving, Mr. Birk said he didn't anticipate the ability to recruit other limited partners, however, legal documents are being drafted to leave the door open to that, he added.

Pending completion of legal documents, the fund could start making loans as early as the last week of April or the first week of May, Mr. Moise said.