New Mexico council creates recovery fund to help small business

New Mexico State Investment Council, Santa Fe, on Tuesday committed up to $100 million to a private equity vehicle designed to offer short-term loans to New Mexico businesses affected by the COVID-19 crisis.

The New Mexico recovery fund will be created and managed by in-state private equity manager Sun Mountain Capital.

This fund will be invested solely from the endowments' $5.5 billion Severance Tax Permanent Fund under a private equity structure designed to seek below-market rates of return. The council is expected to meet in a special meeting in two weeks to review the program, including loan guidelines, and to further develop the program.

"Given the rapid nature of the emergency, staff has consulted with long-term investment partner Sun Mountain Capital ... regarding its resources, ability and willingness to lead such a fund, especially since, as by design, the fund will seek below-market-rates of return and will require a non-traditional structure," a staff memo said.

Other sources of capital might be available to augment the council's commitment and create a public-private partnership, the memo said.

The fund is expected to have a one-year investment period and seven-year fund life, with a one-year extension at Sun Mountain's discretion. Sun Mountain would earn 0.5% on committed but uninvested capital, 1% of invested capital through the life of the fund and 7.5% carried interest, There also would be a preferred return, which is the limited partners' share of profits, of 4% non-compounded annually. Sun Mountain would earn the carried interest after the manager returned the council's original investment and paid the council its preferred return.

Some council members voiced concern over the fees to be charged by Sun Mountain and the fund's life span.

But New Mexico Gov. Michelle Lynn Lujan Grisham, who sits on the council, said she strongly supports the fund. "We have an obligation to do everything we can to support businesses that are in an incredible situation and in dire straits," Ms. Grisham said.

Council officials also expect to hire as early as next month a derivative overlay provider to allow the investment office to gain or reduce exposures to primarily publicly traded equities and U.S. government bonds by way of the financial futures exchanges.

CIO Robert "Vince" Smith told the council that if the markets drops 50% or more, the endowments could start to run out of the liquidity it needs to rebalance. The derivative overlay program would allow the staff to rebalance the portfolio with respect to equities and bonds cheaply and inexpensively and without having to buy and sell securities in the "cash" markets, a memo to the council said.

The council had used the services of Parametric Portfolio Associates in the past, but it allowed that contract to expire as the council was not using it much in the long-running bull market. The staff plans to speak with Parametric and other vendors and could bring a manager recommendation to the council in April.

The council oversees $23.9 billion in endowment assets.