While in-state investing by public pension funds or sovereign wealth funds is nothing new, the formal structure of customized alternative investment funds of funds is uncommon, sources said.
One high-profile precedent is the Florida State Board of Administration, Tallahassee.
The Florida board, which oversees the investments of the $163.1 billion Florida Retirement System, has overseen its own program targeting high-tech businesses in Florida since 2008, when state lawmakers approved allocating up to 1.5% of FRS assets for in-state investments designed to bolster Florida's economy.
In 2009, the state board hired Hamilton Lane to invest in funds for venture capital, small- to midsize buyouts, mezzanine debt and other investments targeting high-tech businesses in Florida, originally committing $250 million.
J.P. Morgan Asset Management came aboard as a second manager earlier this year.
Ashbel C. "Ash" Williams Jr., SBA's executive director and chief investment officer, who joined the board in 2009, said in a telephone interview that the program has been a "spectacular success."
According to an audit from Florida's office of program policy analysis and government accountability, the Florida Growth Fund I had invested $622 million in 46 technology and growth companies and 33 private equity funds as of June 30, 2018, and had a net internal rate of return of 12.5% from inception to that date.
Florida Growth Fund II, which made its first commitment in December 2014, has made 10 fund commitments and nine direct investments totaling $156 million in capital, with a 15.4% net internal rate of return as of June 30, 2018.
The audit also shows that as of June 30, 2018, companies receiving program investments reported creating 17,174 jobs.
Mr. Williams said the structure of the program, giving discretionary responsibility to external money managers, was critically important when it came to a program focused on economically targeted investments.
"If you're in a government setting, there will inevitably be stakeholders — legislators, governors, etc. — who have an acquaintance who could use a little bit of help from this fund," Mr. Williams said.
After the fund launched, Mr. Williams said, "we would be getting calls like that all the time, and I mean it just never stopped and all kinds of ridiculous ideas, stuff that people pulled out of their attics."
Mr. Williams said there was great reward in being able to refer interested parties to Hamilton Lane as the discretionary manager, and after about two years the calls abated.
J.P. Morgan Asset Management was added as a second discretionary manager to provide further diversification. "The two together I think provide an extraordinarily complementary and powerful partnership," Mr. Williams said. Hamilton Lane and J.P. Morgan invest primarily in funds; direct investments are commonly done through a co-investment structure.
Mr. Williams said the Florida program's structure was inspired in part by the $216.2 billion New York State Common Retirement Fund's In-State Private Equity Investment Program launched in 1999.
That New York program has generated $1.1 billion on the $715 million total in 215 individual investments it had exited by June 30, 2019, said Matthew Sweeney, spokesman for New York state Comptroller Thomas P. DiNapoli, sole trustee of the Albany-based pension fund.
The program had closed 14 of the 51 investment funds, generating a 10% net internal rate of return. When looking at capital from all sources including bank loans about $14.1 billion had been invested in 427 companies, Mr. Sweeney said. Companies receiving capital from the program had added 9,000 jobs since the program began.