Amendment SSA2-SB169

LRBs0083/2

MPG:kjf:rs

2013 - 2014 LEGISLATURE

SENATE SUBSTITUTE AMENDMENT 2, TO SENATE BILL 169

June 11, 2013 - Offered by Senator Gudex.

SB169-SSA2,1,2 An Act to create 16.295, 20.505 (1) (fm) and 25.17 (72) of the statutes; relating to: venture capital investment program and making an appropriation.

Analysis by the Legislative Reference Bureau

This substitute amendment directs the Department of Administration (DOA) to establish an economic development program that operates like what is often referred to as a "fund of funds." Typically, under a fund of funds investment model, an investment fund invests moneys with other investment funds that in turn invest those moneys directly in operating businesses. Under the substitute amendment, DOA must contract with an investment manager to manage investments in venture capital funds and Wisconsin businesses.

Before DOA contracts with an investment manager, the secretary of DOA must form a committee to select the investment manager. The committee must consist of three members appointed by the State of Wisconsin Investment Board (SWIB) and two members appointed by the secretary of DOA from the capital finance office in DOA. A majority of the committee's members must be representatives of SWIB.

DOA's proposed contract with the investment manager must be reviewed by the Legislative Audit Bureau and is subject to passive review by the Joint Committee on Finance (JCF) based on the audit bureau's opinion of the contract. JCF's passive review is limited to determining whether the contract is contrary to the substitute amendment or fails to implement an applicable provision of the substitute amendment.

The substitute amendment requires DOA to pay $25,000,000 to the investment manager for investments in venture capital funds. The substitute amendment also requires the investment manager to contribute to those investments $300,000 of its own moneys and $5,000,000 raised from other funding sources. The investment manager must commit all of those moneys to investments within 24 months after the date the investment manager executes the contract with DOA, and the investment manager must invest those moneys in at least four different venture capital funds. The investment manager may not invest more than $10,000,000 in any one venture capital fund.

The substitute amendment requires the investment manager to contract with each venture capital fund that receives moneys under the program. Under that contract, each venture capital fund must do all of the following:

1. Invest all of the moneys the venture capital fund receives under the program in businesses that are headquartered in Wisconsin and employ at least 50 percent of their full-time employees in Wisconsin and invest at least one-half of those moneys in businesses that employ fewer than 150 full-time employees when the venture capital fund first invests in the business under the program. If, within three years after the venture capital fund makes an investment in a business under the program, the business relocates its headquarters outside of Wisconsin or fails to employ at least 50 percent of its full-time employees in Wisconsin, the business must pay to the venture capital fund an amount equal to the amount of moneys contributed by the state that the venture capital fund invested in the business under the program, and the venture capital fund must reinvest those moneys in one or more eligible businesses, subject to the substitute amendment's requirements.

2. Commit at least one-half of those moneys to investments in businesses within 24 months after the venture capital fund receives the moneys and commit all of the moneys to investments in businesses within 48 months.

3. Invest all of those moneys in businesses in the agriculture, information technology, engineered products, advanced manufacturing, or medical devices and imaging industries and attempt to ensure that those moneys are invested in businesses that are diverse with respect to geographic location within Wisconsin.

4. At least match the amount of the moneys the investment manager contributes to an investment in a business with an investment of moneys in that business that the venture capital fund has raised from other funding sources. The substitute amendment also requires the investment manager to ensure that, on average, a venture capital fund invests $2 in a business for every $1 the investment manager contributes to the investment in that business.

5. Provide to the investment manager the information necessary for the investment manager to make its reports to DOA, described below.

6. Disclose to the investment manager and to DOA any interest that the venture capital fund or one of its owners or other representatives or agents holds in a business in which the venture capital fund invests or intends to invest moneys under the program.

Similarly, the substitute amendment requires the investment manager to disclose to DOA any interest that it or an owner or other representative or agent of the investment manager holds in a venture capital fund that receives moneys under the program or a business in which a venture capital fund invests such moneys. Also, the investment manager's profit-sharing agreement with a venture capital fund under the program must be on terms that are substantially equivalent to the terms applicable for other funding sources of the venture capital fund.

Under the substitute amendment, the investment manager must set aside and pay to the state its proceeds from investments of the moneys contributed to the program by the state until the investment manager has paid the state $25,000,000, the amount of the state's contribution. After that point, the investment manager must pay 90 percent of its proceeds from such investments to the state.

The substitute amendment requires the investment manager to submit a report to DOA each year within 120 days after the end of the investment manager's fiscal year that includes all of the following:

1. An audit of the investment manager's financial statements performed by an independent certified public accountant.

2. The investment manager's internal rate of return from investments in venture capital funds under the program.

3. For each venture capital fund that received an investment under the program: a) the name and address of the venture capital fund; b) the amount of the investment; c) an accounting of any fees the venture capital fund paid to itself or any principal or manager, and d) the venture capital fund's average rate of return on its investments under the program.

4. For each business in which a venture capital fund held an investment of moneys contributed by the investment manager under the program: a) the name and address of the business; b) a description of the nature of the business; c) an identification of the venture capital fund that made the investment; d) the amount of each investment in the business and the amount contributed by the venture capital fund; e) the internal rate of return realized by the venture capital fund on the investment; and f) a statement of the number of employees the business employed when the venture capital fund first invested in the business under the program, the number of employees the business employed on the first day of the investment manager's fiscal year, and the number of employees the business employed on the last day of the investment manager's fiscal year.

DOA must submit the investment manager's annual report to the legislature.

The investment manager must also submit a quarterly report to DOA for the preceding quarter that identifies each venture capital fund participating in the program, each business in which a venture capital fund held an investment under the program and the amount of each investment, and the number of employees each business employed when the venture capital fund first invested in the business under the program and the number of employees the business employed at the end of the quarter. DOA must publish the information contained in the investment manager's quarterly report on DOA's Internet site.

The substitute amendment also requires DOA to submit to JCF two progress reports, one in 2015 and one in 2018. Each report must include all of the following:

1. A comprehensive assessment of the performance to date of the investment program created in the substitute amendment.

2. Any recommendations DOA has for improving the investment program and the specific actions DOA intends to take or proposes to be taken to implement those recommendations.

3. Any recommendations SWIB has for improving the investment program and the specific actions SWIB proposes to be taken to implement those recommendations.

The people of the state of Wisconsin, represented in senate and assembly, do enact as follows:

SB169-SSA2,1 Section 1. 16.295 of the statutes is created to read:

SB169-SSA2,4,3 16.295 Fund of funds investment program. (1) Definition. In this section, "investment manager" means the person the committee selects under sub. (3) (a) 1.

SB169-SSA2,4,6 (2) Establishment of program. The department shall establish and administer a program for the investment of moneys in venture capital funds that invest in businesses located in this state.

SB169-SSA2,4,12 (3) Selection of investment manager; contract approval. (a) 1. The secretary shall form a committee to select the investment manager. The committee shall consist of 3 representatives of the investment board and 2 representatives, appointed by the secretary, of the capital finance office in the department. The committee shall select a person as investment manager who has expertise in the venture capital or private equity asset class.

SB169-SSA2,5,2 2. When the department gives the notice under par. (b) 1., the department shall submit its proposed contract with the investment manager to the legislative audit bureau for review. The legislative audit bureau shall review the proposed contract and, within 14 days after it receives the proposed contract for review, submit to the joint committee on finance and the department a letter of review that evaluates the terms of the contract and offers an opinion concerning the extent to which the contract conforms with this section and implements subs. (4) to (7).

SB169-SSA2,5,5 (b) 1. The secretary shall notify in writing the joint committee on finance of the investment manager selected under par. (a) 1. The notice shall include the department's proposed contract with the investment manager.

SB169-SSA2,5,17 2. If, within 14 working days after the date the joint committee on finance receives the legislative audit bureau's letter of review under par. (a) 2., the cochairpersons of the joint committee on finance do not notify the secretary that the committee has scheduled a meeting to determine whether the department's proposed contract with the investment manager is contrary to this section or fails to implement an applicable provision of subs. (4) to (7), the department and investment manager may execute that contract. If, within 14 working days after the date of that notice, the cochairpersons of the committee notify the secretary that the committee has scheduled that meeting, the department and investment manager may execute the contract unless the committee determines at that meeting that the contract, in whole or in part, is contrary to this section or fails to implement an applicable provision of subs. (4) to (7).

SB169-SSA2,5,23 (4) Contract with investment manager; disclosure requirement. (a) Subject to sub. (3), the department shall contract with the investment manager. The contract shall establish the investment manager's compensation, including any management fee. Any management fee may not exceed, annually for no more than 4 years, 1 percent of the total moneys designated under sub. (5) (b) 1. and raised under sub. (5) (b) 3.

SB169-SSA2,6,2 (b) The investment manager shall disclose to the department any interest that it or an owner, stockholder, partner, officer, director, member, employee, or agent of the investment manager has in a venture capital fund that receives moneys under sub. (5) (b) or a business in which a venture capital fund invests those moneys.

SB169-SSA2,6,5 (5) Investments in venture capital funds. (a) Subject to sub. (4) (a), the department shall pay $25,000,000 from the appropriation under s. 20.505 (1) (fm) to the investment manager in fiscal year 2013-14.

SB169-SSA2,6,7 (b) The investment manager shall invest the following moneys in at least 4 venture capital funds:

SB169-SSA2,6,8 1. The moneys under par. (a).

SB169-SSA2,6,9 2. At least $300,000 of the investment manager's own moneys.

SB169-SSA2,6,11 3. At least $5,000,000 that the investment manager raises from sources other than the department.

SB169-SSA2,6,13 (c) 1. Of the moneys designated under par. (b), the investment manager may not invest more than $10,000,000 in a single venture capital fund.

SB169-SSA2,6,18 2. Of the moneys designated under par. (b), the investment manager shall commit at least one-half of those moneys to investments in venture capital funds within 12 months after the date the investment manager executes the contract under sub. (4) (a), and the investment manager shall commit all of those moneys to investments in venture capital funds within 24 months after that date.

SB169-SSA2,6,21 (d) The investment manager shall contract with each venture capital fund that receives moneys under par. (b). Each contract shall require the venture capital fund to do all of the following: