State the Issues - May 2001

State the Issues

by Robb S. Smith, Laura Wallace

Should the Nevada Public Employees Retirement System (PERS) earmark a portion of its portfolio for investments in Nevada-based companies?

Nevada Must Invest in Itself

By Robb Smith

Evidence demonstrates that a state that invests in itself experiences a more diversified tax base, better education, a better-trained workforce and greater opportunities for its people. With Nevada’s perpetual top-ranking population growth, it is irresponsible and unfair to continually rely on the gaming industry to support the state’s coffers.

Based on discussions with global institutions on Wall Street, it has become clear that Nevada must invest in itself before outsiders will. To these ends, our venture capital firm, Nevada Ventures, LP, has engaged in a meaningful discussion with the Nevada Public Employees’ Retirement System (PERS), a major institution controlling a venture capital allocation of several hundred million dollars. Upon requesting that they consider investing a small portion of that back in Nevada, the California-based manager whom they use to manage this money told us that "it is not in Nevada’s best interests" to invest in Nevada. I’m sure Nevada’s public employees, who worked their whole life to make Nevada better, would not want to hear that Nevada is not worth their own money. And let me be clear: the companies and talent exist to produce outstanding returns from Nevada-based venture capital, with correspondingly immeasurable societal returns.

As a venture capitalist, my responsibilities are twofold: to invest in high-growth companies; and to significantly reduce inherent risk by instilling world-class business practices in these companies. My primary objective is singular: to earn disproportionate risk-adjusted returns for the limited partners who invest with our fund.

As a Nevadan, my primary responsibility is to be an upstanding and productive member of society. My primary objective, however, is to drastically improve Nevada’s standard of living, educational standards and culture of entrepreneurship, all hallmarks of a thriving and competitive 21st century geopolitical economy.

I believe these professional and personal objectives are deeply symbiotic. So I respectfully ask that PERS be a good Nevadan. Indeed, Nevada’s future depends squarely on it.

Securing Retirement Funds for Nevadans

By Laura Wallace

While we appreciate others’ roles in economic development, the charge of the Public Employees’ Retirement System (PERS) is to secure the payment of pension benefits to over 100,000 Nevadans. PERS incorporated an alternative investment program into the portfolio in 1984. Currently, $355 million is committed to that sector. The annualized return since inception is approximately 22 percent. The investment strategies primarily focus on venture capital, acquisitions, leveraged buyouts and equity expansions. PERS presently invests as a limited partner in 54 partnerships. When combined, these partnerships invest in over 600 domestic and international companies.

PERS’ investment plan incorporates three tiers of decision making. First, the Retirement Board retains an alternative investment manager, Pathway Capital Management, which has fulfilled that role for 15 years. Second, the manager makes fully discretionary investment decisions regarding limited partnership opportunities on behalf of Nevada PERS. Finally, general partners retain full discretion to invest within individual companies.

The alternative investment partnership criteria incorporated into the system’s investment objectives and policies are as follows:

Cohesive management team. At least two partners must have a minimum of five years’ investment experience as a team.

Strong identifiable deal flow. Partnership must have access to investment opportunities in the stated strategy that is demonstrably superior.

Appropriate strategy. Stated strategy must be in sync with current and expected investment environment.

Multiple cycle experience. Team must have relevant experience over a long enough period of time to cover multiple business and investment cycles.

Successful, replicable performance.

Liquidations for profit. Experience must include at least 10 "roundtrip" (development through profit realization) investments, of which most were for substantial profit.

Investment opportunities at either the partnership or individual business plan level are forwarded for review to Pathway Capital. Investments do include companies having operations within our state; however, we do not mandate or otherwise subsidize that effort.

Robb S. Smith, Laura Wallace
Robb S. Smith is a principal in Nevada Ventures LP, a venture capital group based in Reno. Laura Wallace has been with PERS of Nevada since 1981 and serves as Investment Officer.