SOUTHWEST VENTURE

From today’s “PE Week Wire”: 

An Odd Proposal 

Later this week, the Teacher Retirement System of Texas will take up a gubernatorial request that it allocate up to $600 million for direct venture capital investments into Texas-based companies and related technology endeavors. It is an odd proposal, to be sure, but not necessarily one to be dismissed out of hand.  

TRS currently makes all of its venture capital investments as a limited partner in unaffiliated venture capital funds, as do most public pension systems. For example, its upcoming alternative assets committee meeting will consider fund commitments to both Leonard Green & Associates and Providence Equity Partners. Also like most public pensions, TRS buttresses a fairly meager alternatives staff with third-party consultants (

, in this case). As of August 2005, approximately 3.3% of the $93.32 billion system was invested in alternatives.  

But this new proposal from Gov. Perry is an attempt to shake up the TRS model, in order to promote local economic growth. Specifically, Perry is concerned that the local venture capital community has all but dissipated in the post-bubble years, and that the result is an unfair disadvantage for Texas-based startups. And he’s right.  

Texas receives the third-most venture capital of any state, but this year will receive less than 25% from in-state investors. Compare that to #2 Massachusetts with over 36% from in-state. Sure outsiders are coming in, but it’s always difficult to attract VCs from outside the 50-mile radius. The result often is that entrepreneurs are either trying to bootstrap themselves or picking up and moving to the Coasts. 

The problem - investment capital in Texas - is being recognized.  And as long as the root of the problem is access to capital and not deal supply, the answers are easier.  The infrastructure for deal/opportunity creation is complex and takes generations to create.  The supply of capital to match those opportunities should be simpler and more quickly (and productively) responsive to large initiatives like these.  

-John Reed 

• Texas VC’s in general are not raising the ‘next’ fund, for a variety of reasons, although the opposite seems true on both coasts
• Private Equity continues to gain fundraising momentum, in some cases competitively with VC’s - especially for larger deals
• The traditional exit scenario is still messy
• One thesis is that changes in the VC market are analogous extension of what happened in Texas with commercial banking in the 80’s and in investment banking in the 90’s, where local institutions were sold/merged and became outposts rather than centers.  Most of the traditional Texas names in investment banking - Rotan Mosle, Eppler Guerin, Rauscher Pierce, Schneider Bernet, etc. eventually morphed from having complete capabilites - Institutional Sales,  Retail, Research, Investment Banking - to being limited “Flat Earth” outposts funneling business back to the money centers.

I’d argue that Flat Earth benefits for growth capital are not total, and in fact these developments create a new class of Texas-based investment opportunity.  These posts are about defining new classes of growth company opportunity and raising capital against them.

-John J. Reed