In 2002, then-Iowa Gov. Tom Vilsack signed into law a bill creating the “Iowa Fund of Funds,” a capital investment corporation and a board to oversee it.
The passage of the Fund of Funds bill and another related venture capital measure moves economic development to the next level in Iowa, Vilsack said then.
“In the past, the focus was on growth,” he said. “It is not about growth. It is about prosperity as reflected in a rising standard of living for all citizens.”
At the time, Iowa was ranked last in the nation for being able to attract venture capital — funding for small, high risk, startup businesses.
The bill as intended to encourage more venture capital in to the state by offering tax credits. Banks, insurance companies, utilities and other institutional investors would purchase preferred stock backed by the investment tax credits. Cash received for the preferred stock then would be used to create the $100 million “Iowa Fund of Funds.”
WHAT’S HAPPENED SINCE
Iowa is starting an “orderly wind-up” to close out the Fund of Funds program — a plan that has hit some rocky financial times but is being credited with helping eight companies with an estimated economic impact of $1.49 billion.
The Iowa Executive Council voted 4-0 this month to accept an arrangement in which the entities that were created to oversee the fund no longer are associated with the program that has gradually paid down debt, liquidated or canceled state tax credits.
The council named the director of the state Department of Revenue to now oversee the wind-down in a complicated financial collaboration.
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The statutory framework for the program involved a private, not-for-profit Iowa Capital Investment Corporation to manage the fund and solicit investments from venture capital firms, and also a state Capital Investment Board to review and authorize tax credits for qualifying investments and investors.
As initially envisioned, equity funding would be raised from private investors, and the investment return for those investors would be guaranteed by state income tax credits.
The capital to create the fund was acquired through bank loans, with tax credits used as loan collateral. The investments by the fund were partnership interests in private venture capital funds, and not direct investments in businesses.
The Fund of Funds began in 2003 and by 2011 had invested in seven venture funds with a total commitment of about $35 million with about $25 million already invested.
Financing for the investment — a $40 million line of credit — was secured by a $57 million tax credit certificate issued by the state board with a February 2012 maturity date.
“We were facing a default on financing and a call on $40 million of tax credits,” said Jeffrey Thompson, state solicitor general in the Iowa Attorney General’s Office.
According to Thompson, state officials and others negotiated a program restructuring in 2012 to avoid a default on the financing, the redemption of about $40 million in tax credits and a total loss of investment.
As part of the 2012 partnership agreement, the Fund of Funds was not to make capital investments in any additional portfolio funds and was not allowed to make new commitments to any of the venture capital funds in its portfolio.
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“It started with what could have been a really bad situation and I think it’s a success in the sense that it was a real collaborative effort by private and public people to try and sort through what could have been a tough problem,” Thompson said.
As part of that agreement, the lender extending financing for seven years, the state board verified tax credits equal to the amount of invested capital to serve as collateral and the state agreed to liquidate the tax credits as needed to retire the debt in seven years.
A year later the Iowa Legislature ratified the restructuring agreement and mandated the “wind-up and future repeal” of the program.
“It was a risk management move and I think the restructuring was a success,” Thompson told the Executive Council members last week.
According to a 2017 analysis for the state by an Arizona firm, the Fund of Funds assisted eight companies with an estimated impact to the Iowa economy of $1.49 billion over a 12-year period, including 322 retained and 830 new jobs accounting for $79.3 million in annual payrolls.
The companies received nearly $57.7 million in private capital funding through the program, which enabled them to attract an additional $54.4 million in co-investments and $54.5 million in loans for a total of $166.8 million.
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