VENTURE MICHIGAN FUND REVISIONS
House Bill 4195 as introduced
Sponsor: Rep. Al Pscholka
House Bill 4196 as introduced
Sponsor: Rep. Michael D. McCready
Committee: Commerce and Trade
Complete to 3-2-15
SUMMARY:
House Bill 4195 would amend the Michigan Early Stage Venture Investment Act of 2003 to prohibit the Michigan Early Stage Venture Investment Corporation from entering into new agreements with investors, creating a new Michigan Early Stage Venture Investment Fund, or making any new investments in a venture capital company or a qualified business after December 31, 2014.
House Bill 4196 would amend the same act to move the expiration date for the fund from January 1, 2054, to January 1, 2018, and to remove certain existing language related to the distribution of money in the fund, thereby clarifying that any money in the fund (subject to outstanding debts and obligations) shall be distributed to the state's General Fund on that date.
BACKGROUND INFORMATION:
Public Act 296 of 2003, as later amended by Public Acts 233 of 2005 and 173 of 2007, created the Early Stage Venture Capital Investment Act. The stated purposes of the act are:
(a) To promote a healthy economic climate in this state by fostering job creation, retention, and expansion through the promotion of investment in certain businesses.
(b) To allow the state to enter into agreements with Michigan early stage venture investment corporations to promote a healthy economic climate in this state.
The act created the Early Stage Venture Investment Corporation, governed by a seven-member board that includes the State Treasurer, the Chief Executive Officer of the Michigan Economic Development Corporation (MEDC), and five appointed members. The act also authorized the board to hire a fund manager through a competitive bid process.
Tax vouchers were issued by the state to lending institutions to serve as collateral against the capital provided by the lending institutions to the Early Stage Venture Investment Corporation. Section 419 of the Michigan Business Tax (MBT) Act limited the value of the tax vouchers that could be issued to the amount sufficient for the Early Stage Venture Investment Corporation to raise $450 million of investment capital. The vouchers could be sold by the financial institutions in the event that loans were not repaid on schedule. Purchasers of these vouchers could then apply them against either an MBT liability or against required withholding payments under the Income Tax Act. Section 419 of the MBT Act also imposed a cap of $600 million on the total value of the tax vouchers that could be claimed.
In 2005, the board contracted with GCM Grosvenor Private Markets to be the fund manager for Venture Michigan Fund I (VMF I). In 2006, $200 million in tax vouchers were collateralized with Deutsche Bank and Credit Suisse to provide investment capital. From March 2007 to July 2010, 11 fund managers were hired to invest a total of $95 million in Michigan startup businesses, with reported actual investments of $79 million to date (see Figure 1).
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FIGURE 1 |
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Venture Michigan Fund I - Fund Managers |
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Arboretums Ventures II |
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Arboretums Ventures III |
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Arsenal Venture Partners II |
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Chrysalis Ventures III |
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Early Stage Partners II |
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Fletcher Spaght Ventures II |
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North Coast Technology Investors III |
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Nth Power Fund IV |
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RPM Ventures II |
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TGap Venture Capital Fund II |
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Venture Investors Early Stage Fund IV |
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Source: Venture Michigan Fund financial statements (for year ending December 2013) |
In 2010, the board again contracted with GCM Grosvenor Private Markets to be the fund manager for Venture Michigan Fund II (VMF II). In 2010, $250 million in tax vouchers were collateralized with Stanton (an affiliate of Credit Suisse) to provide investment capital. From March 2011 to December 2013, nine fund managers were hired and have begun to invest a total of $120 million in Michigan startup businesses (see Figure 2).
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FIGURE 2 |
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Venture Michigan Fund II - Fund Managers |
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Arboretums Ventures II |
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Cultivian Sandbox Food & Agriculture Fund II |
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Draper Triangle Ventures III |
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Flagship Venture Fund IV |
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Mercury Fund Ventures III |
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MK Capital II |
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Plymouth Venture Partners II |
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Plymouth Venture Partners III |
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Venture Investors Early Stage Fund IV |
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Source: Venture Michigan Fund financial statements (for year ending December 2013) |
As of a recent reporting, VMF I and VMF II have resulted in total investments of approximately $150 million in 41 Michigan startup companies. Representatives of GCM Grosvenor Private Markets indicate investments were delayed in some cases due to the financial crisis of 2007 and 2008.
Repayment of Loan for Venture Michigan Fund I
VMF I was structured so that the loan would be paid back with both proceeds from the investments and tax vouchers. The first payment for loans to Deutsche Bank is due starting in FY 2014-15. The MBT Act restricted the amount of vouchers sold to taxpayer(s) in any one year to no more than 25% of the total vouchers issued ($50 million). The proceeds from the sale of vouchers will be used to pay interest and principal due. The repayment schedule is anticipated to be as follows:
· FY 2014-15: $50 million
· FY 2015-16: $50 million
· FY 2016-17: $40 million
Deutsche Bank is expected to sell the vouchers to a Michigan taxpayer (or taxpayers) per the above schedule. The amounts listed will be realized as reductions to state revenue (approximately 77% will be a GF/GP reduction; the remaining 23% will be a School Aid Fund reduction).
Repayment of Loan for Venture Michigan Fund II
At this time the magnitude of tax vouchers that will be sold to pay for the debt obligation for VMF II is unknown. A potential total liability of $250 million exists for VMF II. Tax vouchers would be redeemed beginning roughly five years from now.
Expiration of Fund
Section 31 of the act provides for the fund holding the VMF investments to expire on January 1, 2054. The section references remaining funds being distributed to the state General Fund. The phrasing in the relevant sentence is, however, difficult to interpret. Reportedly, the bylaws of the Michigan Early Stage Investment Corporation provide for remaining funds to be distributed to the MEDC or its successor.
FISCAL IMPACT:
House Bill 4195 would limit the amount of any future state liability through tax vouchers authorized by the Michigan Early State Investment Corporation. As indicated above, vouchers totaling $140.0 million are expected to be redeemed over the next three years under Venture Michigan Fund I. The amount of additional vouchers that will be claimed, and the impact the bill would have on that amount, cannot currently be projected.
The impact of House Bill 4196 would depend on the performance of fund investments between 2018 and 2054.
Fiscal Analysts: Kyle I. Jen
Jim Stansell
Mary Ann Cleary
■ This analysis was prepared by nonpartisan House Fiscal Agency staff for use by House members in their deliberations, and does not constitute an official statement of legislative intent.