New 'invest in North Dakota' program to launch soon

BISMARCK — North Dakota is about to embark upon a new era of directly investing in fledgling businesses to help grow the state’s economy by tapping into the $8.7 billion Legacy Fund.

But an out-of-state money management firm will review investment proposals under the new program, and North Dakota bankers complain that they have been repeatedly passed over for the opportunity to invest portions of the Legacy Fund, approved by voters in 2010 to use the state’s petroleum wealth to create economic opportunities in the state.

Aug. 1 will mark the day new legislation takes effect to enable some of the fund’s gains to be invested in businesses inside the state — a departure from the routine practice of investing mainly on Wall Street and around the globe, where critics say the money does nothing to develop the state’s economy.

To start, $100 million will be available for private equity investments — in which the state fund will buy a stake in an early-stage company — and venture capital, another investment stream for businesses that are in their infancy or adolescence.

Up to $250 million can be tapped in the next five years, but state investment officials aren’t immediately making the full amount accessible because of the fees the state will pay to manage the investment program. The fees are based on the amount of the fund under management.

The management fee for the new investment fund, called the 1889 Fund, is almost 1%, said Dave Hunter, North Dakota’s chief investment officer.

The North Dakota State Investment Board selected 50 South Capital, a Chicago investment firm, to manage the fund, including the review of investment proposals.

Representatives of the firm are traveling around North Dakota, meeting with bankers, entrepreneurs and economic developers as they work to get the new program running. They will establish an office in the state and will report on June 16 to the Legislature’s Legacy and Budget Stabilization Fund Committee.

“This will be the first time we have a face-to-face meeting,” said Rep. Keith Kempenich, chairman of the legislative committee and a non-voting member of the State Investment Board.

Already, he said, officials are receiving inquiries about how to submit proposals for the 1889 Fund, a reference to North Dakota achieving statehood in 1889.

“We’re looking at how to invest in North Dakota and get a return,” Kempenich said.

Rick Clayburgh, president of the North Dakota Bankers Association, said banks in the state with trust departments that provide investment services have repeatedly tried without success to get the opportunity to manage investments for the Legacy Fund.

“We’ve been banging our head against the wall for 12 years,” Clayburgh said. “We’ve been very concerned about it.”

North Dakotans trust banks in the state to invest billions of dollars on their behalf, he said. One North Dakota bank that Clayburgh declined to name has more than $1 billion in assets under management and a single client with a portfolio of almost $100 million, he said.

Hunter said: “We really do invite and encourage all investment managers in North Dakota to present data to be considered.”

To do so, they should submit information to investment database services including those by Callan, the state’s chief investment adviser, and eVestment, he said. That’s a simple matter of answering a few basic questions.

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“You really need to submit some data to be considered,” Hunter said. “If they do that, they can be considered. We’re in the process of doing that.”
Hunter said he has a meeting this week to discuss that process, and said that discussions on the issue with the state’s bankers have occurred over the last few years, including before and after the recently ended legislative session.

“We’re working to address their concerns,” Hunter said. “I just need to do a better job of education.”

In the past, North Dakota banks were asked to submit long and detailed forms that appeared to be the investment board’s standard vetting documents for investment managers. But that process now appears to be simplified, Clayburgh said.

“They are much more streamlined and much more realistic,” he said. “It’s a work in progress but this has been a long work in progress.”

Last year, North Dakota spent between $22 million and $24 million on investment management fees for the Legacy Fund, Kempenich said.

Once the new in-state investment program is operating, the State Investment Board and 50 South Capital will review the performance of the fund twice a year and will generate annual reports detailing the fund’s investment performance and the impact on North Dakota companies on the state’s economy.

A website will provide information about the North Dakota Growth Fund as well as a way for companies to submit investment proposals. The website can contain quarterly or annual reports for the fund.

The policy also sets parameters for the North Dakota Growth Fund. No more than a third of the $250 million can be invested in any single year. Distributions from the fund can be reinvested without counting against the $250 million cap.

The policy also includes investment diversification requirements. Investments must be spread across multiple venture capital firms and direct investments based in North Dakota.

No more than $25 million can be invested in any one recipient fund, and the underlying recipient funds must be at least $10 million for venture capital firms with a presence in North Dakota and a minimum of $25 million for funds outside the state but with a track record of investing in North Dakota companies.

“You have to start out kind of small,” Hunter said. “It takes time to grow. It’s one of those things where you have to work a long period of time to get traction.”

The $250 million that can be committed over the next five years is roughly a third of the roughly $800 million that potentially will be available to invest in North Dakota under the program.

The new investment fund for the Legacy Fund, which sets aside 30% of the state’s petroleum revenues to create lasting benefits from a finite resource, has attracted a lot of attention from firms seeking equity investments or venture capital.

But through the state-owned Bank of North Dakota, the state has been making direct investments in state businesses for about 30 years, Hunter said. The bank has set aside $400 million for in-state investments, and has obligated between $50 million and $100 million of that amount, he said.

Equity investments do involve higher risks. One example is the planned Alien Technology project in Fargo involving production of so-called “smart tags.” That venture included a $1.1 million equity investment from the Bank of North Dakota and North Dakota Development Fund, a program of the North Dakota Department of Commerce.

After the Alien Technology plant in Fargo closed, the Bank of North Dakota and other public lenders were able to recover loan debt due, but were unable to recover the equity investment.

It will take time for the 1889 Fund’s equity investments and venture capital investments to mature, Kempenich said.

“Truthfully, to see any results it’s going to take two or three years,” he said. “This isn’t private money. It’s public money. It’ll be watched.”