New Mexico SSBCI venture capital, NMFA invests in funds and not companies

The program is fund-level by its own definition

NMFA states that the Venture Capital Program invests in venture capital funds and does not provide loans or investments directly to businesses. That is not a description of current practice that might change with a deal; it is how the program describes what it is.

NMFA administers venture capital funding from the federal State Small Business Credit Initiative in collaboration with the New Mexico Economic Development Department. The program itself was created by 2022 legislation, with the Legislature appropriating $35 million in 2022 and a further $15 million in 2023. The Venture Capital Program Act created the Venture Capital Program Fund within NMFA and authorised it to make investments, including differential rate investments, in venture private equity funds.

The governing document is the Venture Capital Investment Policy, adopted by the NMFA Board of Directors on July 27, 2023, first revised on May 30, 2024, and last revised on September 26, 2024. Those dates describe the document. They are not the date this page was checked, which is in the Sources and currency block below.

Two definitions do most of the work

The policy defines a New Mexico Business twice, because the test depends on the entity. For a corporation or a limited liability company, it means a business with its principal office and a majority of its full-time employees located in New Mexico. For a limited partnership, it means a business with its principal place of business and at least 80 percent of its assets located in New Mexico.

A Venture Private Equity Fund is defined more tightly than the phrase suggests. It is an entity that makes, manages, or sources potential investments in New Mexico businesses and that has investing for equity or debt as its primary business activity, holds out prospects for capital appreciation, has at least one full-time manager with at least three years of professional experience assessing growth prospects or evaluating business plans, and accepts investments only from accredited investors or from federally recognised Indian nations, tribes, and pueblos with at least $5,000,000 in overall investment assets.

A fund may invest in companies that do not meet the New Mexico Business definition, provided the fund meets the policy's Match Requirement. A fund deploying predominantly outside the state has to demonstrate at least two of four things: sector or strategy expertise supporting the state's diversification, prior investments or a pipeline of New Mexico businesses, locally based resources such as staffing, offices, or consultants, and a commitment formalised in an NMFA side letter to deploying capital to New Mexico businesses and to holding office hours, educational events, or networking events for New Mexico entrepreneurs.

Commitment sizing, and the limits that come with it

The policy sets an objective for the shape of the portfolio and a range for each commitment inside it. NMFA states that it will initially seek a portfolio of five to ten venture private equity funds with diverse underlying investment strategies. Commitments to a single fund are expected to range from $2,000,000 to $10,000,000, and cannot exceed 20 percent of the balance of the Fund at the time of investment approval.

A second set of limits controls how much of any one fund NMFA will be. A commitment to a fund expecting to invest at least 90 percent in New Mexico businesses cannot exceed 60 percent of total commitments to that fund. A commitment to a fund expecting to invest less than 90 percent cannot exceed 20 percent of total commitments to that fund. Read together with the sizing range, those two numbers tell a manager roughly what size of fund NMFA can be a meaningful limited partner in.

Below the fund level the policy sets New Mexico exposure and concentration limits that a manager should model before applying.

• On a projected basis, NMFA targets allocating at least 65 percent of the total Fund to New Mexico businesses.
• Investments in any one New Mexico business cannot exceed 10 percent of the total size of the Fund at the time of investment approval.
• Funds are expected to manage single portfolio company concentration to within 15 percent of the total portfolio at the time of investment, and to address concentration in their own investment and risk management policies.
• Funds investing equity instruments are expected to seek minority non-controlling interests, and investment in any one New Mexico business cannot exceed 51 percent of the total investment capital in that business, except where additional ownership arises from foreclosure or similar action and requires no further investment.
• Investments in any one industry cannot exceed 30 percent of the balance of the Fund at the time of investment approval.

Commitments are issued for a term determined by NMFA and not exceeding 15 years including all extensions. Where an investment is approved by the Board, closing is expected within 120 days of that approval unless the Chief Executive Officer allows longer for good cause.

Three different matching requirements, and they are not interchangeable

This is the part of the policy most likely to be misread, because the phrase private match means three different things in three different places.

A fund expecting to invest at least 90 percent in New Mexico businesses must commit to investing or securing investment by private investors, or by New Mexico public sector accredited investors, in an amount at least equal to 70 percent of NMFA's total commitment. That is a 0.7:1 match, and the wider definition of who counts is part of the concession. NMFA may make a total commitment with drawdowns contingent on the matching commitments being secured, and the fund has up to 12 months from the date of the initial commitment to fulfil the requirement. Final commitments may be reduced at final closing to the amount of matching investment actually raised.

A fund expecting to invest less than 90 percent in New Mexico businesses faces a different test on both ratio and timing. It must commit to investing or securing investment by private, non-governmental investors at the fund level, at the time of closing, in an amount at least equal to NMFA's total commitment. That is a 1:1 match, it excludes public sector money, and it is due at closing rather than within a following year. Such a fund must also make best efforts to deploy investments equal to NMFA's total commitment into New Mexico businesses.

Separately from either of those, any investment funded with SSBCI proceeds requires at least an equal matching commitment from private third-party investors, and the fund must demonstrate that the SSBCI investment caused and resulted in that private matching investment. The causation test is the part managers underestimate. Money already committed before the state's participation does not do the same work as money the state's participation brought in.

What the SSBCI layer adds on top of the state policy

The policy has its own section for the federal money, and it is worth reading as a distinct set of conditions rather than as background. NMFA states that investments funded with SSBCI proceeds target venture capital funds investing in small businesses of 500 employees or fewer, funds investing in businesses owned or controlled by socially and economically disadvantaged individuals with diminished access to credit who reside or operate in Community Development Financial Institution Investment Areas, investments in very small businesses with fewer than ten employees, and incubation and early-stage investment models.

Compliance with the federal requirements for equity and venture capital programs is stated as a condition rather than an expectation.

• Meeting the definition of a venture capital fund as defined by the Securities and Exchange Commission.
• Securing a 1:1 private financing ratio.
• Expecting a 10:1 private financing ratio over a ten-year horizon.
• A ceiling on the total transaction, including investment rounds, of $20 million.
• Holding the SSBCI investment in a separate fund or otherwise accounting for it separately.
• Certification from investees that proceeds are used for permissible business purposes.
• Adherence to the conflict-of-interest standards, and the certifications relating to sex offenses and to services to portfolio companies.

Proposals seeking investment from the state's SSBCI award must also meet the definitions in Treasury's capital program guidelines for qualifying equity and venture capital investments, including the SEDI and very small business definitions, and all of the certification, reporting, and compliance requirements those guidelines set.

The diligence pack, and what an emerging manager has to show

A fund seeking investment completes a publicly available interest form. NMFA staff and its investment consultants review it against the policy and, where a fund is eligible, invite an investment proposal. The proposal list runs to twenty-five items and reads like an institutional data room rather than a state application. It includes the due diligence questionnaire, the legal documentation, prior fund track record against benchmarks, three years of audited financial statements and tax returns, limited partner reporting packages, sample capital call and distribution notices, references from current and former limited partners, and the fund's own policies on investment, valuation, economic impact, conflicts, risk, compliance, ethics, business continuity, and environmental, social, governance, diversity, equity, and inclusion matters.

Diligence then assesses four things: strategy fit with the state's economic development and diversification objectives, the team's skill and track record and its capability to execute the stated strategy, strategy capacity and expected pace of deployment, and fund management operations including financial, accounting, reporting, and compliance controls and service providers.

The policy says something directly to first-time managers. Emerging fund managers with limited operating history and limited assets under management may demonstrate adequate investment expertise and team capacity through verifiable relevant past experience and track record during diligence, and must demonstrate adequate operational sustainability for the expected investment horizon. Operating budget projections for the next three years are among the requested items, which is how that sustainability test is evidenced.

Reporting runs quarterly, annually, and by economic impact

A fund that takes this commitment takes on a reporting obligation that is heavier than a typical first-fund limited partner package. Quarterly, NMFA expects complete financial statements, an investment performance report listing portfolio companies with narrative on their financial performance and economic impacts, a market outlook for the strategy, and a statement of capital calls, distributions, and all fees and expenses charged.

Annually, NMFA expects audited financials, compliance reports submitted to the relevant regulatory bodies, a certification that each investment in a New Mexico business meets the statutory definition, and a certification of all representations, warranties, and covenants. Annual economic impact reporting covers new business creation, job creation, job quality, payroll and average salaries, the number and location of companies funded, the number of companies owned by entrepreneurs representing underserved communities, the number of sectors invested in, and the companies benefiting underserved communities together with measures of those benefits.

Investments funded by SSBCI proceeds carry additional quarterly and annual SSBCI reporting on top of all of that. NMFA also reserves the right to request further information, attends annual general and advisory committee meetings, and reports its own portfolio to the NMFA Board and to interim committees of the New Mexico State Legislature.

Ten funds carry the capital into companies

Ten venture funds participate in the program, and their stated focuses are unusually varied: employee ownership transitions, climate and sustainability, early-stage ventures, regenerative agriculture, Native-owned businesses, female-led technology companies, frontier technologies, food production, medtech and biotech, and Latinx-founded companies.

The investment ranges and stages vary by fund rather than being set centrally, spanning startups, early-stage businesses, expansion, product development, and recapitalization. A company should identify which participating fund matches its stage and sector and approach that fund, because that is where the investment decision sits.

As of the research date, NMFA states that it is actively evaluating potential fund investments and invites an interest form. That statement concerns fund managers seeking a commitment from NMFA. It is not a company application window, and NMFA does not run one.