HD11 - The Feasibility of Economically-Targeted Investments in Venture Capital Projects Located in the Commonwealth


Executive Summary:
This report begins by noting that Economically Targeted Investments (ETIs) are a topic of current interest by both public and private pension funds. It then summarizes the results of a major study conducted in 1992 of public fund involvement in ETIs. The final section of this report sets forth the Virginia Retirement System's conclusion regarding the adoption of an ETI program.

ETIs have their supporters, from those who express mild satisfaction, to those who are enthusiastic proponents. A 1994 report to the National Academy of Public Administration by Pierce, et al. is a good example of enthusiastic support. However, there are those who are just as strongly opposed. William Niskanen, Chairman of the Cato Institute, makes the classic economic efficiency argument that "...if these so-called 'economically-targeted investments' were truly sound, if they really offered a competitive return for a competitive risk, they would already be funded -- they wouldn't need pension capital." Wayne Marr, John Trimble and John Nofsinger, three academic financial economists argue that "ETIs, in general, have underperformed accepted investment benchmarks and have a history of investment blunders involving losses of millions of dollars."

Historically, there have been those who have had some success with business development ETIs and then there are the well-publicized failures (such as Kansas Public Employees' Retirement Fund's focus on in-state savings and loans and State of Connecticut's investment in Colt Industries, Inc.).

When considering whether or not to invest in ETIs, the Board of Trustees of the Virginia Retirement System must heavily weigh their fiduciary responsibility. Indeed, the "prudent expert" approach to investing the assets of the Plan must always be followed.