Over 80 IVCA members turned out on September 9 for the Second Annual Limited Partner Panel luncheon sponsored by Edelman and Synergy Law Group. After a lively networking session, GPs from local firms listened with interest to the opinions and strategies of four of our local institutional investors.

The panel, moderated by Senator Don Harmon (39th District) included:
Jon Bauman, Teachers’ Retirement System of the State of Illinois (TRS)
S. Eugene Choung, University of Chicago’s Office of Investments
Dennis P. McCrary, Adams Street Partners
Robert P. Morgan, Northern Trust Global Advisors

Discussion included sectors of interest, allocation to private equity, preference on firm size, and geographic focus.

On October 6th, 26 women in private equity munched on appetizers and sipped wine at the second annual reception sponsored by McGuire Woods and LaSalle Bank. The group included IVCA Board Members Laura Pearl, Ellen Carnahan and Michelle Collins who mingled with women who had similar or fewer years in the industry. Informal discussions included the recent pace of activity, fundraising plans and the types of deals firms have been evaluating. Several attendees broke away from term sheets for a quick "hello" only to return to their desks post reception.

Congratulations to Steven J. Groya of Prairie Capital on his appointment as Managing Director.

Prophet 21, Inc., a portfolio company of Thoma Cressey Fund VII, LP has acquired Faspac Systems, Inc. (software for fastener distributors), Dynamic Data Systems, Inc. (software for healthcare distributors), Systems Design, Inc. (software for tile and flooring distributors), Trade Service Systems, Inc. (software for electrical distributors), and Distributor Information Systems Corporation (software for fluid power distributors). Additionally, Thoma Cressey Fund VII, LP recently made an equity investment in Web Clients.net, an on-line direct marketing company.

Baird Venture Partners led the preferred stock equity financing (along with Zon Capital Partners and North Hill Ventures) to invest in SmartTime, a leader in strategic work force management solutions for large, diverse work forces and mid-tier enterprises.

Svoboda, Collins L.L.C. announced their lead in recapitalization of Cigars International, Inc., a leading catalog and internet direct marketer of premium cigars and accessories.

During this short year-end legislative session (November 9-18), IVCA’s goal is to pass the FOIA exemption by the General Assembly and to continue advancement of The Opportunity Fund.

Currently, we are working with the bill’s chief Senate sponsor, Democrat Senator Don Harmon, to revise the FOIA exemption to make it acceptable to all four legislative leaders and the Governor. The bill, H.B. 5252, passed the House in mid-May and arrived at the Senate on May 25 where it was referred to the Rules Committee. The bill was not passed by the Senate given the short time remaining in the session.

In fact, the FOIA issue continues to heat up across the nation. Most troubling is a recent pronouncement by activist Texas Attorney General Greg Abbott. Abbott has indicated that he is "drawing a line in the sand" for more open government requiring disclosure of not only top line data, but inexplicably, specific data about the identities and activities of portfolio companies. He recently issued a ruling requiring the Texas Growth Fund and the Teachers Retirement System of Texas to reveal underlying portfolio firm data. Both funds have filed a lawsuit to overturn that ruling.

IVCA has discussed the need for action on this important legislation with several legislative leaders over the summer and we expect action on the issue in the veto session. It is critical that we resolve this issue soon as the IVCA seeks to increase public pension fund investments in private equity firms with a focus on investing in Illinois-based firms.

The compromise package developed by the DCEO and IVCA has not yet been introduced in the House. The Governor’s original bill passed the Senate early in the 2004 legislative session. While IVCA continues to support the compromise package, its final disposition is a matter for the Speaker of the House and the Governor to negotiate. IVCA will continue to press for the Opportunity Fund particularly in light of the trends we are seeing in other states (most notably, Midwestern states) of initiating such funds to spur increased private equity in their respective states.

According to a July 2004 survey conducted by the Community Development Venture Capital Alliance, entitled State Tax Credit Incentives for Equity Investments: A Survey of Current Practices, 18 states have adopted tax incentives for direct investment into local businesses and/or seed capital funds.

Such programs are found mainly in the Midwest and Mississippi Valley and are structured in a number of ways to meet state objectives, including contingent tax credits, or “tax credits given to investors only in the event that a state-sponsored fund of funds is unable fulfill the financial returns contractually defined by its investors."

Additionally, the survey indicates that the contingent tax credit programs constitute the most recent wave of tax credit programs with seven states having these programs, six of which were enacted in 2003-2004 (Arkansas, Iowa, Missouri, Ohio, South Carolina, and Utah). Prior to that time, only one state—Oklahoma—had such a program.

IVCA’s Legislative Committee is in the process of developing the association’s legislative agenda for 2005. Specific legislative items included in the agenda will depend on the resolution in the veto session of the two key IVCA issues noted above. We also encourage members to alert us to any significant or emerging issues which have not been noted below. The following issues have been identified as key legislative issues for IVCA members in 2005:

1. Providing IVCA members with greater access to Illinois and Chicago public pension funds. There is a clear opportunity to support the Illinois private equity sector, and thus improve the state’s economic and employment prospects, by increased investment with nationally competitive Illinois-based private equity firms by Illinois and Chicago public pension funds. Currently Illinois pension funds’ private equity investment is 45 percent below the national average (Illinois weighted average at 3.2%; national weighted average at 5.9%; A.T. Kearney). When compared to nine competing money center states, including California, New York, and Massachusetts, Illinois public pension fund private equity investment fares even worse at almost 50 percent below average (Illinois at 3.2%; competing states at 6.3%).

IVCA strongly supports increased private equity allocation by these pension funds. As part of this effort, IVCA is beginning to establish working relationships with pension systems’ boards and staffs to ensure that they are aware of the competitive returns and the local economic leverage advantages of investing in funds managed by Illinois private equity firms. Towards that end, IVCA has:

• established an Institutional Investors Task Force to gather data on the state’s and Chicago’s public pension funds and other institutional investors and to begin organizing networking events with these investors, following up on the successful July IVCA-sponsored dinner with TRS trustees, advisors and staff. (Note: You will hear more about these dinners and every regular member will have an opportunity to attend one or more of these dinners in the next year or so.)

• has met with Chicago Mayor Daley in September to discuss pension fund investment and other key IVCA issues;

• will meet with City CFO and comptroller in early November to further discuss opportunities to increase private equity investment in City-related pension funds.

• met with Senate President Emil Jones at an IVCA-sponsored dinner in October. Senate President Jones has experience with pension fund investments, having served on the Senate’s Insurance and Pensions Committee. Senator Jones indicated that they will be looking at pension investment in the near term and invited IVCA representatives to be part of that process. The October dinner is part of IVCA’s legislative quarterly dinner series, and again, members will have an opportunity to attend these dinners in the future.

IVCA will also be exploring other ways to increase these pension funds’ investment in local funds that may include:

• working with other elected officials to develop incentives for these boards and staffs to hire local expert advisors who may be more likely to keep investment dollars in the state;

• encouraging the Governor and the Mayor of Chicago to appoint individuals to public pension fund boards who are financially sophisticated and knowledgeable about the private equity sector in Illinois and the benefits to the state of investing with those firms;

• pursuing legislation that requires public reporting by the pension systems of the amount invested in private equity funds and the number of jobs created in Illinois by those investments (as required in Michigan and other states);

• amending the Pension Code to indicate that investing in private equity is an "acceptable" investment for these funds, and of course;

• securing a FOIA exemption for private portfolio company information possessed by a public pension fund as part of its investment in a private equity fund.

2. Securing an amendment to the recently enacted exemption for passive investment income from the state’s personal property replacement tax (PPRT). While the new law provides a PPRT exemption for passive investment income for most of our members, there are some members who continue to have a portion of their passive partnership investment income subject to the PPRT. (The new law requires at least 90 percent of an investment partnership’s income to be derived from passive income; passive income to funds with more than 10 percent non-passive income continues to be subject to the PPRT). IVCA did address this concern with Department of Revenue officials last year, but they were unwilling to expand the “90 percent” rule. IVCA will work closely with affected companies to elaborate on their concerns, meet with key Department officials and attempt a resolution by amending the new PPRT exemption law.

If your firm is affected by the 90 percent rule and is interested in helping to resolve this issue, please contact Penny Cate at pcate@illinoisvc.org.

3. IVCA will also continue to explore possible tax credits to spur additional private equity investing in Illinois. While the Governor is supporting the contingent tax credit approach with his Opportunity Fund proposal, other states have offered different tax credits that may be relevant for Illinois if the Opportunity Fund approach fails to gain the legislative support it needs. These tax credits include:

• direct tax credits - "tax credit for an institutional or individual investor for an equity investment directly into a qualified business"; providing a greater incentive to invest; and

• seed capital credit - "tax credit for an institutional or individual investor for an investment into a qualified investment fund making equity investments."

State objectives for these programs range from diversifying a state’s economic base to creating new businesses and jobs with some states specifically targeting equity investment in rural/low-income areas.

Midwestern states that have one of three types of tax incentive programs covered in this article include Indiana, Iowa, Michigan, Missouri, Ohio and Wisconsin (the remaining 12 states with these programs are Arkansas, Colorado, Hawaii, Kansas, Kentucky, Maine, New York, North Dakota, Oklahoma, South Carolina, Utah and West Virginia). Illinois does not currently have any direct or indirect tax incentives for private equity investing in businesses located in the state. The survey also notes that most of these programs have been enacted within the past five years and appear to be gaining traction.

IVCA may pursue any of these types of tax incentives to spur greater private equity investment in Illinois and to keep the state competitive with the several other states providing this and other incentives for private equity investing.