Barkley et al. / CERTIFIED CAPITAL COMPANIES
The Missouri CAPCO program was authorized in 1997 with the purpose of inducing private investment in new or expanding small businesses. The original legislation was sponsored by a member of the state legislature and championed by a coalition including a St. Louis regional eco- nomic development group and Advantage Capital, a partnership that operated CAPCOs in Louisi- ana. The Missouri Department of Economic Development supported both the CAPCO concept and modifications to the bill as it moved through the legislative process. Several factors made a tax credit program attractive to policy makers in Missouri. First, Missouri is constitutionally prohib- ited from making any direct investments in businesses, so economic development strategies in the state generally rely on tax credits. Second, Missouri has a limit on state tax revenues, and revenues collected in excess of this cap are returned to taxpayers. As a result, tax credit programs have been attractive, particularly during the recent economic expansion. Third, the Missouri State Retirement Fund’s past experience with venture investing was not positive, suffering from poor management and political pressures.
The Missouri program provides a 100% tax credit, taken over 10 years, to insurance companies who invest in CAPCOs. The legislation allocated $50 million in tax credits in 1997 and $50 million in 1998. The state viewed this initial $100 million as a demonstration program to see how well the CAPCO program performed. An additional $40 million allocation of tax credits was made in 1999, with the money targeted to distressed communities in the state. Businesses in these distressed com- munities could have up to $5 million in revenue as compared to the $4 million limit for businesses in other parts of the state. In 2000, legislation providing additional tax credits for CAPCOs was passed in the Missouri House and Senate but vetoed by the governor.
When CAPCO legislation was passed, the state placed an initial cap of $25 million on total capi- tal that any CAPCO could raise. This limit was designed to encourage the creation of CAPCOs in the state other than established CAPCOs such as Advantage Capital and BancOne. These two existing CAPCOs had a competitive advantage in raising funds from insurance companies relative to newer CAPCOs because of their established relationships with insurance companies and exist- ing investment instruments.
Similar to the revised Louisiana legislation, Missouri legislation allows the state to capture some of the return on investments made in portfolio companies by the CAPCOs. The Missouri Development Finance Board will receive 25% of any distribution in excess of the investment return that, in combination with the value of the tax credits, yields a 15% IRR. Given the short operating history of the program, it is unclear what the magnitude of the return to the state will be.
The Missouri legislation provides a more restrictive definition of qualified businesses than does Louisiana. CAPCO investments must be made in Missouri businesses with fewer than 200 employ- ees, 80% of whom must be employed in Missouri. Annual revenues for qualified businesses cannot exceed $4 million, or $3 million if the firm is less than 3 years old. The business also must demon- strate a need for venture capital and show an inability to obtain conventional financing (i.e., unable to qualify or turned down for a bank loan).
Since 1997, four CAPCOs have been active in Missouri, one established by Advantage Capital, one by BancOne (Gateway Ventures), and two established by other Missouri firms (Stifel CAPCO and CFB Emerging Fund). In 1997, CAPCOs certified $50 million in capital (committing the state to $50 million in future tax credits) and made investments of more than $27 million in 12 firms. Average investment per firm was $2.2 million. In 1998, another $50 million in capital was certified and $5 million invested, all but $504,000 as follow-on investments in existing portfolio companies. The CAPCOs reported total jobs created by these investments as 726.
In summary, state officials believe the program has improved the infrastructure and environ- ment for venture capital in the state. The program provides a demonstration effect for other venture funds and has functioned to attract additional venture capital to the state through coinvestment on CAPCO deals. One state official described the program as “priming the pump.” On the other hand, although Missouri’s CAPCO legislation is relatively restrictive in defining qualified investments, the legislation has resulted in relatively little seed capital investment within the state. According to