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Group wants state-backed venture capital fund

With investment capital for cash-strapped businesses scarce and banks warier than ever of loaning start-up money, a group of investors wants the state to create a government-baked fund to fill the void.

The Arizona Growth Foundation, headed up by former legislative candidate John Kowalski, unveiled proposed legislation on Monday to create an Arizona Fund of Funds, a public-private venture capital fund backed by state tax credits. Kowalski said the tax credits would encourage private sector investment by essentially insuring those investments against losing money in the fund.

At the hearing, which was attended by a handful of legislators, Kowalski said additional measures are needed to jumpstart Arizona’s economy because the Arizona Competitiveness Package, a slew of tax incentives and phased-in tax cuts, does little to help small businesses and won’t provide them with enough money to hire new people.

“Purely private efforts have not worked, so we’ve got to do something different than what’s been done before,” said Kowalski, a Republican candidate for a District 6 House seat in 2010. “If somebody can come in and create an incentive that minimizes (investors’) downside risk – that is a far more attractive investment than one that does not.”

The fund would solicit money from private venture capital funds and turn it over to 15-20 other funds that would invest it in business opportunities. If the investments failed, the investors would get their money back in the form of tax credits.

Jeremy Neilson, the longtime manager of the Utah Fund of Funds who was hired by the foundation to help with the Arizona proposal, said the Arizona fund would need about $100 million to be effective.

The legislators who attended the presentation in a Senate caucus room seemed open to the idea, though one questioned what impact it would have on the state budget and general fund if the investments went belly-up. When Rep. Ruben Gallego, D-Phoenix, asked how much the tax credits would cost the state, Kowalski and Neilson said the fund could theoretically cost the state the full $100 million, but that such an outcome was unlikely. Most states have a fund of funds, they said, and only one, Oklahoma, has ever had to pay out on the tax credits.

The fund would have a CEO chosen by an independent board. It would not choose the businesses that received investments, but rather would invest in private sector funds that would make those decisions.

The fund of funds proposal – the first of many economic development bills expected to be introduced in the 2012 legislative session – received a warm reception from the half dozen lawmakers who attended the meeting. But advocates are likely to have trouble with conservative lawmakers who oppose government intervention in the economy and may view the fund of funds as an attempt by the state to “pick winners and losers.”

Neilson said the independent nature of the fund could blunt some of that criticism.

“States have adopted that financial model or structure such that they don’t have to pick winners and losers, such that they can then hire their experts to pick the ultimate investments,” he said.

Sen. Michele Reagan, R-Scottsdale, who chairs the Senate Economic Development and Job Creation committee, said that opposition doomed a similar proposal made years ago. But Reagan was supportive of the idea and noted that economic circumstances are different now.

“The banks aren’t investing in very much right now. I’m not going to sit here and bag on banks, but in a lot of legislators’ offices, ‘bank’ is a four-letter word,” Reagan said after the presentation. “They’re not investing. Individuals are. How do we get them to invest in our state? What kind of incentive do they need? That would be my argument to my colleagues, should I choose to do something like this.”

Kowalski said the Arizona Fund of Funds would also be built to withstand any court challenge from groups like the Goldwater Institute. The tax credits would be modeled on the state’s school tuition organization tax credits, which survived a lawsuit that went to the U.S. Supreme Court. Neilson said the Utah Fund of Funds also survived a legal challenge based on a provision similar to the gift clause in the Arizona Constitution, which prohibits government entities from giving money directly to private sector companies.

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