The 2% Solution for Maryland: Increasing Pension Fund Investment in Venture Capital

June 1996 / Abell Reports / Community Development

A plan for bringing in unrealized income and for stimulating economic development.

In 1989, The Abell Foundation published a report in support of a Maryland General Assembly resolution which recommended that the Maryland State Retirement and Pension System consider investing a portion of assets in venture capital as a way to boost returns and reduce risk for the pension fund and to stimulate the development of Maryland companies. The report argued that Maryland should follow the example of several states across the country and invest a small percentage (1-5) of its pension funds in venture capital, with preference given to venture capital partnerships that commit to make their best efforts to invest in Maryland companies. The report concluded, “Investing in venture capital can be justified on the merits of superior investment return, reduction of risk through diversification, and support and stimulus for the state’s economic well being.”

The resolution passed the Maryland General Assembly and the Maryland Venture Capital Trust was established with an initial investment of $2 million from the State of Maryland general fund. Within the following two years, the Trust raised another $17.1 million from the Maryland State Retirement and Pension System ($15 million) and the Employees’ Retirement System of the City of Baltimore and the Fire and Police Employees’ Retirement System of the City of Baltimore ($2.1 million). As of June 1994, $19.1 million had been committed to eight venture capital partnerships, with each partnership committing to make “best efforts” to invest in Maryland companies.

Although it is still too early to assess the financial performance of the Trust at this stage (since most venture capital investments take years to mature), data on the progress of the partnerships indicates that the state’s economic development goals have been achieved. Following the Maryland Venture Capital Trust’s initial investments, the eight venture partnerships have invested $19.3 million in 20 Maryland companies. This follows investments in Maryland companies of $7.1 million made by these partnerships prior to the Trust’s investments, for a total investment to date of $26.4 million in 23 Maryland companies which employ 1,053.  Because the eight funds still have $50 million available to invest, Maryland companies might benefit from further investment.

The Abell Foundation undertook this study to evaluate, on a national basis, the market of public investments in venture capital. In particular, the following questions were posed:

  • How does the Maryland pension fund’s participation in venture capital investments compare to other public pension funds’ participation in venture capital investing?
  • Are there sound economic reasons why Maryland state and local pension funds, as well as the private pension funds in the region, should invest more funds in venture capital? If so, what is the right amount of venture capital to be invested?
  • How will an increase in venture capital investments have an impact on the state’s economy?

To answer these questions, a survey of public pension funds across the country was undertaken to obtain information on current strategies and trends for future venture capital investing. To assemble and analyze this information on public investments in venture capital and to address the economic issues raised by this study, numerous interviews and discussions were conducted with institutional investment managers and advisors, venture capitalists, industry analysts and staff members of public and private pension funds.