The New Mexico State Investment Council has voted to tighten transparency requirements in connection with its in-state private equity investment manager Sun Mountain Capital last week.
The push for greater transparency from Sun Mountain stems from a co-investment in glass technology company Growstone, a spin-out of a troubled New Mexico SIC investment Earthstone. Members of the SIC expressed concern that the $2.5 million investment in Growstone might have the appearance of having been influenced by political connections between former Governor Bill Richardson and Earthstone company founders.
Furthermore, one council member pointed “the SIC has a lot invested in Earthstone intellectual property, and $500,000 of that was given away to Growstone”, according to documents. Although that figure could not be confirmed by Growstone CEO Mike Langone at press time, he did say an Earthstone investment in Growstone following its spin-out included intellectual property.
The SIC made its first investment in Earthstone in 2004, before the state had established its co-investment programme, according to documents. When Growstone spun out in 2008, Sun Mountain invested in that company on its own as well, which one council member said constituted conflict of interest.
Though the SIC determined that no ethical violations took place, steps were taken to ensure that improved communication between Sun Mountain and the council would prevent similar situations from occurring in the future.
Under the new transparency guidelines, which the council approved unanimously, Sun Mountain must consent to third-party oversight of the co-investment fund; regular updates on capital call reports; continued adherance to ethical standards; provide exit strategies for portfolio companies by 2013 as well as a twice-annual report on out-of-pocket expenses, operating expenses and reimbursement or compensation.
SIC documents indicate that Sun Mountain agreed to these terms on 23 April. The Santa Fe, New Mexico-based firm is a private equity advisor that specialises in regional investment programmes. Sun Mountain also provides debt financing through a credit opportunity fund, with a focus on deals in the Southwestern US.
New Mexico was at the center of a pay-to-play scandal that affected several private equity players over the last several years. In 2011, the $15 billion endowment filed state and federal lawsuits against placement agent Saul Meyer and his firm Aldus Equity Partners, former state investment officer Gary Bland and former New York state senator Daniel Hevesi. Charges included breach of fiduciary duty, aiding and abetting breach of fiduciary duty, breach of contract and unjust enrichment.
Since then, New Mexico state officials have been sensitive to the possibility of another scandal, which provided motivation for Sun Mountain’s transparency requirements, according to documents detailing the council’s actions.
As of January, New Mexico had a 9.8 percent allocation to private equity on a 9 percent to 12 percent allocation target, according to Private Equity Connect. The SIC’s national private equity programme has generated an 11.6 percent internal rate of return since inception as of 31 May, according to the SIC’s website.