Board Report 2005

Ladies and Gentlemen

At the 2004 Legislative session, the New Mexico Small Business Investment Corporation (NMSBIC) received an increase to one-half of one percent of the Severance Tax Permanent Fund. The additional investment of $8.5MM was made in late July, increasing the amount of capital under the SBIC?s management to $18,250,000. In addition, legislative amendments broadened the NMSBIC?s ability to invest debt or equity in New Mexico small businesses by including sole proprietorships as eligible participants.

Over the past several months the NMSBIC has entered into multiple relationships with both debt and equity providers. The current Board, appointed in 2003 determined it would not make loans or investments directly, but instead make investments through intermediary organizations with the requisite skills to invest in small businesses.

Lending Partnerships
ACCION New Mexico is an active, statewide micro-lender. In early 2004, ACCION and the NMSBIC created a $3,333,000 loan pool that targets New Mexico small businesses with loans as small as $200 to entrepreneurs and as large as $50,000. The NMSBIC contributed 75% of the loan capital in the pool. By the end of 2004, the entire $3.3MM had been lent to approximately 400 New Mexico businesses. A target has been set that at least half the loans will be made outside the Albuquerque area. In November 2004, the loan pool was doubled to $6,666,000, which is currently being deployed by ACCION.

WESST Corp. and the NMSBIC recently agreed to create a new $500,000 Loan Fund that primarily targets the artisan community. WESST Corp., founded in 1989, is best known for providing technical training assistance and business education to small businesses, primarily minorities, throughout the State. However, since 1990, WESST Corp has also managed a small loan fund, which has helped finance over 270 New Mexico businesses. This has helped lead to the creation of 2,600 jobs in New Mexico. WESST Corp. makes small loans that range from $200 to $35,000 to business owners who attend WESST Corp?s training sessions, complete business plans, and who make presentations to a credit committee comprised of staff and volunteer business leaders.

ACCION, WESST Corp. and the New Mexico Community Development Loan Fund are often referred to as ?alternative lenders?. All three lenders have small business clients, most of which do not qualify or have been declined for loans from traditional lending sources. Many of their clients are women or minorities. Some have a prior history of credit related problems. Some are too small or to new to qualify for standard bank loans. Yet, a very high percentage have proven to be faithful in the payment of interest and principal on their loans and have proven to be of excellent credit quality. Loan losses at all three institutions are less than 3%.

In November 2004, the New Mexico Community Development Loan Fund partnered with the NMSBIC in the creation of a new $2,000,000 loan fund. This new fund will be similar to their current lending activity, which is focused on small businesses and non-profit corporations. The NMCDLF is the largest alternative lender in the State, with a portfolio approaching $8,000,000. The NMCDLF makes larger loans than either ACCION or WESST Corp, typically in the range of $25,000 to $500,000.

All three lending relationships are structured similarly, with the NMSBIC retaining 75% of the loan risk. All three funds are managed on a fully discretionary basis by the financial partner. The combined loan funds total almost $9,100,000 of available capital, all of which can only be lent to New Mexico businesses. Contact information for all three organizations is available on the final page.

Equity Partnerships
The NMSBIC has also been an active catalyst in the initial funding of three new venture capital funds, Flywheel LP 1, Verge Fund 1, and New Mexico Growth Fund. All three funds target New Mexico businesses; the first two focusing on high technology companies and New Mexico Growth Fund concentrating on more traditional low-tech businesses located outside the Albuquerque area. Each of these funds received funding from the NMSBIC because they provide very early stage ?seed capital? not available from other venture funds in New Mexico. Almost $3,500,000 has been committed to the three funds by the NMSBIC. This early funding also enabled Flywheel and Verge to secure additional limited partnership investments.

Flywheel LP 1 will be in excess of $20MM in size and will focus on a four state area. With offices in Las Cruces and from its headquarters in Santa Fe, Flywheel will look to make seed and early stage equity investments in companies, typically in the range of $500,000 to $1,000,000, that focus on Semiconductors, Software, Materials, and Telecommunications. The NMSBIC provided the first institutional commitment in Flywheel LP 1 of approximately $1 million.

Verge Fund 1 is currently about $10MM is size, but hopes to grow to $15MM. It also has an office in Las Cruces, with its headquarters in Albuquerque. Its investment focus is also high technology, which includes Life Sciences, Optics, Semiconductors, Software, Telecommunications, Manufacturing Technologies. Its investments will range from $250,000 to $750,000 in seed and early stage companies. The NMSBIC?s commitment to Verge is also $1 million.

New Mexico Growth Fund 1 is managed by Mesa Ventures from its Santa Fe office. The primary focus of the fund is more traditional companies, like manufacturing, service, retail sales and distribution companies. There is also a focus on non-Rio Grande located companies as part of an effort to provide equity capital to rural area companies. The NMSBIC is the sole Limited Partner and has committed $1,500,000 of capital to the Fund. New Mexico Growth Fund will make $200,000 to $450,000 investments in early stage companies that are looking for working capital and growth capital to expand.

Community Development Venture Capital
The NMSBIC is also seeking the creation of a type of venture capital fund that invests not just for investment return but also to provide ?social return? in the form of jobs and other community development outcomes. Called New Mexico Community Capital, the NMSBIC has committed $5,000,000 as lead investor, subject to attracting additional capital from Foundations and Financial Institutions. Entities and documents are being created with the support of McCune Charitable Foundation, which has agreed to financially support and incubate the parent organization. Wells Fargo is the lead Bank investor.

The primary focus of the equity fund will be on underserved industries, like manufacturing, distribution, and service businesses and on underserved communities,

The NMSBIC
The New Mexico Small Business Investment Corporation was created by the Legislature in 2000 to support small businesses throughout the State by providing equity or debt capital to finance expansion, to help create and retain jobs, and to enhance the economic livelihood of New Mexico communities by investing in local companies. Because of glitches in the original legislation, the NMSBIC did not begin operations until 2003. Six of the eight Board members are appointed by the Governor. They are Chuck Wellborn, Albuquerque, Chair; Sam Cobb, Hobbs, Vice-Chair; Mary A. Garza, Las Cruces; Nestor Romero, Albuquerque; and Vangie Gabaldon, Albuquerque. State Treasurer Robert Vigil and Bob Jacksha of the State Investment Office are also board members. The financial advisor to the NMSBIC is former investment banker Paul Goblet.

For additional information, contact Mr. Goblet at 505-670-1329.