Investment Policy Statement
New Mexico Small Business Investment Corporation
Sept. 29, 2003

Revised and Adopted by Board June 29, 2004

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INTRODUCTION
The powers of the Small Business Investment Corporation are defined in Section 58-29-4 NMSA 1978 and were originally adopted in the 44th Legislature, 2nd Session, 2000.  Amendments to this Section were made in the 45th Legislature, 1st Session, 2001 and in the 47th Legislature, 1st Session, 2003.  The following investment policy is concerned with the investment of the initial funding amount received from the Severance Tax Permanent Fund as well as the investment strategy for longer-term investments in New Mexico businesses.
The purpose of this Investment Policy Statement (IPS) is to establish a clear understanding of the investment policy, guidelines and constraints for investing the short- term cash and long-term investments held by the New Mexico Small Business Investment Corporation.

Key Contacts for Plan
Chuck Wellborn, Chairman
New Mexico Small Business Investment Corporation

OVERVIEW COMMENTARY
Funds will initially be invested in short-term high quality fixed income securities or pooled equivalents with an average duration of one year. The Corporation, being non-profit, pays no taxes and thus has no need for tax-preferenced securities.

IPS Information
New Mexico Small Business Investment Corporation

Account Information
Investment Account     
Custodian     
Account Number     
Authorized Decision Maker     
Account Value    

SHORT TERM INVESTMENT OBJECTIVES AND GUIDELINES
The New Mexico Small Business Investment Corporation shall invest its short-term cash assets to generate an income stream sufficient to fund the operating budget of the Corporation while protecting the principal (market) value of these assets. The following are considered appropriate short-term investments:
1) Cash Equivalent Pooled Vehicles
   a) Money Market Funds or Stable Value Funds that have duration of one year or less and invest in the securities and have the characteristics described in section 2) to section 6) below.
   b) Management fees charged for these vehicles will be negotiated by the Corporation and will not exceed the average fees for such vehicles as reported by Morningstar Investor Services.
2) Individual Securities
   a) U.S. Treasury Securities and notes or debentures issued by U.S. Government sponsored agencies.
   b) A1 or P1 rated Commercial Paper.
   c) Repurchase Agreements (REPOS). No such Agreement shall be invested in unless the Agreement is fully secured by U.S. Treasury Securities, notes and debentures issued by U.S. Government sponsored agencies, A1 or P1 Commercial Paper, Corporate Obligations rated AA or better or Asset Backed Securities rated AAA. The Market Value of this collateral must equal at least 102% of the invested amount.
   d) Bankers Acceptances of banks with minimum assets of two billion U.S. dollars which bank’s deposits are rated A (S&P) and A2 (Moody’s) or higher if less than two years maturity or AA (S&P) and Aa2 (Moody’s) if greater than two years maturity.
   e) Time deposits/CDs, in banks incorporated in the United States or time deposits that are fully guaranteed by banks incorporated in the United States, which are rated A1 or P1 by a nationally recognized rating agency.
   f) Corporate Obligations rated A (S&P) and A2 (Moody’s) or higher if less than two years maturity or AA (S&P) and Aa2 (Moody’s) if greater than two years maturity. The aggregate market value of all corporate obligations shall not exceed 35% of the aggregate market value of all short-term investments.
   g) Asset Backed Securities (ABS) rated AAA or equivalent by at least two nationally recognized rating agencies. These include but are not limited to the following: Automobile Loan-Backed Securities, Credit Card-Backed Securities, Home Equity Loan-Backed Securities, Manufactured Housing Loan-Backed Securities, Student Loan-Backed Securities and Recreational Vehicle Loan-Backed Securities. The aggregate market value of all Asset Backed Securities shall not exceed 50% of the aggregate market value of all short-term investments.
3) No single investment shall have a final maturity greater than three years.
4) No investment in the securities of any one issuer shall constitute more than 5% of the aggregate market total of all short-term investments.
5) All short-term instruments with maturities of less than one year may be either fixed rate or floating rate. Short-term instruments with maturities over one year may be floating rate only.
6) The aggregate market value of all Corporate Obligations and Asset Backed Securities shall not exceed 70% of the aggregate market value of all short-term investments. Corporation Obligations in this context do not include commercial paper.

TIME HORIZON
For the purposes of planning, the time horizon for the short-term portfolio is not to be in excess of one (1) year.

RISK TOLERANCE
The primary objective of the short-term investment portfolio is the preservation of principal (market) value. Given this, little to no risk is desired. This includes both specific (issuer) risk and market (interest rate) risk. The above investment guidelines and constraints squarely address these risks and should minimize the effect of these risks on the market value of the short-term portfolio. This long-term stable market value will allow the Corporation to carry out its stated mission.

SELECTION/RETENTION CRITERIA FOR INVESTMENTS
Cash Equivalent Vehicles
All cash equivalent investments shall be pooled investment vehicles, such as money market funds, where the fund’s share price is intended to remain constant and the fund’s yield is comparable with the current risk-free rate of return.
The following criteria for selecting and retaining any pooled investment vehicles serving as a Cash Equivalent investment:
1. The fund will have an investment track record of no less than three years.
2. The funds’ average annualized yield, net of fund level expenses, over a three-year period will be no less than 0.5% below that of the average of all other funds sharing a similar investment objective for an equivalent period.
The New Mexico Small Business Investment Corporation will review the performance of each Cash Equivalent vehicle on an annual basis. The investment vehicle’s total returns will be compared with the average returns for all other cash equivalent funds with a similar investment objective for the previous one-, three- and five-year periods.

LONG-TERM INVESTMENT POLICIES AND PROCEDURE
The New Mexico Small Business Investment Corporation may invest equity or debt in New Mexico small businesses in conjunction with cooperative agreements with parties with demonstrated capabilities in the provision of financial services and capital to new and emerging businesses.  These investments may be made directly in New Mexico businesses or may be made indirectly, through arrangements with qualified organizations.  Given the statutory direction to create new job opportunities to support new or expanding businesses, the impact of the investment decisions in this regard shall be one of the factors to be considered by the New Mexico Small Business Investment Corporation in determining the prudency of any investment.

Composite Investment Benchmarks
1. The yield on the investment.
2. The safety of the investment.
3. The diversification of the overall investment portfolio.
4. The creation of job opportunities to support new or expanding businesses in New Mexico.

Indirect Investments
The New Mexico Small Business Investment Corporation may indirectly invest in New Mexico businesses by providing debt or equity capital to organizations having the attributes described below, and such investments may be through any one or more of the vehicles or formats also described below:
1. A historical track record of successful investing debt or equity in small businesses.
2. Headquarters or branch offices within the State of New Mexico staffed by at least one full-time portfolio manager.
3. Staffing of financial professionals who have the demonstrated capabilities to successfully source, underwrite, service and obtain appropriate returns on investments made to small businesses and the necessary skills to develop and manage a portfolio.
4. Either have itself the ability to provide training, mentoring, or other business assistance or support services to portfolio companies or have an affiliation or relationship with third party providers of such services.
5. Well defined and realistic strategies to implement their business plan and the ability to realize successful exits.
6. Committed to investing the NMSBIC’s capital in accordance with legislative mandates.
7. An investor communications program for quarterly reporting and provision for annual audited financial statements.
8. Meets Investment Benchmarks.

Approved Investment Vehicles or Structures
1. Direct loans or loan participation pools or agreements.
2. Managed loan or equity portfolios.
3. Co-investment accounts.
4. Limited Partnerships or limited liability company interests.
5. Joint Ventures.

Direct Investments
The New Mexico Small Business Investment Corporation may        directly invest equity or debt in New Mexico small businesses.  In every instance, the investment should be identified by a financial professional, like a bank, alternative lender or equity fund, who has the ability and has provided extensive due diligence on the proposed investment.  In every instance, the financial professional should have a financial stake in the proposed investment, either as a co-investor or as a lender.  Direct investments should have the following characteristics and attributes:
1. Represents an extraordinary opportunity to create jobs or provide other benefits to community where located.
2. Company has qualified management, Board of Directors, and/or provisions for monitoring/oversight by qualified parties.
3. Meets investment benchmarks.
4. Not capable of obtaining capital or suitable terms from other sources.
5. Has been reviewed and evaluated by credible financial professionals.

Approved Investment Vehicles or Structures
1. Common stock, preferred stock or equity linked security.
2. Limited Partnership or limited liability company interest.
3. Senior or subordinate debt.
 
INVESTMENT MONITORING AND CONTROL PROCEDURES
Reports
1. The New Mexico Small Business Investment Corporation will provide its board with a report each month that lists all short-term cash investments and long-term investments held by the New Mexico Small Business Investment Corporation, including values for each investment and all transactions affecting assets within the portfolio, including additions and withdrawals.
2. The New Mexico Small Business Investment Corporation shall receive no less frequently than on a quarterly basis and within 30 days within the end of each such quarter the following management reports:
   a) Portfolio performance results over the last quarter, year, 3 years and 5 years;
   b) Performance results of comparative benchmarks for the same periods, where possible;
   c) Performance shall be reported on a basis that is in compliance with AIMR standards;
   d) End of quarter status regarding asset allocation—current allocation versus the policy established under this Investment Policy Statement; and
   e) Any recommendations for changes of the above.

Disclosure
The NMSBIC will publicly disclose information in accordance with the New Mexico Inspection of Public Records Act, NMSA 1978, Sections 14-2-1 to 12.  The NMSBIC may disclose the following information, including, but not limited to:
• Name of fund or cooperative relationship
• Vintage year
• Commitment amount
• Total commitment drawn down since inception
• Total cash and stock distribution since inception
• Internal Rate of Return since inception

The NMSBIC reserves the right to deny a request, in part or in whole, pursuant to NMSA 1978 Section 14-2-1(A)(8), which may permit non-disclosure for documents protected under the law, such as protected trade secrets and a party’s proprietary information