$15 Million Planned Buyout At Philips Plant in Jeopardy
Gov. Bill Richardson’s plan to boost economic development by investing directly in private companies has run into big trouble.
Two deals approved by the State Investment Council just last week are off, and the governor has ordered a “top-to-bottom review of existing practices, procedures and current consultant performance as it relates to any investments considered.”
The state has reversed its decision to put $15 million into the venture capital firm Anila Fund III.
The move jeopardizes a management buyout of the Philips Semiconductor plant in Albuquerque, in which the state planned to invest $15 million and Anila at least $10 million.
A $4 million state investment in a Minneapolis-based tech firm, another venture with Anila, also is off.
On Tuesday, the governor’s spokesman, Billy Sparks, said the governor has instructed his top economic officials to “institute additional safeguards for any future state investments and to strengthen existing guidelines to require more due diligence regarding all future deals.”
State officials said they were severing all ties with Anila and with an investment consultant that had vetted the state’s plan to invest in the venture capital fund.
Sparks said the decision to not invest in Anila came Friday because of “serious concerns” involving the Palo Alto, Calif., firm and its founder, Moses Joseph. The concerns arose after the state learned of litigation involving the fund’s finances.
Sparks said no state money had changed hands.
The state has also decided to sever ties to its consultant, Pacific Corporate Group, for not uncovering the litigation.
“Nothing raised any red flags when the meeting was held last month recommending that the council approve the deal,” Sparks said. “Pacific was asked to provide the investment council with a report on each of these entities. That report should have contained these red flags and it didn’t.”
Anila Fund founder Joseph said he “respectfully disagrees” with the state’s conclusion.
“From our understanding and legal advice, we went above and beyond the call of duty to make full disclosure to the Governor’s Office and the State Investment Council,” he said in a written statement.
A spokeswoman for Pacific Corporate Group who refused to be identified did not address the charges against her company but said, “We are not aware that New Mexico has publicly announced their final investment decision regarding the Anila Fund.”
In a statement released through the Governor’s Office, State Investment Officer Gary Bland said he was not satisfied with the Anila Fund or Pacific.
He is in the process of “exercising state’s rights” to discontinue the state’s association with the firms, he said.
Bland sent letters to that effect to the two firms on Friday.
“Prior to the actual signing of any agreement (with Anila), continued due diligence is required,” Bland said in the statement. “I exercised my judgment in severing ties with Anila prior to the exchange of any funds or the execution of contracts.”
The Legislature passed a new law this year enabling the council to invest directly in private companies, as well as in venture capital funds.
Last week the State Investment Council approved its first direct investment in private companies:
* A management buyout of the Philips Semiconductor plant by a group called Mesa Semiconductor was scheduled to get $15 million from the state and at least $10 million from Anila.
* PowerWAN Inc., a spin-off of ADC Telecommunications in Minneapolis, was approved for $4 million.
* Eclipse Aviation is still expected to receive the $10 million it was approved for.
Both the Mesa and PowerWAN deals were to be “co-investments” of Anila and the state.
The state is seeking another investor to save the Mesa deal, but will not invest in PowerWAN, Sparks said. State law does not permit the council from being the lead or sole investor in a company.
The Anila Fund III is the latest venture of entrepreneurs Joseph, John Wheadon and Gary Schlageter. Since 1996, the three have committed $55.2 million to 46 companies via several different ventures.
However, one of their other funds, Anila Fund I, hasn’t fared well. The fund’s total value at the end of 2002 was $7.9 million. Losses totaled $5.4 million, according to the firm’s prospectus.
Of eight companies listed in the prospectus as receiving investment money, four have shut down, two were restructured because of poor demand for their original technologies and one, Express Action, lost all of the $165,000 the fund invested in it. It was unclear whether that company was still open.
The eighth company is PowerWAN Inc.
