State Kicks off CAPCO to Attract Venture Capital

Birmingham Business Journal announces the start of Alabama’s CAPCO program and Enhanced Capital Partners’ interest in opening an office in Birmingham:

A new state program that seeks to generate more dollars for startup businesses by giving tax credits to insurance companies that invest in venture capital firms has begun.

Alabama’s CapCo (certified capital companies) program, approved during the recent legislative session and signed into law April 18, was to have started July 1. But the state agency charged with writing the rules that govern the program delayed implementation to give more time for public input.

The Alabama Development Office held the last of a series of public hearings on Oct. 8 and this week opened the certification process for venture capital firms that want to participate.

At least one firm already is interested. New Orleans-based Enhanced Capital Partners says it is considering opening an office in Birmingham. General counsel Michael Korengold says the firm, which also has locations in New York and Denver, typically opens offices in states where it invests.

“We have already spent a fair amount of time in Birmingham,” he says. “We have interviewed and talked with qualified folks, and we’ve looked around for office space.”

Korengold predicts a dozen venture capital firms might eventually participate in Alabama’s CapCo program, based on what he’s heard at the ADO hearings and on the street. He and other supporters say the program will provide much-needed venture capital in the state.

“There’s a huge demand for venture money that is not being met right now,” says Tim Taylor, director of investments for Harbert Management Corp., a Birmingham investment firm whose nearly $1 billion in assets under management includes venture capital funds.

How it works
Alabama’s CapCo program works this way:

In lieu of paying premium taxes to the state, insurance companies can invest money in certified capital companies. The CapCos need state approval before they can receive investment dollars from insurance companies and, in turn, invest that money in qualified start up companies.

In all, the state will grant $100 million in insurance premium tax credits over 10 years.

Insurance companies will receive tax credits equal to what they invest in CapCos between now and January and may take up to 12.5 percent of the credit each year, beginning in 2005. No one insurance company can receive more than $15 million in tax credits.

CapCos must file premium tax credit claims with the ADO by Jan. 15, 2003. The ADO will notify CapCos of the amount of their allocation by Jan. 29, 2003.

There are no restrictions on what kinds of start up companies can be funded under the CapCo program. Money can go to firms involved in technology, manufacturing, processing, assembly, research and development and those that provide services.

The start ups must be headquartered in Alabama or commit to relocate their headquarters here, have no more than 100 employees and have at least 80 percent of their employees or payroll in Alabama.

CapCos must invest 35 percent of their “certified capital” within three years of the date allocated, and at least 50 percent within five years.

In-state investors
While the program promises to increase the amount of venture capital funds in Alabama, equally important is that more of these dollars likely will originate within the state, says Taylor, who also is chairman of the Alabama Information Technology Association. That’s significant, he says, because Alabama venture capital firms know the market here and are close enough to share business expertise with the budding companies.

Taylor says 60 percent of venture capital currently invested in Alabama companies comes from outside the state.

Korengold adds that more venture capital raised within Alabama could attract even more venture capital dollars from outside the state. He says venture capitalists in other states will be more inclined to invest in Alabama start ups if they know their counterparts in Alabama also are investing and keeping tabs on how the start ups are doing.

“Venture capitalists are not always willing to fly across the country to invest in a company, but they will if they know there are people on the ground watching things,” Korengold says. “So you have this leverage. There’s about $6 to $8 leverage capital for every $1 of CapCo capital.”

But there are concerns. The CapCo program threatens to pull money from the state’s already strapped general fund. The bulk of insurance premium taxes goes directly into the general fund. In the fiscal year ending Sept. 30, 2001, the taxes brought in $164 million. Under the CapCo program, the general fund could potentially lose $12.5 million a year. That amounts to roughly 1 percent of the nearly $1.2 billion general fund, legislative fiscal analysts say.


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