CAPCO Programs

The South Florida Business Journal reports that there is a great need for venture capital in Florida and tech companies are hoping to expand the CAPCO program to meet this need:

Venture capital lobbyists are preparing a new push to expand Florida’s Certified Capital Company (CAPCO)program, and CyLex of Boca Raton is part of the case they are building for the Florida Legislature.

CyLex is moving toward profitability as an applications service provider for its clients’ Internet operations. The company credits its growth partly to venture capital it has received from a CAPCO fund.

In a pair of investments in 1999 and last year, Stonehenge Capital, one of the state’s three certified CAPCO funds, invested $1.5 million in CyLex.

Stonehenge also introduced CyLex to several other venture funds, which have provided it with $18 million in venture capital.

“Because of the CAPCO situation, Stonehenge had the ability to help us get into the market, and I think there is a tremendous need for that type of capital by other companies in Florida,” said Bill Newell, CyLex president and CEO.

Newell, who has been an executive with several tech-oriented companies in California’s Silicon Valley, is among Florida business people who hope that the state government next year will expand the CAPCO program that it created in 1998.

CyLex is one of nine South Florida companies that received a total of $22.5 million in venture capital under the CAPCO program. Statewide, Florida’s three CAPCO funds have invested $51.8 million in 28 companies.

The CAPCOs receive their money from insurance companies, which obtain Florida tax credits equal to the amount of dollars that CAPCO funds invest for them. Those credits, on taxes such as the state corporate tax, are pro-rated over 10 years after CAPCOs invest the insurers’ funds.

In 1998, Florida legislators passed a bill that set up the CAPCO program, which authorizes CAPCOs to invest up to $150 million in Florida-based companies that meet a set of “early-stage technology” criteria.

The 1998 law also set up a system under which venture funds and other financial firms can gain certification as CAPCOs.

Stonehenge, Advantage Capital Partners and Wilshire Partners met the new law’s standards and gained certification as CAPCOs. All three companies have similar tax credit-based venture funds in several other states.

This year, the CAPCO program’s supporters in the House and Senate sponsored almost identical bills that would have permitted insurance companies to invest an additional $250 million in a second CAPCO program, which would have extended through 2006.

The bills included a system for authorizing additional venture funds to become eligible for the CAPCO program.

Both bills were approved unanimously by the first committees that discussed them. But chances of the bills passing either house or the full Legislature ended when Senate President John McKay, citing a pending tax revenue shortfall, said he would oppose any programs that included new tax breaks.

Peter Dunbar, a partner in the Pennington law firm in Tallahassee that represents Advantage Capital, said lobbyists for the CAPCO funds and several legislators who support the program have held several meetings this summer to determine whether and how to introduce CAPCO-expansion bills in 2002.

A key factor will be whether preliminary projections by economists for Gov. Jeb Bush and economists for the House and Senate indicate a budget surplus for the state’s 2002-2003 fiscal year, which begins July 1, Dunbar said.

There was little apparent opposition to the CAPCO program this year, said Tate Garrett, a vice president for Advantage Capital’s Florida fund.

“Economic times were tough this year, so we will try again in 2002 [to expand the program],” Garrett said.

Advantage Capital has invested $36 million in 14 Florida companies, including $11.2 million in three South Florida companies.

Advantage has raised $82 million from several dozen insurance companies. That list of investors includes Met Life, American General, Fireman’s Fund and John Hancock.

Advantage’s agreement with those insurers requires it to keep half of their CAPCO dollars in U.S. Treasury bonds or in AAA corporate bonds to minimize the potential risk of venture capital investments.

Advantage has $5 million on hand for investment in Florida. That’s a main reason the company supports an expansion of the CAPCO program.

The three South Florida companies that have received venture funding from Advantage are Automated Fuel Technology of Fort Lauderdale, AudienceBank of Fort Lauderdale and EmailChannel of Boca Raton.

Automated Fuel Technology has developed a payment system that allows owners of fuel delivery trucks to use specialized credit cards to pay for fuel they pump at designated service stations.

Garrett said Automated Fuel’s executives developed a similar system for a company in Louisiana, which received funds from Advantage’s CAPCO-like fund in that state.

EmailChannel is an online search engine where consumers can access e-mail promotions and offers.

AudienceBank operates an online advertising and shopping site, audiencebank.com, that Garrett anticipates will “be among the companies that are still standing” after the Internet advertising market emerges from a shake-out that began last year.

Stonehenge Capital’s Florida CAPCO fund has raised $31.5 million. Stonehenge has invested $9 million in eight Florida companies, including CyLex of Boca Raton and Electronic Data Research of West Palm Beach.

Steve Lux, a Stonehenge managing director, said Stonehenge’s criteria include “evidence that you will be able to develop your product and have a market for it,” and a management team with a track record in a similar business.

Newell said CyLex is growing its revenues in a tough ASP environment because “we are concentrating solely on content management, while many ASPs also are serving as hosts.”

CyLex’s biggest customer is the Florida Department of Motor Vehicles, which keeps its records for auto titles and licenses on CyLex’s systems.

CyLex had revenues of almost $800,000 last year and anticipates revenues of $2 million this year.

Newell said technology-oriented companies in CyLex’s size-range in California, Texas and other states with numerous venture funds have easier access to venture capital than Florida companies.

Basically, he said, funds in other states don’t need to travel to Florida to find companies that need $1 million or $2 million in funding.

“If we had more funds like Stonehenge operating in Florida, it would help make more capital available,” he said.

Advantage’s Garrett and Stonehenge’s Lux each said they would like to see other venture capital firms gain CAPCO status in Florida, because the demand for venture capital and other private equity far exceeds the potential supply of existing CAPCOs.

Stenton Leigh Group of Boca Raton would like to become part of the CAPCO program, CEO Milton Barbarosh said. His company arranges mergers, acquisitions and venture capital investments.

In 1998, Stenton Leigh headed an investment group that raised the required $15 million from insurance companies. That group was one of 10 that raised the required funding but did not meet some of the other requirements for certification as a Florida CAPCO.

If the CAPCO program’s supporters seek an expansion next year, they will stress research that indicates the program’s potential as a job creator. The Washington Economics Group, a Coral Gables-based research firm, this year estimated that if CAPCOs invest their current maximum of $150 million, they will create 9,800 new full-time jobs by 2005.

J. Antonio Villamil, Washington Economic Group chairman, said he feels there is a strong chance legislators will focus on those job figures and expand CAPCO in 2002, provided that Florida is not facing a tax shortfall.

“This is a program for market-driven investments, and 2001 was not the year for it because of the budget,” Villamil said. “In other years, there would be support for the view that this program will help businesses grow and thus help produce an increase in longer-term tax revenues.”

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