Certified Capital Companies (CAPCO)

The Midwest Technology Journal published an article discussing the benefits of the Missouri Certified Capital Companies (CAPCO) program:

Given the tremendous importance of small business to the Missouri economy – 95 percent of all companies and 35 percent of all jobs – it is remarkable that so few of the state-sponsored programs designed to stimulate economic growth are directed at assisting smaller firms. In Missouri, for example, only four of the 21 tax incentive programs designed to encourage investment and job growth are directed primarily at small business. This lack of support is even more inexplicable given the dynamic potential of small emerging businesses and the special problems that are unique to these firms – in particular, a lack of specialized managerial expertise and access to external sources of funding.

One program that does address these problems is the Certified Capital Companies (CAPCO) program that has been adopted in nine states, including Missouri. In essence, a CAPCO is merely a special type of venture capital firm. The program, however, has two features that differentiate if from the private sector VC firms. The first is the economic development mission of the CAPCO program. This is, in fact, the sole objective of the program. The other distinguishing feature is that the initial seed money to establish the venture fund is provided by insurance companies.

This approach to economic development has many advantages that are not inherent in the traditional state programs. The most obvious of these is the ability of the program to generate additional investment funds from traditional capital markets. For the two largest Missouri CAPCO’s, Advantage Capital and BOME/Gateway which comprise over 70 percent of the entire program, the ratio of leveraged to direct investment is an astonishing 38 to one.

The other salient feature of the CAPCO program is that it brings the hands-on management expertise that is essential to the development of the small firms. This aspect is unique compared to other state incentive programs that cannot offer the day-to-day management that is required.

While there is often much debate as how to analyze the effectiveness of economic development programs, one generally accepted approach is the use of cost-benefit analysis. The technique consists of determining the total costs and benefits of a particular program and then calculating either the ratio of benefits to cost or merely the net value of the attendant flows-benefits less cost.

The determination of the cost of the CAPCO program is fairly simple. On a cash flow basis, it is merely the annual value of the tax credits claimed by the insurance companies. For the two largest CAPCO’s this amounts to a total of $98.1 million over the 11 to 12 year redemption horizon, or alternativ ely about $9.8 million per year. On a present discounted value basis, assuming an interest rate of 5.0 percent, the value of the credits is only between 65 to 75 percent of the actual value depending upon how soon the insurance companies claim the credits. This yields a maximum cost to the State of between $65.1 million and $73.5 million based on a benchmark date of 1998.

Translating investment expenditures into output, jobs and payrolls necessitates the use of sophisticated economic models and multiplier analysis. While this is often viewed as an arcane or esoteric exercise, it is the most common and accepted analytical technique to evaluate the economic impact of a particular program, from the construction of a sports facility to the closing of a military base.

Using the most conservative assumptions as to the economic impacts, the CAPCO program has been a huge success. Direct Missouri jobs attributable to the program totaled over 8 thousand as of the end of 2002. Secondary or multiplier effects have resulted in an additional 6,900 jobs. The corresponding gains in personal income have equaled nearly $500 million.

Direct Missouri Jobs

Additional state and local tax revenues attributable to the CAPCO program now total over $180 million. Compared to the total cost of the program to date, this implies a current value cost-benefit ratio of 4.7 for total tax revenues and 2.8 for just the state portion.

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