IVCA Profile Q&A: Bob Morgan, Senior Vice President and Director of Private Equity for Northern Trust, on the State of Illinois Technology Development Account

IVCA Profile Q&A: Bob Morgan, Senior Vice President and Director of Private Equity for Northern Trust, on the State of Illinois Technology Development Account

August 18, 2010

CHICAGO - “ In 2003, the State of Illinois established by legislation the Treasurer's Technology Development Account (TDA). This was implemented as a program the following year, using the state investment portfolio to fund Illinois-based venture capital and private equity funds focused on technology development.

Bob Morgan, Senior Vice President and Director of Private Equity for Northern Trust, talked to IVCA about the evolution of this innovative investment strategy for Illinois.

IVCA: You are involved in the State of Illinois Technology Development Account (TDA). What is the background of the account, it's purpose and what is your role?

Bob Morgan: The TDA was created in 2004 through legislation that allocated one percent of the Treasurer's assets account to be invested in venture capital funds in the State of Illinois. The goal of the program is foremost to generate a good return, but also to help fund small private businesses within the state by investing with venture capitalists that bring the real expertise to find, invest and build companies along with the entrepreneurs.

When the Treasurer was charged with the execution of this account, they interviewed several advisors to work with the office. They also established a top notch board of advisors. Northern Trust serves the role of the non-discretionary advisor for the TDA.

IVCA: These types of programs can be found in several surrounding states. Which state model was Illinois hoping to emulate with their TDA and what characteristics were in that model that made it work for Illinois?

Morgan: Almost all of the states surrounding Illinois have similar programs. But they're all a little bit different, and the Illinois program is as well. The difference generally comes in two areas: the investment mandate, and where the funds come from in order to execute the program. In some states, these programs are set up using private capital, generally through large corporations headquartered in the states. Sometimes state pension funds provide the capital. In other states, tax-free bonds were issued that were purchased by private buyers and used to fund accounts.

In Illinois it's a little bit different, because it's actually a State Treasurer's account that is the capital source. It's tax revenue, instead of pension money, which is a little bit different. I think a few reasons that the Illinois plan has worked so well is the fact that you have a large universe of quality venture capital funds within the state, and a good infrastructure for continued development. A lot of the neighboring states just don't have that. The Illinois Venture Capital Association has been key in this area. These two factors greatly increase the likelihood of success for a program like this.

IVCA: The Treasurer's Office, an Advisory Board and a Due Diligence Advisor make up the directors of the affairs and investment decisions of the funds. What role do each of them have in governance?

Morgan: I would say that one of the key success factors with the TDA is the way these three different entities have worked so well together. The State Treasurer's Office oversees the entire program and has ultimate responsibility for the execution. The Treasurer's Office ultimately approves the investments going into the program based on the recommendations of both the Due Diligence Advisor, which is Northern Trust, and the Advisory Board. The Treasurer's Office has a program administrator that works closely with all the constituents.

The Advisory Board has been a fantastic tool, because it is comprised of numerous local venture capitalists, academics, and thought leaders in the venture area. They know the industry, the people and have the networks. They are key in helping us in our due diligence, helping to find new funds and knowing the different players in those funds. That board meets quarterly to review recommendations and discuss the program as presented by Northern Trust in our due diligence advisor role. They approve or decline investments as a recommendation, which is ultimately signed off on by the Illinois Treasurer's Office.

IVCA: While I understand that the primary goal is to earn a great return for the state, it must be helpful for local companies to have local sources of capital. Can you provide an overview of the benefit this fund has brought to Illinois companies?

Morgan: Despite being named the - œTechnology-  Development Account, the definition of technology in the legislation is fairly broad. It allows for the inclusion of biotechnology and information technology. So the program has been successful in funding venture capital funds that in turn have invested in a pretty diversified range of business types - “ everything from life sciences businesses, information technologies, distribution businesses, healthcare and even a few manufacturing businesses. It's a wide range of companies and this diversification has clearly benefitted the program and the state by helping to mitigate some of the downside risks of investing in start-up companies, and by ensuring that a broader group of Illinois-based businesses are supported.

The funds backed by the TDA have invested in 144 companies and 37 of those are directly based in the state of Illinois, which is a fantastic percentage. It truly exceeds the expectations we had when we set out to do this.

IVCA: How does the commitment to TDA in Illinois reflect back to the state's general economy?

Morgan: It reflects extremely positively on the general economy in Illinois. One of the premises that we've always had with the program is that we have to get a good investment return on the investments we're making in order to get the ancillary benefit of helping to build productive private companies. These two are very closely linked. Although it happens often in the venture capital area, we obviously don't want to fund a venture capital fund that in turn invests in a company or idea that is not successful. If we make good investments, the Illinois-based companies that are backed generate revenue, they hire more employees, and they build a nice tax base for the future. The exact opposite is true if poor investments are made. It's all tied together. If you look back on how it reflects on the state's general economy, those 37 funded businesses as a group have generally done well, especially when you take into consideration the weak economy of the last few years. In a difficult economic environment, or any environment for that matter, anything that can help to fund small growing businesses, run and financed by hard working, motivated people, is clearly a good thing - “ and that is what the TDA is accomplishing.

IVCA: Do you have any specific examples?

Morgan: There are numerous good examples to choose from. The one that comes to mind is a company called iCyt, which was backed by Illinois-based venture capital funds: IllinoisVENTURES, Illinois Emerging Technology (IETF) and Open Prairie Ventures. iCyt is a manufacturer, marketer and distributor of state of the art flow cytometry instruments used in agricultural markets and research institutions. The company is located in Champaign and IETF was one of the initial backers, which was joined in a later financing round by Open Prairie as the company grew. It was sold to a large corporate buyer late last year in an outcome that was positive for the company, its employees, and investors.

IVCA: Finally, has the program in your viewpoint met the state's objectives and why?

Morgan: I think it absolutely has met the objectives. The investment return has been positive, and a high percentage of funded companies are located within the state. When you look back at what has happened since 2004 in the public markets and the economy generally, it is very positive that the TDA is generating a positive return for the Treasurer. But if you look beyond the investment returns, to what I call the - œtotal return-  for the State of Illinois, it's even more positive because 37 businesses have hired people, paid taxes, and continue to grow, and the number of companies backed by the venture funds will continue to grow. It is also important to keep in mind that there is a multiplier effect for funding these companies. As these companies grow and hire more people, those people spend more money in their community, pay income taxes, on and on.

To get the latest update on the State of Illinois TDA II Legislation, click here.