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United States Small Business Administration 
Office of Advocacy 
RS 153_______________________________________________________________________________________________







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Purpose

In 1992 U.S. public pension fund investments totaled $891 billion
across 1,142 funds; by 1993 this number had risen to $1.0 trillion.
In 1992 public pension funds included an estimated $5.4 billion
in small­business­invested assets, representing 0.6
percent of all public pension fund investments. Public pension
funds, a major source of capital for the economy, represent a
potential source of financing for small businesses - which are
always searching for new financing vehicles. This study estimates
the overall level of public pension fund financing of small businesses
in 1992 by state.

More and more public plans are using this capital pool for economically
targeted investments (ETIs). ETIs are defined as investment programs
designed to produce a competitive rate of return as well as create
collateral economic benefits for a targeted geographic area, group
of people or sector of the economy. One of the goals of these
programs is to direct capital to small business growth and development.

This study identified the types and dollar amounts of investment
being made in small businesses through ETI programs from public
pension funds. The study also examined public pension fund monies
targeted toward venture capital funds, and examined selected individual
ETIs in several states to determine how they invest in small business
financing.

The study shows the public pension plan assets of all 50 states
and the District of Columbia. Estimates of small business dollar
investments, the share of those investments relative to the total
plan size, and the number of pension plans per state are also
shown.

There are useful insights to be gained based on the study results.
First, significant increases in the amounts allocated to small
firms may be affected by modest changes in public pension fund
investment policies. Second, large pension funds are in a better
position to make investments in small businesses and economically
targeted investments. Third, the major obstacle to further expansion
of programs such as ETIs is the perceived risk of such investments.
Fourth, because several successful ETIs are in states with no
legislative mandate, state policy should probably not be focused
on mandates.

Scope and Methodology

The core set of estimates regarding small business investments
is for 1992. Some supplemental data for selected states have also
been obtained for 1994 in the context of examining future trends
in ETI programs. The data sources include the results of surveys
on ETIs, recurring publications containing up­to­date
information on public pension funds, annual pension fund reports,
and phone interviews with individual fund managers.

The information on ETIs is derived from data collected by the
Institute for Fiduciary Education's Survey of Economically Targeted
Investments, which was mailed to 139 of the largest public pension
funds. From this pool, 119 responses were obtained. While these
119 funds represent only 10 percent of the 1,142 U.S. public pension
funds, they accounted for more than 76 percent of all public pension
fund dollars in 1992.

For each ETI, questions were aimed at the following issues: the
target of the investment and the reason it was selected; the number
of dollars reserved for the ETI and the number of dollars invested;
the types of individuals responsible for promoting and developing
the ETI; the degree of difficulty regarding a variety of issues
related to developing the program (e.g., return/risk requirements,
liquidity requirements, expense of operation, board concerns,
etc.); and other characteristics of the ETI.

The study also examined public pension fund dollars invested in
venture capital funds. For the purposes of this study, all net
venture capital dollars are assumed to be small­business­related
and were therefore added to the estimates obtained from ETI sources
for each state.

Four states were highlighted to give case studies of the types
of programs underlying each source of capital. Public pension
funds in Wisconsin, Pennsylvania, New York and Colorado were examined
to provide some idea of the types of programs underlying each
source of capital. Finally, the study examined any public pension
fund monies specifically targeted to women­ and minority­owned
small businesses.

Highlights

- Most pension funds with ETIs were satisfied with their financial
performance.
- In 1992, 29 states had public pension funds that made investments
in the small business sector. Of these 29 states, 21 had established
ETI programs.
- Overall, debt constitutes 20.5 percent ($1.1 billion) and
equity constitutes 79.5 percent ($4.3 billion) of the $5.4 billion
in small­business­invested funds in 1992.
- Major investment targets of ETIs were residential housing,
other real estate and some venture capital.
- Venture capital from all sources, including ETIs, represents
74.5 percent of public pension fund investments in small business.
- Very few funds explicitly target women­ or minority­owned
businesses in their ETI programs. There were 20 pension funds
in 17 states that indicated an interest in receiving more information
on minority and or women business enterprise ETIs undertaken by
other funds.

Ordering Information

The complete report is available from:

National Technical Information Service
U.S. Department of Commerce
5285 Port Royal Road
Springfield, VA 22161
(703) 487-4650
(703) 487-4639 (TDD)

Order Number: PB95-199105

Cost: A05; A01 Microf.
*Last Modified 6-11-01