Venture capital firm bets on New Mexico

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When Brian Birk, the managing partner of Sun Mountain Capital, talks about venture investing in New Mexico, his voice projects an almost evangelical fervor.

The man is a believer: "New Mexico is a technically sophisticated place with a very deep talent pool," he said. "Look at Silicon Valley. There are startups everywhere, but little innovation. It's more about a new social media idea, a new app, a new way to buy socks online. New Mexico, on the other hand, excels in real innovation."

You wouldn't know it by driving by, but housed in modest offices on Don Gaspar Avenue is Sun Mountain Capital, a Santa Fe-based venture capital firm with more than $750 million under management. Much of it is targeted at new ventures in New Mexico, and Sun Mountain claims to have a role - directly or indirectly - in more than 50 companies that employ more than 1,500 New Mexicans.

The firm is the only New Mexico-based investment adviser to be awarded a contract from the State Investment Council, which manages permanent or endowment funds for taxpayers. The SIC money is spread over stocks, bonds, real estate and fixed income by many firms like Sun Mountain that have a small slice of the portfolio. For Sun Mountain, that is $270 million deployed in private businesses throughout the state.

At age 57, Birk still gets enthusiastic talking about his business, often sitting on the edge of his chair and leaning forward to make a point.

"We are not a buyout firm that makes a short-term investment and trashes the company," he said. "We make long-term investments - five, six, seven years - and stand by the companies we invest in. On my tombstone, I don't want it to say, 'He cut 5,000 jobs.' I want it to say, 'He created 5,000 jobs that gave families a decent living.'"

Birk began his career at General Electric Co. He moved through the company's training program and steadily up the ladder, but he wasn't happy. "I wasn't a good fit at such a big company," he said.

So as a next step, he and a few friends started an environmental services company named Mikon. They chose St. Joseph, Missouri, because the U.S. Army Corps of Engineers had a strong presence in the area and the Mikon crew viewed it as a potential customer.

But he knew his options were limited as long as he stayed at Mikon, and he applied to Northwestern University and the Kellogg School of Management, where he received a master's in business. After finishing, he landed a position with The Boston Consulting Group Inc., where he worked with large corporations on strategy and investments.

But again, Birk found that he wasn't a fan of working at big companies. And the father of three small children had a more pressing problem: "At BCG, you have to make a choice: It's either BCG or your life."

So he and his wife decided to move on. A colleague had a house in Santa Fe, was involved with the Santa Fe Institute, knew of a few business leads in the area and sang the virtues of New Mexico. Soon, the Birk clan was heading west.

Upon his arrival in Santa Fe, Birk was involved with a few early stage companies. That led to his first position in the private-equity world, at Fort Washington Investment Advisors Inc. He oversaw $400 million for the state development funds of Utah and New Mexico.

At the time Birk took over, the fund was losing about 18 percent each year. "From its inception under Gary Johnson, the fund's approach was to focus on employment and companies that SIC thought could provide jobs. Our approach was different. We wanted to invest in the best companies and the best managers. We knew that if they were successful, they would take care of everything else, including employment."

One problem, though: Fort Washington is a big company. "I might as well have been back at GE," Birk said. So he quit, although he did so with the intention of starting his own firm.

That fall, Sun Mountain was born. "It was a real startup," Birk said. "We had no money, no customers. But we had confidence in our approach to regional investing. We had a different model, a different strategy."

In 2006, the SIC asked for new management proposals and put out a request for proposal. The newly formed Sun Mountain put in an application to manage the in-state portion of the private-equity money and won the job.

With Birk at the helm, private-equity investments for the state gained more than 10 percent in 2006. Since then, the fund has outperformed its national benchmark most of the time. Other partners at Sun Capital include Sally Corning, Lee Rand, Edward Markman and Leslie Shaw.

Ecosystem in progress

Birk says New Mexico has a nearly perfect ecosystem for venture investing.

The ecosystem has three legs. The first is good ideas and good technology. Second is the availability of startup capital. And the third part of the ecosystem is management expertise - the ability of a company to evolve from one that is good at technology to one that is commercially viable, that makes something that customers will pay for.

It's the third leg, the management expertise leg, where New Mexico is weakest, according to Birk. "We just don't have the infrastructure of industry here. We have to make a concerted effort to reach out to find partners and customers," he said.

Sun Mountain, according to Birk, is a shop where everyone brings a certain skill, and the skills complement each other. This person knows technology, she knows high finance, another woman knows how to raise capital.

Birk's strength is not just an uncanny sense of which companies will succeed, but a network that spans the country, an important way to bolster the third leg of the ecosystem.

New Mexico's ecosystem may be in equilibrium. However, like anywhere else, it is vulnerable to shock from the outside, some of those global, such as President Donald Trump's rhetoric on trade, which is affecting investor confidence in some areas.

Other tremors are emanating from Silicon Valley, although some of that earth-shaking works to Sun Mountain's advantage.

"We just hired a couple from the valley. They each had terrific jobs with top-tier companies. But even with their combined salaries and no kids, they couldn't afford a house that was within 90 minutes of where they worked. That commute was one of the big reasons they moved to New Mexico," Birk said.

When it does invest, Sun Mountain doesn't just hand over $5 million and walk away; it essentially becomes a partner. For its money, Sun Mountain holds weekly conference calls with senior management, gets one or two seats on the board and hosts a monthly board meeting.

The spirit of collaboration is echoed by John Uczekaj, president and chief executive of Aspen Avionics, a longtime investee of Sun Mountain. Uczekaj also enthuses about New Mexico's environment for startups and venture investing, although he adds that the area hasn't yet attained a critical mass. It needs more growth and people to sustain that growth.

Uczekaj also recognizes the evangelical preacher in Birk. "I feel Brian's excitement, too. It infuses the place. And it's one of the things that helps lure people to New Mexico."

Birk's latest gig is managing the $20 million Catalyst Fund, launched in 2016 by the SIC to fill a gap in the investing ecosystem. Birk advises the state on where to best place Catalyst Fund money to help formative startups that need cash to build a prototype or hire engineers.

In May, Gov. Susana Martinez announced the first $2 million investment in Bayotech Inc., which manufactures high-tech nitrogen fertilizer production equipment and will now be able to finish testing and begin delivering on commitments worth $1.5 billion in North America sales.

"The Catalyst Fund is a powerful toolbox to help businesses grow and create jobs throughout New Mexico," Martinez said. "New Mexico has enormous potential to become a high-tech jobs leader."

'Blowups' and improvement

With a move to invest money in homegrown firms, not just on Wall Street, the idea of local equity partnerships has solid support in the Legislature and has been pushed by both Martinez and former Gov. Bill Richardson.

But results have been mixed.

Eclipse Aviation, one investment prior to Sun Capital, went bankrupt in 2009 and laid off 1,100 workers. And even the most recent financial report submitted to the SIC shows the private-equity program has current or past interest in 73 firms, with 30 still active. Of those where investments have ended,15 gained money and 28 lost money.

"No doubt there have been some high-profile blowups in the fund," said Charles Wollman, spokesman for the State Investment Council. But many of the losses were prior to policy changes that brought better oversight, like bringing in professional management. He said Sun Mountain has evened out the performance, and its contract was renewed after a competitive RFP process.

"Based on the fact that we've committed more money to Sun Mountain to manage for us over time, I think we've seen good improvement," Wollman said.

Wollman said the state doesn't evaluate in-state equity commitments solely on the basis of percentage returns, but wants to boost job growth and private-sector entrepreneurship in the state.

But assessing private firms and investing in them remains far more expensive than just dumping money into bonds or stocks. According to the 2016 fiscal year audit of the SIC, New Mexico had $1.8 billion invested in private equity and pays annual management fees of about 2 percent.

Total management fees in 2016 came to $32 million, with Sun Mountain receiving more than $3 million for its portion of the New Mexico portfolio, according to the audit.

In 2009, the Rio Grande Foundation, a libertarian think tank, took a position that it was time to end private-equity investments with public money. "The program has been a major league loser for taxpayers," wrote the organization in its report, "A Failure by Any Measure: The State Investment Council's New Mexico Private Equity Program."

Paul Gessing, executive director of the group, said the report helped raise awareness about a state program that was not well scrutinized. He agreed it is showing more success, but so is the broader economy.

Bruce Krasnow, Santa Fe New Mexican business editor, contributed to this report.

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