The basic concept behind Venture Capitalist is the investors assuming all the risk they will evaluate, monitor and insure performance. CAPCO and Oklahoma have defeated the main advantage.


  • Source: Understanding CAPCOs, National Association of Seed and Venture Funds, October, 2001
  • Oklahoma officials justified using outside firms was the knowledge, experience and the private Venture Capital communities principle of reward based on success. Yet, look what they gave us.
  • Also note no other state, even CAPCO promotes withholding the amount of states funding and who received the tax credits from the public.
  • Oklahoma's economic development program was modeled after CAPCO, but taken to even greater levels of abuse.
  • Oklahoma's economic development program was clever constructed where in practice the state funds the entire, not the investors.

Feature Typical Venture Capitalist CAPCO Oklahoma's CFIA
State Experiences with Venture Capital   Certified Capital Companies or CAPCOs, are identified as by far the most expensive model to facilitate the formation of venture capital. More than twice as costly as CAPCO, with even fewer requirements imposed on the Venture Capitalist.
Source of Capital   Insurance companies provide funding for capitalization of CAPCOs (referred to as "certified capital").

As an incentive to invest in CAPCOs, a state provides tax credits to insurance companies against their premium taxes. Tax credits equal 100% of certified capital to be taken at 10% per year for ten years. In some states, tax credits may be transferable or sold.

The insurance companies are guaranteed the return of their principal and an annual coupon.

Maintain Certification and Qualification for Tax Credits   A specified share of certified capital must be invested in businesses with specific characteristics (referred to as "qualified businesses"). Qualified businesses generally are small (per the SBA definition), in certain industrial sectors, and located in the state.

CAPCOs must meet investment milestones as specified in the enabling legislation (e.g., 30% of certified capital invested in 3 years).

Returns from CAPCO Investments   CAPCOs generally cannot make liquidating distributions to CAPCO owners until they have invested an amount equal to the amount of original certified capital.

The state generally receives little or none of the liquidating distributions in exchange for revenues lost due to the provision of tax credits.

How is a CAPCO Funded?   A traditional seed or venture capital partnership is capitalized with investments from large institutions and wealthy individuals. These investments are fully at risk. There is no guarantee that investors will receive a return on their capital, or even a return of their capital.

In contrast, CAPCOs are funded almost entirely with debt. Insurance companies lend 99% to 100% of the total capitalization of most CAPCOs. These loans are usually fully guaranteed. The guarantees extend to 100% of principal and 100% of the interest for the life of the loan. The loans are for a term of 10 to 12 years, and are very low risk, of the type appropriate for the fixed income portfolio of many insurance companies. CAPCOs also pay an unusually high interest rate on these loans, making them very attractive to insurance companies.

Sources of Capitalization      
- VC Mngrs 1% 1% 0%
- Investors 99% 0% 0%
- Lenders 0% 99% 0%
- * State 0% 0% 99%
How are Capital and Profits Distributed? A traditional venture capital partnership is owned by the limited partners (institutions and wealthy individuals) and the general partners (the venture capitalists). The general partners always invest at least 1% of the total capital of the partnership. All investors share pro-rata in the return of capital from fund investments. Once original capital is fully returned to all investors, the general partner is typically paid 20% of the profits that may accrue thereafter. In contrast, CAPCOs may be owned entirely by the CAPCO promoters. The insurance companies are usually lenders, not risk-bearing investors. CAPCO owners typically contribute not more that 1% of the total capital of the CAPCO, while receiving about 50% of the return of original capital and 100% of the profits.
Comparison of Distributions      
- Capital 1% 50% 0%
- Profits 20% 100% 0%
How are Most VCs Compensated?  
Annual Management Fee A typical venture fund general partner receives an annual management fee equal to 2.5% of the total capital available for investment. If the fund has capital of $50 million, the VC would earn $1.25 million per year for the life of the fund (usually 10 years). To have $50 million of investable capital a CAPCO manager raises about $100 million. Most statutes provide for an annual management fee of 2.5% of the total certified capital (the full $100 million), or $2.5 million.  
Incentive Fee A typical venture fund general partner receives incentive compensation based on success in producing investment profits. For most funds this is equal to 20% of the profits. So, if the general partner is moderately successful and doubles the size of the capital under his management to $100 million, he would first return $50 million to his investors, then receive 20% of the $50 million profits, or $10 million. If a CAPCO manager is equally successful and doubles the size of the capital available for investment to $100 million, he would be paid not only 100% of the $50 million in profits, but also 100% of the $50 million in base capital, for a total of $100 million.

So, if a CAPCO manager does reasonably well, he earns ten times the amount earned by a private venture fund manager.

What happens if they both do poorly and only recover the original $50 million, with no profits? The private VC would earn no incentive fee. The CAPCO manager would still earn $50 million. By all counts, traditional venture fund general partners are very well paid. Yet, their chance at wealth depends on whether they produce for their investors.

In contrast, CAPCO managers may become immensely wealthy regardless of investment success.  
Incentive Compensation   Use Chart
Who Bears the Risk of CAPCO Investments? In a traditional seed or venture capital partnership all the investors bear risk. A primary goal of sophisticated investors is to make sure the interests of the general partners and fund managers are aligned with the interests of the limited partners. Care is taken to ensure that the limited partners and the general partners always win together, or lose together. In contrast, in a typical CAPCO, the insurance companies bear no equity risk and only low credit risk. The CAPCO owners and managers also bear little risk, given the compensation paid to them in relation to the small amount they may invest Consequently, the insurance companies do not underwrite the investment skill of the CAPCO managers in the way a private investor would, but base their decisions to lend on the quality of the collateral and guarantee.

The equity risk in the CAPCO structure is borne almost entirely by the state. The state provides the tax credits, and, as a result, sacrifices future tax revenues. The tax credits make the guarantee possible, without which the insurance companies would not lend. Under any comparable scenario, an investor of this type would deserve equity compensation similar to or exceeding that received by the limited partners in a traditional venture fund.

Loophole was inserted to allow taking out artificial loans to inflate the value.

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