OKLAHOMA CITY - An audit of the Oklahoma Capital Investment Board found $31 million in debt and more questions than there are answers, State Auditor and Inspector Jeff McMahan said Wednesday. But board members say the problems have been addressed and the program has had an $881 million impact on Oklahoma's economy.
While the concept of the investment board is admirable, we believe that attention needs to be given to several areas, said McMahan. One concern is the lack of transparency of the overall venture capital program. Oklahomans need to know that the liability as of last June 2005 was $31 million, with an additional $26 million in unfunded commitments.
The OCIB also has been functioning without clearly stated performance measures, said McMahan, and without a standard by which to measure success or failure, the auditor's office has had a hard time in determining how well the agency is performing. Although the OCIB's stated purpose is to attract venture capital to Oklahoma, until just a few weeks ago the agency had not been tracking performance measures such as how many jobs were created.
The Oklahoma Capital Investment Board is a state agency, created in the late 1980s for the purpose of getting Oklahoma's venture capital infrastructure off the ground. When the legality of a state agency making private investments was questioned, the Oklahoma Capital Formation Corp. was formed in 1992 to serve as an intermediary, performing financial transactions under the board's direction.
The Legislature provided the board with $100 million in tax credits, which the agency uses as collateral to borrow money from lenders. The borrowed money gets invested in venture capital funds, and the proceeds from the investments are used to pay off the loans. Ideally, the agency will never have to cash in the tax credits, because the investments should be generating enough revenue to cover the debt payments, said board member Robert Heard.
But venture capital is by definition a risky business, and not all of the agency's investments have paid off as well as they would have liked. The agency has carried debt each year since its inception, and the debt has grown by about $2.4 million per year, the auditors said. Though the books now show $31 million in debt, if the agency's current investment portfolio were to be liquidated today, the amount of debt left outstanding would be $17 million, said Heard, which the state of Oklahoma would be responsible to pay.
Due to the way the program was structured, only someone savvy about financial reports would have been able to find out the program is in debt, McMahan said. The debt was reported under the Formation Corp. - not the OCIB - and many of the records for the corporation are protected under law as proprietary information.
OCIB President Devon Sauzek agreed that the program's financial structure has been a little hard to follow, and so the agency has made some changes. For the fiscal year that begins this July, the state agency will absorb the privately held Oklahoma Capital Formation Corp., and the two entities' financial reports will be homogenized into one statement.
McMahan also noted that the venture capital funds the agency invests in include very few Oklahoma companies. Board members say this diversification is necessary to mediate the risk of the investment. Though McMahan said his office had a hard time getting a list of Oklahoma companies that have benefited from the program, a list of Oklahoma companies that have benefited is now posted on OCIB's Web site. Last month, the board also worked with an economic consulting firm referred by the Greater Oklahoma City Chamber to study the economic impact the investment program has had in the state.
The study, issued March 2006, includes much of the information McMahan's office said they have been asking for since last July. Since 1992, OCIB has helped 19 Oklahoma companies through its venture investment program. The companies, which account for $157.8 million in payroll and more than 1,300 employees, as a group received more than $99 million in venture capital funding through OCIB over the past 12 years, according to study.
While board members said the agency is meeting its goal of investing $2 for every $1 of tax credits provided for the program, Director of State Agency Audits Kevin Wright said the auditor's office and the board disagree about what items may be included in that assessment. The auditor's office interprets the $2-to-$1 goal to refer to investment in Oklahoma companies, though the agency has taken the position that investment in their selected venture capital funds, which include funding from other investors and benefit companies in other states as well as in Oklahoma, meet the requirement.
When OCIB was established in 1992, there were two venture capital firms in the state, reads the agency's Web site. Today there are more than 15 Oklahoma-based venture firms, and that many more out- of-state firms investing in Oklahoma companies. This investment not only takes the form of capital, but also in the expertise needed to help Oklahoma ventures become world-class opportunities.