Colorado CAPCO debate rages – Wilshire investments not what legislature intended, critic says

The top lender to rural Colorado in the state-backed venture-capital program is taking taxpayer money and investing in its own businesses – and makes no apologies for it.

By David Milstead, Rocky Mountain News

Wilshire Colorado Partners and its parent company, Newtek Business Services, have made $4 million in investments, nearly half of all the investment made in the state’s certified capital company – or CAPCO – program. It’s more than 95 percent of the rural money invested so far.

The recipients, though, are not an agribusiness in Logan County or a manufacturer in Las Animas. Wilshire is unabashedly investing the money in companies controlled and majority-owned by Newtek, with a goal of developing its own business-service companies. And the two rural investments so far employ just a handful of people out of an office park 600 yards west of the Jefferson County line in Clear Creek County.

This, says Newtek Chief Executive Barry Sloane, is exactly the intent of the CAPCO program – giving money to entrepreneurs whose hard work creates products and services that help other entrepreneurs. "Colorado is the beneficiary of what we’re doing in our business model," Sloane said. "What is the state supposed to care about? Economic activity."

This, says Office of Economic Development Director Bob Lee, is absolutely not what CAPCOs were supposed to do. "These investments are legal, but they violate the legislative intent," said Lee, whose office administers the program.

Newtek is taking Colorado taxpayer money to start up its own businesses, he says. "The beneficiary of this investment is certainly not rural Colorado."

Criticism of program mounts

Lee has joined some legislators in criticizing the CAPCO program, passed by the General Assembly in 2001 as a way of promoting venture capital – particularly to rural areas.

Under the CAPCO law, insurance companies – rather than paying $200 million in taxes on premiums to the state – are instead allowed to divert the money to CAPCOs. The CAPCOs then make venture-capital investments.

The state allocated the first $100 million in tax credits in 2002 and is scheduled to give out the next $100 million in April.

Momentum has built, though, to fix or kill the CAPCO program before the next allocation. Critics, including Lee, say the CAPCOs collect high fees, are never required to invest all their capital, and will never have to share profits with the state, based on the way the law is written.

The CAPCOs, Lee and his staff say, are either misinterpreting the statute in some cases or assuming worst-case scenarios that simply haven’t played out in states like Louisiana or Missouri that have had the program for several years or more. If clarification is needed in the regulations or in the law, the industry is ready to help, they say.

Legislators made attempts to revise or abolish the CAPCO law last spring but failed. Now, the issue is on the front burner again. Treasurer Mike Coffman has formed a task force to study the program.

$22 million from state

Wilshire Colorado Partners is one of six CAPCOs, all of which have varying degrees of out-of-state ownership or control.

Its parent, Newtek Business Services, is a Garden City, N.Y.-based public company whose stock trades on the American Stock Exchange. It started in 1999 to "operate CAPCOs and utilize the resources available under the programs to develop businesses that emphasize serving other small businesses," according to its annual report to the Securities and Exchange Commission.

Doug Baird of Stone Pine Investment Banking signed on to manage Newtek’s Wilshire Colorado Partners and head its "regional business development center" in Denver. Wilshire Colorado Partners became a certified capital company in 2002 and received just over $22 million from the state.

About 15 months into the program, it’s made $3.9 million in investments in two companies. The sum is more than twice the investment of any other CAPCO, and it represents 42 percent of all CAPCO investments.

The two companies are located in Clear Creek County, 20 minutes from Denver but a rural county by the definition of the CAPCO law. So the Newtek/Wilshire money represents more than 95 percent of the money all the Colorado CAPCOs have invested in rural areas.

While most of the other Colorado CAPCO investments are established companies with existing investors – typical recipients of venture capital – Newtek/Wilshire’s investments are different. Newtek/Wilshire is looking for entrepreneurs who want to start business- service companies and use Newtek’s trade name and existing business relationships to sell services to small businesses.

The first Colorado investment for Newtek/Wilshire was a company called Universal Processing Services of Colorado LLC. Newtek/Wil-shire put $3.3 million into the investment last year.

On the same day the business incorporated, it also registered the trade name Newtek Merchant Solutions of Colorado, according to records from the Colorado secretary of state.

Investing in own product line

Newtek owns 95 percent of Universal Processing Services of Colorado LLC, according to Newtek’s annual report to the Securities and Exchange Commission.

Newtek/Wilshire’s second investment was $600,000 in New Technologies Solutions LLC. Newtek owns 80 percent of the business-consulting company, according to Sloane; it will do business as Newtek Strategies.

The two companies occupy space in an office park in Clear Creek County at 35715 U.S. 40. A CAPCO industry list of investments says the address is in Idaho Springs, but that’s simply the nearest municipality. John Reece, the state CAPCO program manager for the Office of Economic Development, called Clear Creek County last week and got verification that the office is indeed within the county – yet just a few hundred yards from the Jefferson County line.

Without actually naming Newtek/Wilshire, Lee told Coffman’s task force, "One CAPCO – they’re not looking for business plans; they’re not looking for companies to invest in. What they’re looking for is a manager to invest in their own product line. They’re taking the money from their CAPCO pocket, they’re putting it in their product-line pocket, and they’re charging the state fees and expenses."

When the legislature passed the CAPCO program, Lee told the task force, "they did not anticipate one (CAPCO) was going to make an investment in its own product line 600 yards from the Jefferson County line. But it’s legal."

It’s legal, yes, Sloane says, and it’s also in keeping with the state’s true goals of promoting entrepreneurial spirit and economic activity.

"It’s clearly what we believe was the intent of the legislation," Sloane said. "The program was designed to promote funding and capital to small business – that’s what we do."

Sloane also encouraged potential critics to think about the products and services the Newtek companies will make available to Colorado small businesses. Jennifer Dincola, the nonpracticing certified public accountant who runs Newtek Strategies, can offer IBM technology solutions through a Newtek partnership, Sloane said. Or, she can refer clients to a Newtek company that makes loans guaranteed by the U.S. Small Business Administration, Sloane said.

Dincola, a former chief financial officer at Thomas & Perkins Advertising, said she saw firsthand that small- and medium-size businesses needed resources. It was Newtek/Wilshire – and the CAPCO program – that made it possible for her to start her own company to provide them.

"I’m a native Coloradan and I’ve long dreamed of getting this concept off the ground."

As for the location of the two businesses, Sloane said Newtek/Wilshire chose "a terrific office location with low costs that’s easily accessible off the interstates that’s also reasonably close to Denver . . . and that’s also part of the rural investment area."

"To say that it’s near a border, I don’t know where they’re coming from on that," Sloane said. "If there was a real issue on the location, we could talk about it."

Other CAPCOs reticent

While a number of CAPCOs defend their industry and the current law, they can be a bit more reticent on the topic of the Newtek/Wilshire model.

At a recent meeting of CAPCO industry executives and Office of Economic Development staff, the -CAPCOs asked state officials – without naming names – if the state could block a CAPCO from investing in "related parties."

Sloane said that any CAPCO that might look askance at Newtek/Wilshire "ultimately will see the error of their ways; . . . that’s called ‘nobody likes the Yankees.’ The Yankees are winners and successful every year."

"The state should want to give subsidies to people who start out small and are able to grow," Sloane said. "We’ve done it; we can teach other people to do it. That’s America. That’s capitalism."

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