Auditor slams D.C.-backed venture capital plan
By: Michael Neibauer
March 15, 2009
A D.C. taxpayer-backed venture capital plan that invested $1 million in a start-up that did not and never will exist is but one of many examples of how the economic development program has failed, city auditors concluded in a scathing new report.
The “poorly managed” Certified Capital Companies program, or CAPCO, has cost D.C. $76 million yet has yielded only 31 net jobs and very little revenue over its four years, D.C. Auditor Deborah Nichols found in the audit released Friday. It is clear, Nichols wrote in the audit, “that the District’s CAPCO program has not had the desired economic impact,” and she recommended that D.C. pull the plug.
Through the program, insurance companies shift cash to one of three independent CAPCO funds, which invest that money in local start-ups. The insurance companies reap tax breaks and are repaid for their investments. The fund managers reap a 2.5 percent fee.
And the District is supposed to reap the benefits of a stronger economy.
The city’s three CAPCOs — Enhanced Capital Partners, Advanced Capital Partners and Wilshire D.C. Partners — have invested $22 million in 15 companies, spent $54 million more in start-up costs, collected about $4 million in management fees and produced few positive results, the audit, conducted at the request of D.C. Council Members Mary Cheh and Kwame Brown, found. Their investments include a restaurant, a pizzeria, a title processing company, a failing financial company and a theater company that shut down after one play.
The D.C. Coalition for Capital, an alliance of individuals supporting economic development through “long-term access to capital,” fired back that Nichols had a “fundamental misunderstanding” of the CAPCO program and ignored its long-term benefits in her report.
The $76 million figure that Nichols cited “has no basis in reality,” the coalition said in a response issued Saturday, given that insurance companies are barred from collecting more than $50 million in tax credits over the course of the program. The coalition added that CAPCO was responsible for creating or saving 318 direct jobs and that the start-up investments have continued to grow.
Nichols focused much of her attention on the D.C. Department of Insurance, Securities and Banking, which oversees the program.
The agency, the auditor said, failed to conduct mandatory annual reviews and wrongly certified investment opportunities. The CAPCO statute, for example, requires that each business vying for funds be headquartered in D.C., with 25 percent of its employees residing in the District and 75 percent working in the District.
DISB, the auditor said, declared start-up NuAmerica Bank a “qualified business” even though the bank did not exist, had no headquarters and had no employees. NuAmerica principals received $1 million from CAPCO in 2007 to build a presence in Adams Morgan. On June 10, 2008, according to the audit, the project was abandoned.
In a written response to the audit, D.C. Insurance Commissioner Thomas Hampton wrote that it was “inappropriate” to conclude that the department failed to follow the law.
His agency “worked closely with NuAmerica officials over an extended period during NuAmerica’s effort to obtain a bank charter in the District,” Hampton wrote.
The president of AVC Smoot LLC, a painting and historical restoration company that collected $750,000 total from two CAPCOs, praised the program Friday during a D.C. Council committee hearing.
“If it were not for CAPCO, I would not have been able to grow my company,” Adrienne Smoot said.
Hampton disagreed with virtually all of Nichols’ findings. He described the audit as “prejudicial,” arguing its “primary shortcoming” was that “in most respects it overstates the nature of the problems.”
mneibauer@dcexaminer.com
