Dan Schwartz, the GOP candidate for state treasurer, is criticizing a $50 million private equity fund that Treasurer Kate Marshall set up as a legislatively approved, long-term investment for education that her office argues might bring Nevada hefty profits one day.
Schwartz, an international businessman and investor, said the fund is unconstitutional and is losing money because of six-figure annual management fees. He proclaimed he could do a better job of investing the state’s money, setting a goal of a 2 percent annual return, or four times the current overall rate under Marshall.
“States should not be involved in private equity because it’s a risky investment that can work out, but it’s not going to be something that will always work out,” Schwartz said in an interview this week. “This is not an appropriate investment for the state. The problem is you have a state treasurer who doesn’t understand the financial markets.”
But Chief Deputy Treasurer Mark Mathers said the state is confident the $50 million Silver State Opportunities Fund will perform well over the 10-year contract the state signed in August 2012 with fund manager Hamilton Lane.
The company has a good track record managing similar funds in California, New York state and Florida, Mathers said. The company’s rate of return has ranged from 6 percent during the recession to nearly 30 percent, he added.
“There’s an initial period where the cash outlays are what they are,” Mathers said, referring to investments in companies and management fees. “In the second half of that 10-year period is when you see those returns realized.”
So far, the state has seen a $2 million investment in a Reno fund, Miller Heiman Inc., return $200,000, he said. But that is only the beginning. Fund manager Hamilton Lane has made three other investments in funds, which are looking for companies to invest in that expand, improve or relocate to Nevada using private equity.
Hamilton Lane has also signed a deal for $5 million with Huntington Capital, for $5 million with Waterton Global Resources Management and for $2.6 million with Enhanced Capital, according to a fact sheet from Mathers. He said the various fund managers have opened six offices in the state “which helps bring attention and capital to Nevada.”
Under the contract with the state, the main fund manager Hamilton Lane will get up to $3.48 million in management fees over 10 years. The firm also can earn another $3.14 million — for a total of $6.62 million — during the decade if the companies it invests in make profits. The profit share will be 10 percent for the fund managers and 90 percent for the state, according to the contract. Mathers said Nevada could profit by an estimated $27 million if the investments are realized and the fund manager then would have to reimburse the state for the fees.
“We have confidence in Hamilton Lane and their ability to recover the principle and to realize profits,” Mathers said.
Schwartz, however, said the “golden age of private equity is over” and he’s skeptical Nevada will see many profits from the fund. Instead, he said he would seek legislation to increase the amount of general fund money the state treasurer can invest in corporate securities. Now, the cap is 20 percent of the state’s portfolio and he wants the cap raised to 50 percent.
Now, he said, the state is getting “a miserable return” on investing the general fund, which totals more than $3 billion a year. State law requires the treasurer to invest in mostly low-interest, safe vehicles such as government bonds.
“Kim (Wallin), as nice a lady as she is, is a good accountant, but she’s in the same shoes as Kate,” Schwartz said of his 2014 Democratic opponent, who’s now state controller. “She doesn’t understand financial investment.”
In January 2010, Schwartz published his first book, “The Future of Finance: How Private Equity and Venture Capital Will Shape the Global Economy.”
Neither Wallin nor Schwartz have any Democratic or Republican competition in the June 10 primary. They will face one another in the Nov. 4 general election as well as Kress Cave, an Independent American Party candidate.
On the constitutional issue, a judge in Carson City signed a declaration saying the law passed in 2011 as Senate Bill 75 to create the fund is constitutional because it uses part of a special trust — the $310 million State of Nevada Permanent School Fund — for investments.
The Nevada Constitution says, “The State shall not donate or loan money, or its credit, subscribe to or be interested in the stock of any company, association, or corporation, except corporations for educational or charitable purposes.”
District Court Judge James E. Wilson Jr., in his April 20, 2011, order said: “The Permanent School Fund is set up to hold the monies transferred into it, in trust, not for the general enrichment of the State, but for its beneficiaries, which are identified in the Nevada Constitution as educational purposes among the several counties.”
The Permanent School Fund was created by state law in 1956 when Nevada created county school districts. Revenues for the fund come from a variety of sources, including investment proceeds, the reversion of estates to Nevada, the sale of lands given to the state as well as fines collected from courts. The bulk of the investments are U.S. government securities.
All annual earnings from the Permanent School Fund are transferred to the Distributive School Account of the state’s General Fund, which divvies up the money among the state’s school districts.
Zach Hudson, spokesman for the Nevada Democratic Party, said it’s Schwartz who doesn’t understand state financing.
“Considering he was previously in charge of the finances of the dysfunctional Nevada Republican Party, perhaps it shouldn’t be surprising Republican candidate for State Treasurer Dan Schwartz has zero understanding of our state’s finances,” Hudson said. “The reality is: Schwartz has become a perennial fringe candidate who is lying about Kate Marshall’s record because he has no record of his own to run on on account of never having won an election.”
“Nevadans will have a very clear choice this November between Kim Wallin, who will continue Kate Marshall’s strong oversight of Nevada’s tax dollars as treasurer, and a desperate Tea Party fringe candidate like Dan Schwartz, who is pathetically making up outright lies in an effort to pull the wool over Nevadans’ eyes,” Hudson added.
In 2012, Schwartz lost the GOP primary in the race for the 4th Congressional District, which covers part or all of seven counties in Southern Nevada, including the northern part of Clark County. He has never held public office.
Contact Laura Myers at email@example.com or 702-387-2919. Find her on Twitter: @lmyerslvrj.