Pension Funds and Small Firm Financing



Small Business




United States Small Business Administration
Office of Advocacy
RS 153


Pension Funds and Small Firm Financing


by Mariana McNeill and Richard Fullenbaum


1995. 83p. M&R Associates, 11622 Boiling Brook Place, Rockville, MD 20852, under contract no. SBA­8025­OA­93.



In 1992 U.S. public pension fund investments totaled $891 billion across 1,142 funds; by 1993 this number had risen to $1.0 trillion. In 1992 public pension funds included an estimated $5.4 billion in small­business­invested assets, representing 0.6 percent of all public pension fund investments. Public pension funds, a major source of capital for the economy, represent a potential source of financing for small businesses - which are always searching for new financing vehicles. This study estimates the overall level of public pension fund financing of small businesses in 1992 by state.

More and more public plans are using this capital pool for economically targeted investments (ETIs). ETIs are defined as investment programs designed to produce a competitive rate of return as well as create collateral economic benefits for a targeted geographic area, group of people or sector of the economy. One of the goals of these programs is to direct capital to small business growth and development.

This study identified the types and dollar amounts of investment being made in small businesses through ETI programs from public pension funds. The study also examined public pension fund monies targeted toward venture capital funds, and examined selected individual ETIs in several states to determine how they invest in small business financing.

The study shows the public pension plan assets of all 50 states and the District of Columbia. Estimates of small business dollar investments, the share of those investments relative to the total plan size, and the number of pension plans per state are also shown.

There are useful insights to be gained based on the study results. First, significant increases in the amounts allocated to small firms may be affected by modest changes in public pension fund investment policies. Second, large pension funds are in a better position to make investments in small businesses and economically targeted investments. Third, the major obstacle to further expansion of programs such as ETIs is the perceived risk of such investments. Fourth, because several successful ETIs are in states with no legislative mandate, state policy should probably not be focused on mandates.

Scope and Methodology

The core set of estimates regarding small business investments is for 1992. Some supplemental data for selected states have also been obtained for 1994 in the context of examining future trends in ETI programs. The data sources include the results of surveys on ETIs, recurring publications containing up­to­date information on public pension funds, annual pension fund reports, and phone interviews with individual fund managers.

The information on ETIs is derived from data collected by the Institute for Fiduciary Education's Survey of Economically Targeted Investments, which was mailed to 139 of the largest public pension funds. From this pool, 119 responses were obtained. While these 119 funds represent only 10 percent of the 1,142 U.S. public pension funds, they accounted for more than 76 percent of all public pension fund dollars in 1992.

For each ETI, questions were aimed at the following issues: the target of the investment and the reason it was selected; the number of dollars reserved for the ETI and the number of dollars invested; the types of individuals responsible for promoting and developing the ETI; the degree of difficulty regarding a variety of issues related to developing the program (e.g., return/risk requirements, liquidity requirements, expense of operation, board concerns, etc.); and other characteristics of the ETI.

The study also examined public pension fund dollars invested in venture capital funds. For the purposes of this study, all net venture capital dollars are assumed to be small­business­related and were therefore added to the estimates obtained from ETI sources for each state.

Four states were highlighted to give case studies of the types of programs underlying each source of capital. Public pension funds in Wisconsin, Pennsylvania, New York and Colorado were examined to provide some idea of the types of programs underlying each source of capital. Finally, the study examined any public pension fund monies specifically targeted to women­ and minority­owned small businesses.


  • Most pension funds with ETIs were satisfied with their financial performance.
  • In 1992, 29 states had public pension funds that made investments in the small business sector. Of these 29 states, 21 had established ETI programs.
  • Overall, debt constitutes 20.5 percent ($1.1 billion) and equity constitutes 79.5 percent ($4.3 billion) of the $5.4 billion in small­business­invested funds in 1992.
  • Major investment targets of ETIs were residential housing, other real estate and some venture capital.
  • Venture capital from all sources, including ETIs, represents 74.5 percent of public pension fund investments in small business.
  • Very few funds explicitly target women­ or minority­owned businesses in their ETI programs. There were 20 pension funds in 17 states that indicated an interest in receiving more information on minority and or women business enterprise ETIs undertaken by other funds.

Ordering Information

The complete report is available from:

National Technical Information Service
U.S. Department of Commerce
5285 Port Royal Road
Springfield, VA 22161
(703) 487-4650
(703) 487-4639 (TDD)

Order Number: PB95-199105

Cost: A05; A01 Microf.

*Last Modified 6-11-01