The CAPCO Program for Small Business

The Certified Capital Company program, commonly referred to as CAPCO, was designed as an outline for states to promote local entrepreneurship to give states new ways of addressing both the needs of the small-business sector as well as the state’s economic development goals. By offering access to needed capital for new businesses the CAPCO program promotes entrepreneurship while serving as a facilitator for small-business development.

The CAPCO programs also provide modifications in response to changing industry developments. CAPCOs, which are usually private venture-capital groups with considerable local industry expertise and knowledge, leverage the money received from insurance company investments by investing those funds in qualified small businesses within the state.

CAPCO encourages the insurance companies to invest in certified capital companies and in return the state provides tax credits to the insurance companies for qualified investments in the CAPCO program. The tax credits, which are taken over time, help encourage companies to establish the private venture-capital funds that are then invested in the state.

Knowing that small business is a significant creator of jobs, states create CAPCO programs to address unique challenges many small businesses deal with in raising operating capital. Unlike customary government-assistance programs, CAPCO relies mainly on private-sector investments in targeted industries of a geographic region.

Using private-investment money, venture capitalists establish pools of accessible funds, analogous to mutual funds. The venture-capital firms decrease their own overall risk by forming a portfolio of investments in several different companies; with this structuring, the small businesses receiving funding are termed “portfolio companies.”

While program participants are positioned to leverage private funds, CAPCOs are unlike traditional venture-capital providers and are best looked at as an economic-development tool. In order to compensate for the larger lending risks and lower rate of return associated with economic-development directives, the CAPCO returns are higher than the participation ratio that is normally associated with traditional venture-capital structures.

The predicted result of the CAPCO program is new-job creation as well as increasing state and local tax revenues, while requiring only a nominal initial investment by the state. However, instead of direct business subsidies, some of the states have endeavored to encourage investment activity through creating a business-friendly tax environment through enactment tax-credit programs. As an example, some states offer sales- and property-tax exemptions. To date, several states have already established CAPCO programs, with Louisiana becoming the first state to adopt CAPCO in 1983. Subsequently, New York, Missouri, Wisconsin, Florida, Texas and Colorado have all adopted CAPCO programs.