CAPCOs: Capital idea or a loser for taxpayers?
A CAPCO (for “capital company”) is a private firm that is specially certified by the state to invest in small businesses. They don’t exist in Georgia yet, but several CAPCOs operate in other states. Opponents of CAPCOs argue that the real object of a CAPCO is to make money for the CAPCO, at the expense of taxpayers. The Georgia proposal doesn’t call them CAPCOs — they’re “small business investment companies” — but they’re the same thing. How the process would work:
Insurance companies
• What they pay: After CAPCOs are certified to operate in Georgia, insurance companies in the state extend credit to the firms.
• What they get: The insurers’ return on investment is virtually guaranteed. First, the CAPCO sets aside a portion of the money to ensure that it can pay the insurance company back. Second, the state gives the insurer a tax break for investing in CAPCOs. The tax break is in the form of credits that would total $125 million for the whole program.
CAPCOs (Part I)
• What they pay: With the money from insurance companies, CAPCOs act as venture capitalists, investing in small businesses and startups either by lending them money or buying stock in them.
• What they get: The capital companies take a 2 percent management fee. They also recoup startup costs and professional services fees.
Georgia small businesses
• What they pay: If it receives a CAPCO loan, the business has to pay it back in as little as three years, with interest.
• What they get: Business owners may use the CAPCO investment to expand and create jobs.
The taxpayers
• What they pay: The state forgoes the $125 million it would have received in tax payments by the insurance companies.
• What they get: In theory, the state benefits by the creation of any new jobs because business growth expands the tax base.
CAPCOs (Part II)
The CAPCO only lends or invests a portion of the money from the insurance company. So when it recovers its investments, the CAPCO reinvests the money. When it has invested the equivalent of 100 percent of the tax credits issued, the CAPCO is “decertified” and may keep the principal plus any profits from the investments.
