I wrote last week about the issues of fees in the investment industry. Now it appears that state governments are so enamored with the venture industry that they are investing on margin. According to VentureWire:

Deutsche Bank AG is emerging as a leading source of capital for private equity funds of funds sponsored by state governments.

In the latest instance, Michigan Gov. Jennifer Granholm announced this week that Deutsche Bank had ponied up $200 million to finance the state’s Venture Michigan Fund, which is a fund of funds earmarked for regional venture capital funds.

The Venture Michigan Fund is the second state-sponsored fund of funds that Deutsche Bank has financed. Deutsche also supplied Utah with $100 million for its Utah Fund of Funds in March. That vehicle invests more broadly in in-state venture capital and buyout funds.

Deutsche is said to be negotiating with other states that are also in the process of setting up funds of funds, a person close to the issue said. Deutsche declined to comment.

The Venture Michigan Fund is managed by Credit Suisse’s Customized Fund Investment Group, while the Utah Fund of Funds is overseen by Ft. Washington Capital Partners.

Rather than serve as a traditional investor, Deutsche acts more like a lender to the funds of funds. Both Michigan and Utah pay interest on the value of the bank’s commitment. In the case of the Venture Michigan Fund, the state pays Deutsche more than 6.5% interest on the $200 million it is supplying. And if the fund of funds’ investments fail to generate enough profits to cover the interest payments, Deutsche receives tax vouchers for the full amount as a backstop.

This is the kind of crass stupidity from politicians that bolsters the argument for limited government.