Presentation on theme: "COMMUNITY INVESTING FOR PENSION FUNDS"— Presentation transcript:
1COMMUNITY INVESTING FOR PENSION FUNDS Presentation to Canadian Pension Funds on Community Investing/ETIsCoro Strandberg, Strandberg Consulting2006Sponsored by: Canadian CED Network
2Overview Context and Background Definition and Rationale US and Canadian ExperienceLessons LearnedFuture Opportunities
3Context and Background Capital gapCanadian Community Economic Development Network (CCEDNet) projectFunded by WD and VancityCapital gap in the community investment sectorExperience in the U.S. demonstrates community investments can generate market returns for institutional investorsFunded by Western Diversification and managed by the Canadian Community Economic Development Network (CCEDNet)
4Community Investment Defined Market grade investmentsCollateral social returns:JobsAffordable housingCommunity economic restructuringUrban revitalizationCommunity servicesEnvironmental regenerationSocial economy enterprisesCI is defined as: market grade investments that generate collateral social returns such asjobsaffordable housingcommunity economic restructuringcommunity servicesenvironmental regenerationsocial economy enterprisesInvestments in underserved capital markets that deliver an appropriate risk-adjusted rate of return and provide collateral benefits.Also called – domestic emerging markets, under-served capital markets, double bottom line investing
5Under-Served Capital Markets Exist because:Information gapsCapital provider preferences for other sectorsFew Canadian precedentsReasons why underserved capital markets exist include:Information gapsCapital provider preferences for other sectorsFew Canadian precedents
6Rationale for CI Emerging asset class Enhances long term assets Community investing is an emerging asset class: as with private equity 15 years ago, CI creates new investment opportunitiesEnhances long term assets: Opportunity to take advantage of unique assets that exist in underserved markets, e.g. under-utilized skills, local community knowledge, local market demandInvesting in economic growth and stability enhances long term assetsEconomically vibrant and healthy communities indirectly benefit the pension plan
7US ETI Experience Public: Church: Private: CalPERS New York State Pension FundsNew York City Pension FundsChurch:United Methodist Church General Board of Pensions and Health BenefitsThe Church Pension Group (Episcopal Church of America)Private:AFL-CIO Housing Investment TrustAmerican pension funds involved in community development finance:CalPERSNew York State Pension FundsNew York City Pension FundsUnited Methodist Church General Board of Pensions and Health BenefitsThe Church Pension Group (Episcopal Church of America)AFL-CIO Housing Investment Trustinvestment company regulated by the Securities and Exchange CommissionTrust investments of over $4.5 billion have financed more than 75,000 units of multifamily and single family housing nationwide. These investments have generated an estimated 50,000 jobs in construction and related industries1965Investment objective is to generate competitive risk-adjusted total rates of return for its participants by investing in fixed-income investments, primarily multifamily and single family mortgage-backed securities and mortgage-backed obligations, including participation interests.the Trust encourages the construction of housing, facilitates employment for union members in the construction trades and related industries, improves the housing supply and promotes community revitalization.To accomplish these objectives, the Trust invests primarily in mortgage securities that directly or indirectly finance new construction or rehabilitation of multifamily housing projects and in mortgage securities backed by single family loans. All on-site construction work financed through Trust investments is required to be performed by 100% union labor.seeks to provide competitive risk-adjusted returns relative to its benchmark, the Lehman Brothers Aggregate Bond Index.Feb year net return of 6.58% while benchmark had a 10 –year return of 6.32%Real EstatePrivate EquityFixed Income
8Current ResearchMapping US public sector pension funds to assess urban revitalization interestPolicies and programs:CalPERSCalSTERSNY State CommonsNY City Retirement6 considering urban revitalization10 inner-city investments part of asset allocation - no stated goalMapping largest 53 US public sector pension funds to assess their interest in urban revitalization4 had policies and programs on urban revitalizationCalPERSCalSTERSNY State CommonsNY City Retirement6 were considering urban revitalization10 have inner-city investments as part of asset allocation, but no stated goalNow mapping the Canadian ETI sectorFORD FOUNDATION STUDY – AIM IS TO ENCOURAGE MORE PENSION FUND INVESTMENT IN URBAN REVITALIZATION – HAVE FUNDED 3 YEAR STUDY RUNNING HARVARD RESEARCH PROJECT – APPROACH IS TO TAKE THE BEST PRACTICES AND ENCOURAGE OTHER FUNDS – FINAL SEPT. 2007CALPERS NYCITYNYSTATEMASSATCHEUSETTSCALSTRSTEXAS EMPLOYEESEXCELL SPREADSHEET – WHO IS TARGETING WHAT – 50 LARGEST FUNDS BY ASSET SIZE AND SAID HOW CAN WE FIND OUTWHAT THEY ARE TARGETING IF AT ALL AND WHAT ARE THEY TARGETING.. ANY TYPE OF TARGETING AT ALL.TARGETED, URBAN – IF THEY CAN FIND FIXED INCOME WILL NOTE IT.IN THE MIDST OF DOING ONE FOR CANADA – AVAIABLE IN JUNE. USING DATABASE PUT TOGETHER BY THE CANADIAN PENSION FUND DIRECTORY – THEY BREAK OUT ALL THE ASSET CLASSES, PRIVATE EQUITY, VENTURE CAPITAL, INFRASTRUCTURE AND REAL ESATE – CAN SEE WHAT FUNDS ARE IN THOSE ASSET CLASSES AND DO A PUBLIC SEARCH TO ID TARGETING - FOLLOWING UP WITH TELEPHONE CALLS.PRINCIPLE RESEARCHERS, TESSA HEBB– PENSION FUNDS AND URBAN REVITALZATOIN7TH CASE STUDY ON ACTUAL VEHICLES.CALSTRS TARGETING DIVERSTIY
9Legal Framework ERISA governs private pension funds May pursue ETIsStandard prudent investment guidelinesAppropriate risk/return characteristicsMany states cite ERISA standardsPrivate pension funds are governed by the federal law of the Employee Retirement Income Security Act of 1974 (ERISA) – Department of LabourIn a recently revised interpretive Bulletin (2004):Clarifies that private pension funds may pursue ETIs as long as they meet standard prudent investment guidelines and seek appropriate risk/return characteristicsCan’t be investing for political purposesState and local retirement systems are exempt from ERISAWhile ERISA covers only private pension funds, many states cite ERISA standardsUnder ERISA an interpretive bulletin was issued that states they can invest in ETIsMarket rateCapital gapIn an appropriate asset class
10CalPERS$200 B in assets2005 ETI Policy (updated): collateral intent to stimulate economy: job creation, development and savings, business creation, increases to or improved affordable housing stock and improved infrastructureCompetitive risk-adjusted rates of returnTarget: 2% of fund assetsProvides collateral benefits to targeted geographic areas, groups of people or sectors of the economy while providing pension funds with prudent investmentsCalPERS:California Public Employees' Retirement System - provides retirement and health benefits to more than 1.4 million public employees, retirees, and their families and more than 2,500 employers.$200 B in assetsReal estate was an initial starting point for CalPERS’ ETI program: (California Urban Real Estate Program)Committed $375 million with the aim of creating value through the rehabilitation, repositioning and development of real estate projects located primarily in the urban neighbourhoods of California’s major metropolitan areas (1992)The program began with investment in affordable single-family homesAt the time very few pension funds had ever invested in single family homesThe investment was expected to generate a 22% return, provide construction jobs and fill a capital gap in the market, while increasing the supply of moderately priced homes in the StateBy March 2005, the CURE program had a total asset allocation of $3.4 billion with an acual investment of $1.2 billion across twelve real estate investment partners. Since inception the CURE portfolio pro-forma IRR based on invested equity is 20.2% as of March 31, 2005 well above the NCREIF benchmark.2005 ETI Policy (updated): collateral intent to stimulate economy: job creation, development and savings, business creation, increases to or improved affordable housing stock and improved infrastructureCompetitive risk-adjusted rates of returnTarget: 2% of fund assetsProvides collateral benefits to targeted geographic areas, groups of people or sectors of the economy while providing pension funds with prudent investments
11CalPERS cont’d California Emerging Market Investment Program: Investment opportunities in traditionally underserved markets in California while providing competitive risk-adjusted rates of returnInvestments included with similar investments in assets classes (fixed income, private equity and real estate)California Emerging Market Investment Program:Focuses on investment opportunities in traditionally underserved markets in California while providing competitive risk-adjusted rates of returnUnderserved markets include urban and rural areas undergoing or in need of revitalization where there are assets (e.g. an available labour pool, underutilized infrastructure) conducive to business developmentInvestments are included with similar investments in assets classes including fixed income, private equity and real estateEquity or debt investments in:Companies with substantial business operations in an underserved urban or rural areaReal Estate (office, retail, housing, industrial) located in an underserved urban or rural areaPrivate equity: $2.8 B committed since 1999 (California Emerging Ventures)Over 130 companies have received financing. The first tranche is earning –4% IRR (1999); the second tranche is earning –8.4% (2000) and the third is earning –24.8% (2001)
12CalPERS Case Study Pacific Community Ventures Investment Partners: Invest in businesses such as Ever Green Lodge:San Francisco lodging businessGoal of helping at-risk Bay Area youth/low income to develop stable careers and livesEmploys 10 Bay Area youth and 60 low income adults a year in seasonal and year-round positionsAnd Timbuk2 DesignsCalPERS has $10 M in private equity investment invested in Pacific Community VenturesPacific Community Ventures provides resources and capital to businesses that have the potential to bring significant economic gains to low-income communities throughout California. They are the first community development investment fund on the West Coast.PCV has $20 M under management, with $11 M in nine active companies.Food products and distribution, value-added manufacturing, business services and specialty consumer productsThey measure social returns in terms of the number of jobs with good wages, comprehensive benefits and marketable skills that portfolio companies are able to provide to low income individuals in California communities.1,173 residents of low/moderate income communities employed since 2000Average wage $12.78 per hourEvergreen Lodge is an 80-year old property located on 15 acres along the western border of Yosemite National Park. PCV investment in Evergreen helped support the lodge’s expansion from 18 to 70 cabins. (Invested in Evergreen May 2003).Timbuk2 DesignsSan Francisco based manufacturer of bicycle messenger bags, computer carrying cases and other urban-lifestyle bags and accessoriesOver the past 3 years, have evolved from cult status to an emerging lifestyle brand.August 2000 September 2002 investments by PCV16 year old companySince PCV’s investment, the company’s annual revenue more than tripled. PCV earned nearly four and a half times their original investment in just three years.Lower income workers at Timbuk2 received a cash bonus through the Company’s Employee Wealth Sharing ProgramPlans to distribute more than $1 M to 40 employees.Over half of the employees receiving the payout work in factory and warehouse positions, and reside in low/moderate income communities targeted by PCV.PCV will conduct on-site financial management workshops for employees receiving cash payouts to help them understand options for investing and saving this money.October 2005 – private equity investors bought majority ownership of the company.VMG Equity Partners (San Francisco)Capital Logic Partners (Washington, DC)
13New York City Pension Funds 5 pension funds; $85 B1982 programETI assets: $700 MAffordable housing, community facilities, small businessAverage 5 year returns: 8%Use intermediariesGovernment-guarantees5 pension funds; $85 BETI Program established in 1982Current ETI assets: $700 MFinancing for affordable housing (majority), community facilities and small businessFixed income programPrimarily government-guaranteed investments (principle plus interest – 100% guarantee is the usual model)Average 5 year returns: 8%Full repayment of principle since inception (government guarantees)Use of intermediaries: Banks and CDCUs originate loans which are purchased by the fundsBEAT THE BENCHMARK AND MANY PEOPLE ASK WHAT IS THE BENCH MARK – LEHMAN BROTHERSCASE STUDY CONDUCTEDFUNDED BY THE FORD ROCKEFELLR FOUNDATION
14General Board of Pensions and Health Benefits of the United Methodist Church 1990 program; 10% capETI assets: $600 MAffordable Housing 85%Community Facilities Lending 10%Other %Community Reinvestment FundAverage 5-year returns: 8.4%Use intermediaries$13.5 B fund1990 program: $600 M in Affordable Housing and Community Development ProgramCommitments for 10 % capWork through intermediariesBusiness case:Asset-liability matchingMarket mis-pricing creates opportunity for premiumLehman Non-Call Agency Index benchmark (managed as any fixed income investment)5-year returns (2005): 8.4% versus 7.3% indexReturns since inception (1990): 7.2% versus 7.1% index (differential due to change in accounting policies over 15 years)Portfolio:Affordable Housing 85%Community Facilities Lending 10%Child Care, Charter Schools, Community Health Facilities, Supportive HousingOther 5%Community Reinvestment Fund MORE ON THIS LATERNon-profit facilities and commercial lending in low and moderate income areasTriple A rated; $4.5 M; approx. 5% coupon; 6 year average life50% of what they do is triple A; 30% is unrated and plan to be doing more unrated in the future b/c they are growing the programThey have made a decision to take on more risks over the life of the program; expect to be 100 bp over long term basis related to benchmarkIntermediaries include: Community Development Trust, New YorkEnterprise Mortgage, BaltimoreCommunity Reinvestment Fund, MinneapolisThe General Board is located in Evanston, IllinoisThe have ETIs in all states
15The Church Pension Group (Episcopal Church of America) $7.5 B in assets2000 programETI assets: $152 M$117 M in urban development equity real estate$20 M in low income housing mortgages$15 M in international micro-financeReturns comparable to asset class on a risk-adjusted basis$7.5 B in assets$2.5 B in fixed income, $750 M in real estateCommunity development investments for 5 yearsCommitments to date:$117 M in urban development equity real estate$20 M in low income housing mortgages$15 M in international micro-financeReturns comparable to asset class on a risk-adjusted basis
16Analysis of US ETI Experience 5 – 24 yearsUnder-invested marketsaffordable housingcommunity facilitiessmall businessinternational micro-financeAllocation capsComparable returnsIntermediariesETI policies from 5 – 24 years oldPurpose: To finance under-invested markets, e.g. affordable housing, community facilities, small business, international micro-financePrimarily low-income housingAllocation cap: .8% - 10% of fund assets; 2% commonComparable returns to asset classWork through intermediaries
17US ETI Product ExampleCommunity Reinvestment Act Qualified Investment FundSupports community and economic development5.04% 5-year returns (12/31/05); 5.60% since inception (8/30/99)$660 M, 300 institutional shareholders (Dec. 05)Portfolio:Affordable Multi-Family Housing %Affordable Home OwnershipEnterprise DevelopmentEconomic DevelopmentAffordable Health CareCommunity Reinvestment Act Qualified Investment FundLargest US fixed-income, community investing money managerAims to deliver competitive financial performance while supporting community and economic development in US neighborhoods (housing, health care, job creation, green facilities and brownfield redevelopment)$660 million under management, 300 institutional shareholdersHas purchased $1.2 billion in securities for community developmentMajority of portfolio has a guarantee (e.g. fannie mae, freddy mac, ginnie mae, FHA, SBA, etc.)Average credit quality of Triple AEnterprise development loans: low and moderate income communities with an emphasis on minority census track110,000 affordable rental housing units3100 home mortgages24.3 M in affordable healthcare facilities$107.6 M in community development activities including neighbourhood revitalization$182.9 M in down payment assistance and statewide homeownership programs$51.6 M in job/training creation programsInvestments are across the US
18US Community Development Lenders (Intermediaries) 800 – 1,000; $8 BServe under-servedRural, urban and reservation-basedRisk management:adequate capitalloan loss reserveclose monitoringtechnical assistance.7% charge-off ratio (Banks .97%)U.S. COMMUNITY DEVELOPMENT LENDERS:COMMUNITY DEVELOPMENT FINANCE INSTITUTIONS800 – 1,000 in US; $8 B in assetsBanks, credit unions, loan funds, micro-enterprise lenders and venture capital funds that serve individuals, businesses and non-profits not served by conventional banksWork in rural, urban and reservation-based marketsManage risks through combination of equity capital, loan loss reserve, close monitoring and technical assistanceNet charge-off ratio of .7% (Banks .97%) – f.y data for 442 CDFS who participated in the survey
19Failed ETIs High profile losses in 80s Standard investment rules were not practicedSocial benefits drove investments; market rates were secondarye.g. Pennsylvania state employees’ and public school employees $70 M investment in an in-state Volkswagen plant in the early 1980sAlaska public employees’ and teachers’ retirement systems $165 M loan for in-state mortgages in 1980 (35% of total assets),Kansas Public Employees Retirement System investment in direct placements in vaoious local businessesConnecticut pension fund $25 M (47% stake in the company) invesment in a distressed local firm in 1990.
20Canadian Experience Caisse de Depot Concert Properties Quebec Mapping project is underwayLittle is knownNo legal framework in CanadaExpected because we don’t have a law on this Canadian law would look at ERISA as part of the precedent for this type of investing
21Caisse de Depot New Act states the Caisse de Depot mission: “To achieve an optimal return on capital…while at the same time contributing to Quebec’s economic development”In December 2004, the National Assembly of Québec amended the Caisse’s constituting statute considerably. For the first time since the Caisse was created, the new Act formally states the institution’s mission:“to receive moneys on deposit as provided by law and manage them with a view to achieving optimal return on capital within the framework of depositors’ investment policies while at the same time contributing to Québec’s economic development.”Past bad experience:CDP significantly underperformed its peers during the early 2000s. Reasons for this include:Open to political influence (government appoints CEO and board members)Overinvested in communications and technology (e.g. $2.9 B to keep ownership of Videotron in Quebec – this investment was ultimately written down to $435 M; the unit that includes Videotron lost 85% of its value in 2 years)Legislation did not clarify which of two mandates (returns versus economic development) took precedenceRecently top quartile of pension fund performance
22Concert Properties Over $800 M in assets Established in 1989 100% of fund in ETI projects:Assured rental housingMandate to employ unionized trades people on job sitesProperty development company20 pension plans are shareholders2,580 assured rental housing units in last 16 years built or planned/under construction(Nov. 2005)
23Quebec Chantier – social economy enterprises ($58.5M) Fonds de Solidarite de la FTQ $12.0 MFondaction de la CSN MFederal Government MProvincial Government M6% return to pension funds after 15 years (flexible if prime goes up)1 rep. each on a 5 person boardEnterprises are charged a fee to create guarantee fund1) Real estate fund – capital repaid when remortgaged in a ballon at the end2) Revolving fund – no reimbursement of capital before 15 years – plans to create a secondary capital market that will provide liquidity for the pension funds.
24Analysis Limited experience in Canada Building Trades pension funds including carpenters in the 80s invested in real estate development to create union jobs. A number of Building Trades pension funds over-invested in real estate. Up to 3X over-invested in real estate.Daniel McCarthy, Canadian Director of Research and Special Programs, Carpenters Unions
25Canadian ETI Product Example CMHC: Canada Mortgage Bonds (CMB) Program (March 2005)Mortgage loan financing for social housingPrincipal guaranteedMost current bond, maturing 03/11, is yielding 12 bp over GOC; range from 8 – 15 bp33% of investors are Cdn. pension and fund managers/advisors$78.05 B in poolCMHC: Canada Mortgage Bonds (CMB) Program (June 2005)Mortgage loan financing for social housingPrincipal guaranteed by government% coupon since inception46% of investors are pension and fund managers (mix of Canadian and international investors)$54.45 billion in pool
26Canadian CI Sector Over 150 organizations $546 M; $387.5 M in Quebec Includes:Small loans to micro-businessesRisk capital to SMEsLoans and equity for non-profits, co-ops and businesses meeting community needsAboriginal Capital CorporationsMortgages or construction loans for low income housingNo performance dataCommunity Loan FundsCapital raised from individuals, charitable and civil society organizationsProfile of existing CI investors?
27Canadian Experience: Case Study Ecotrust financed tuna fishing vessel$175,000 loan for 60 monthsRate: Prime (5.25%) + 4%Difficulty qualifying for traditional credit:high risk industryinconsistent historical cash flowBenefits:increased jobssustainable fisheryEcotrustFinanced purchase of a tuna fishing vessel out of Merville, BC$175,000 loan for 60 months/amortized 120 monthsRate: Prime (5.25%) + 4%Difficulty qualifying for traditional credit becausea) high risk industryb) inconsistent historical cash flow.Benefits:increased jobssmall fleet sustainable fishing practices in a sustainable fishery
28Lessons Learned Trustee board level champions External feasibility studyDue diligenceEffective partnershipsBoard level championsTo build support with the board and consultants to consider targeted investingTHE ROLE OF THE BOARD IS TO SAY “LET’S TAKE A LOOK AT THIS” – IT WILL NOT COME FROM THE PENSION FUND CONSULTANTS AND IT IS UNLIKELY TO COME FROM THE STAFF FOR A NUMBER OF REASONS – USU. B/C THE DUE DILIGENCE IS HIGH WHERE THE ACTUAL INVESTMENT AMOUNT IS SMALLER AND THEY ARE OFTEN NOT COMPENSATED FOR THIS TYPE OF ACTIVITY – THEY PERCEIVE WHEN THE INVESTMENT DOES WELL, NO ONE NOTICES AND IF IT DOESN’T DO WELL IT GETS ATTENTION –BOARD STARTS THE BALL ROLLING – BOARD LEVEL CHAMPIONS DON’T HAVE TO BE AN EXPERT – THEY JUST HAVE TO GET THE MANAGERS TO LOOK AT THIS SERIOUSLY IN THEIR OWN ORGANIZATION. ONCE A DECISION IS TAKEN TO UNDERTAKE AN ETI AND ISSUE AN RFP USUALLY A FEW VEHICLES OR MORE WILL RESPOND TO AN RFPExternal feasibility study – once the board agrees to take a look at targeted investment, pension fund internal staff are often asked to commission an expert study of these investment opportunitiesThe study can take as much as a year to completeBased on the outside expert report, the board will choose the asset class and level of investment most appropriate for targeted investment given their current asset allocation and diversification targetsBoards pick top quartile investment vehicles and stay out of investment selectionSensitivity to emerging trends provides early mover advantage in rapidly shifting marketsCo-mingled, pooled funds with reciprocal targeting capability provide good opportunities to diversify targeted investment and reduce riskComingled funds with professional management are one of the most successful ways of structuring ETIsDUE DILIGENCEEFFECTIVE PARTNERSHIPSTHE FUNDS THAT HAVE MADE MONEY ARE THOSE WHICH HAVE FOLLOWED THESE STEPS – 6 FUNDS – ACROSS CASE STUDIES – THROUGH INTERVIEWS AND ACCESS TO DOCUMENTS IN ORGANIZATION.
29Next Steps Conduct research Incorporate practices into SIPP Risk mitigationBenchmarksCommunicate“Fiduciary Duties, Investment Screening and ETIs: A Flexible Approach for Changing Times”, May 2005Prudent process – demonstrate that care and diligence is applied in evaluating an investment decision:Conduct necessary research and obtain expert adviceIncorporate practices into the plan’s investment policyIncorporate protective measures to reduce riskin the case of initial uncertainty about the potential risk associated with a particular investment, pension plans may allot a small portion of their assets consistent with a risk diversification strategy so that any possible losses will not materially impact the fund’s overall performanceEstablish benchmarks to measure performanceDelegate responsibilities and monitor agentsProvide trustees with the discretion to withdrawCommunicate to plan members