COMMUNITY INVESTMENT FUND CONSULTATION DRAFT JANUARY 2006.
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Transcript of COMMUNITY INVESTMENT FUND CONSULTATION DRAFT JANUARY 2006.
CONTEXT AND BACKGROUND
Capital gap in the community investment sector
Experience in the U.S. demonstrates community investments can generate market returns for institutional investors
Initiative to establish community investment fund in Canada for institutional investors
Funded by Western Diversification and managed by the Canadian Community Economic Development Network (CCEDNet)
COMMUNITY INVESTMENT DEFINED
Different definitions of community investment (CI) or community development finance
For the purpose of the Community Investment Fund, CI is defined as: market grade investments that generate collateral social returns such as jobs, affordable housing, community economic restructuring and community services
RATIONALE Community investing is an emerging
asset class: as with private equity 15 years ago, CI creates new investment opportunities
Opportunity to take advantage of unique assets that exist in underserved markets, e.g. under-utilized skills, local community knowledge
US ETI EXPERIENCE
American pension funds involved in community development finance:
CalPERS New York State Pension Funds New York City Pension Funds United Methodist Church General Board of
Pensions and Health Benefits The Church Pension Group (Episcopal
Church of America) AFL-CIO Housing Investment Trust
ANALYSIS OF US ETI EXPERIENCE (4 case studies) ETI policies from 5 – 20 years old Purpose: To finance under-invested
markets, e.g. affordable housing, community facilities, small business, international micro-finance
Primarily low-income housing Allocation cap: .8% - 10% of fund assets;
2% common Comparable returns to asset class Work through intermediaries
CANADIAN ETI EXPERIENCE
Concert Properties Over $800 M in assets Established in 1989 100% of fund in ETI projects:
Commercial, industrial and residential real estate, including affordable rental housing
Mandate to employ unionized trades people on job sites
CANADIAN ETI PRODUCT
CMHC: Canada Mortgage Bonds (CMB) Program (June 2005)
Mortgage loan financing for social housing
Principal guaranteed by government 3.55 - 5.527% coupon since inception 46% of investors are pension and fund
managers (mix of Canadian and international investors)
$54.45 billion in pool
CIF OBJECTIVES
Maintain security of invested capital Provide return equivalent to GOC 5-year
bond rate Low investment risk through
government guarantee of principal (TBD)
Support community economic growth and asset development
FINANCIAL STRUCTURE Returns/Asset Class: Equivalent to GOC 5-year
bond rate Risk: Principal guaranteed by government (TBD) Liquidity: Available on a partial basis (prior to
normal five-year term) through redemption of CI Fund's cash holdings (20% of Fund to be held in Treasury Bills)
Governance: Oversight provided by intermediary (Vancity) and proposed Investment Committee (2/7 reps are investor appointments); both investor reps must be in agreement
Investor A
Investor B
Investor C
Investor D
Intermediary: Vancity Credit UnionInvestment
Committee
Credit Unions
(3)
Loan Funds
(3)
CAPITAL FLOW
LENDING CRITERIA
Project must be in Western Canada Conventionally sound and viable
investment Strength of the borrower Strength of the project Loan projects must be
community/FN; CED impact Terms of no more than 5 years
INVESTMENT STRATEGY
Company characteristics Small businesses that diversify and
strengthen local economies Community real estate including
affordable housing, community facilities and construction financing, non-profit asset development
Businesses with less than $10 million in annual revenues and less than 100 employees
INVESTMENT STRATEGY CONTINUED
Deal Characteristics Debt financing $2 M maximum Borrowers include individuals, partnerships,
societies, co-operatives or corporations Excluded: tobacco, pornography,
franchises, multi-level marketing schemes, gambling casinos or bingo halls (to be aligned with government restrictions)
Reasonable security and equity components
INTERMEDIARY
Vancity Credit Union: $10.5 billion in assets; largest community-based credit union
in the world Citizens Bank, wholly owned subsidiary, offers commercial
loans; national license with offices in Vancouver, Calgary and Toronto
Proven track record in social economy $18 M in regional development financing through Vancity
Capital Corporation: last 5 years invested $35 M in over 100 investments; 10 syndicated loan transactions over past 2 years
Leading ethical fund managers; major wealth management division including full service brokerage
$300 M Victoria real estate project Range of community development finance vehicles
PARTNERSHIP OPERATING TERMS Investment Committee: Reviews each
investment on a deal by deal basis. Members: 7 members including 2 from partner funds, 1 from applicant partner fund, 2 from Vancity, 2 from investor group; Vancity chairs committee
Investment Approval: 4 out of 7 in agreement; both investor
representatives in agreement
PARTNERSHIP OPERATING TERMS CONTINUED Transaction Size: Minimum transaction size of
$50,000 with maximum of $2,000,000
Returns: Partner will provide CIF pool a return equivalent to GOC
5-year bond rate. Partner is responsible for
achieving blended rate of return (I.e. partner may price loans at whatever rates the market will bear with an obligation to generate GOC 5-year bond rate to the CIF pool.)
LOAN DIVERSIFICATION
Asset Target Commercial and non-profit loans: 25 – 50% Community real estate (including affordable housing): 50 – 75%
GEOGRAPHIC DIVERSIFICATION
Asset distribution will be population-driven. If no take-up, assets will be re-allocated to active provinces, with flexibility for financings that cross provincial boundaries.
RISK CONTROLS
Government guarantee of principal Loans will be secured by an appropriate
combination of mortgages, chattel mortgages, general security agreements, personal property security agreements, promissory notes and personal guarantees
Double diligence for larger transactions Diversified investment pool