Transcript COMMUNITY INVESTMENT FUND

COMMUNITY INVESTMENT
FUND
CONSULTATION DRAFT
JANUARY 2006
CONTEXT AND BACKGROUND
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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
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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
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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)
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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
COMMUNITY INVESTMENT FUND
PROPOSAL
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Seeking feedback on $20 M Community
Investment Opportunity
CIF OBJECTIVES
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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
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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
CAPITAL FLOW
Investor
A
Investor
B
Investor
C
Investor
D
Intermediary:
Vancity
Credit Union
Investment
Committee
Credit
Unions
(3)
Loan
Funds
(3)
LENDING CRITERIA
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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:
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$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
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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
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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:
 Community real estate (including
affordable housing):
25 – 50%
50 – 75%
GEOGRAPHIC DIVERSIFICATION
Asset distribution will be populationdriven. If no take-up, assets will be reallocated to active provinces, with
flexibility for financings that cross
provincial boundaries.
DEAL FLOW
Targeted deal flow: $4 – 5 M per year in
business financings
RISK CONTROLS
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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
PRINCIPAL TERMS
Fund size
Commitment
Term
Management fee
$20 million
Minimum $1 million
5 year minimum (for Investors)
1.25%