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Public Pension Funds and Urban Revitalization. October 25, 2005 Hartford, Connecticut Tessa Hebb, Senior Research Associate Lisa Hagerman, Research Fellow Labor & Worklife Program, Harvard Law School Oxford University Centre for the Environment
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Public Pension Funds and Urban Revitalization October 25, 2005 Hartford, Connecticut Tessa Hebb, Senior Research Associate Lisa Hagerman, Research Fellow Labor & Worklife Program, Harvard Law School Oxford University Centre for the Environment Sponsored by the Rockefeller and Ford Foundations
Presentation Overview • Best practice findings from three pension fund case studies • NY City & State: fixed income focus • CalPERS: private equity and real estate • Implications drawn from this research
Urban Investment Strategies • Types of targeted investment • Private equity • Real estate • Fixed income • Infrastructure • Credit enhancement • Success if measured in risk adjusted rates of return • Pension funds are not market makers
New York City - NYCERSEconomically Targeted Investment (ETI) Policy • Returns must be comparable to non-targeted investment • Guided by strategic asset allocation policy • 2% across assets to date majority in fixed income • August 2005 ETI policy target allocation: • 6% of fixed Income portfolio (30% of total) • 2% of private equity portfolio (5% of total) • 2% of real estate portfolio (6% of total) • Geographic target (5 boroughs) and to fill capital gap
Public Private Partnership $42.7b NYCERS 2% ETIs Capital deployed 11,000 housing units NYCERS commits to buy loan at lock-in interest rate CPC/JPMorgan Chase makes construction loan as permanent financing in place 100% SONYMA Guarantee - P&I since 1978 total claims only $1.7 m. NYCERS no losses Partners have track record know neighborhood & developers City - tax abatements agencies - low rate second mortgages
NYCERS Fixed Income • PPAR Program (CPC/J.P. Morgan Chase CDC): • 11,000 apartments 3,000 in works • $208 m. invested $123.m committed • 10 year net return forward-rate commitments: 9.33% Benchmark: Lehman Aggregate: 7.72% • Investments in national funds leverage fund (i.e. HIT $500m. in NYC ) to make direct investments • Investments programmatic - deflect political interference
New York State - NYSLRSCommon Retirement Fund Fixed Income • Affordable Housing Permanent Loans (1991) Over 6,000 units 3,148 in works Invested $205m. Committed $400m. to CPC Program • Mortgage Pass-Through Program (1981) Purchased $6.8 b. in NY state mortgages Homes to over 60,000 residents • Backed by Fannie Mae and Freddie Mac • Total fixed income portfolio 5 year return 9.28%
Common Retirement Fund Private Equity & Real Estate • In-state Private Equity Program • Response to Jobs 2000 Act • $364m. committed / over $250m. legislated target • 12 private equity managers • Real Estate: $25m. mixed use complex • NYC - 360 rental apartments - first phase • 80% market-rate 20% low-income housing • Commercial - community center, supermarket
CalPERS’ Targeted Investments • Geographic targeting: underserved capital markets • Real estate – CURE Program ($1.6 b.) • Private equity – California Initiative ($500 m.)
CalPERS’ Real Estate • Thirteen vehicles in targeted real estate • Broad geographic focus • ‘Location, location, location’ • CURE program initiated in 1997 • IRR 22.2% since inception
Targeted Investment in Urban Revitalization – Hollywood CA Woolworth Building: Hollywood CA CIM Group
CalPERS’ Urban Real EstateTime Warner Center New York NY Time Warner Center CUIP
CalPERS Private Equity • California Initiative started in 2000 • Ten vehicles of varying types across all stages • Large and small investments - $200 m. to $10 m.
Impacts • Too early for financial results • $230m invested in 56 companies • 37 in California • All investments met one or more social objective: • underserved capital markets 63% of total investment • women and/or minority owned businesses 57% • employed low/moderate income workforce 36%
CalPERS’: California InitiativePacific Community Ventures: Planet Organics – San Francisco
Steps in Targeting Investment • Board level champion • Board direction “let’s look at..” • Staff get outside expert study • Boards set broad targets • Select appropriate asset class and amount • Issue RFP • Hire top-quartile manager
Best Practice in Pension Fund Urban Investment • Success is measured first in risk-adjusted rates of return • Geographic rather than social targeting • Set broad targets • Allow top-quartile vehicles to do their job
Conclusion • Targeted investment can generate risk-adjusted rates of return and healthy vibrant communities • Pension funds are not excessive risk-takers or market makers • Best practice in targeted investing is important for success • While these cases look at some of the nation’s largest cities, what are the market-rate opportunities in urban revitalization in the smaller US cities? • For more information visit: http://urban.ouce.ox.ac.uk