COMMUNITY INVESTMENT FUND CONSULTATION DRAFT

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COMMUNITY INVESTMENT FUND CONSULTATION DRAFT

  1. 1. COMMUNITY INVESTMENT FUND CONSULTATION DRAFT JANUARY 2006
  2. 2. CONTEXT AND BACKGROUND <ul><li>Capital gap in the community investment sector </li></ul><ul><li>Experience in the U.S. demonstrates community investments can generate market returns for institutional investors </li></ul><ul><li>Initiative to establish community investment fund in Canada for institutional investors </li></ul><ul><li>Funded by Western Diversification and managed by the Canadian Community Economic Development Network (CCEDNet) </li></ul>
  3. 3. COMMUNITY INVESTMENT DEFINED <ul><li>Different definitions of community investment (CI) or community development finance </li></ul><ul><li>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 </li></ul>
  4. 4. RATIONALE <ul><li>Community investing is an emerging asset class: as with private equity 15 years ago, CI creates new investment opportunities </li></ul><ul><li>Opportunity to take advantage of unique assets that exist in underserved markets, e.g. under-utilized skills, local community knowledge </li></ul>
  5. 5. US ETI EXPERIENCE <ul><li>American pension funds involved in community development finance: </li></ul><ul><li>CalPERS </li></ul><ul><li>New York State Pension Funds </li></ul><ul><li>New York City Pension Funds </li></ul><ul><li>United Methodist Church General Board of Pensions and Health Benefits </li></ul><ul><li>The Church Pension Group (Episcopal Church of America ) </li></ul><ul><li>AFL-CIO Housing Investment Trust </li></ul>
  6. 6. ANALYSIS OF US ETI EXPERIENCE (4 case studies) <ul><li>ETI policies from 5 – 20 years old </li></ul><ul><li>Purpose: To finance under-invested markets, e.g. affordable housing, community facilities, small business, international micro-finance </li></ul><ul><li>Primarily low-income housing </li></ul><ul><li>Allocation cap: .8% - 10% of fund assets; 2% common </li></ul><ul><li>Comparable returns to asset class </li></ul><ul><li>Work through intermediaries </li></ul>
  7. 7. CANADIAN ETI EXPERIENCE <ul><li>Concert Properties </li></ul><ul><li>Over $800 M in assets </li></ul><ul><li>Established in 1989 </li></ul><ul><li>100% of fund in ETI projects: </li></ul><ul><ul><li>Commercial, industrial and residential real estate, including affordable rental housing </li></ul></ul><ul><ul><li>Mandate to employ unionized trades people on job sites </li></ul></ul>
  8. 8. CANADIAN ETI PRODUCT <ul><li>CMHC: Canada Mortgage Bonds (CMB) Program (June 2005) </li></ul><ul><li>M ortgage loan financing for social housin g </li></ul><ul><li>Principal guaranteed by government </li></ul><ul><li>3.55 - 5.527% coupon since inception </li></ul><ul><li>46% of investors are pension and fund managers (mix of Canadian and international investors) </li></ul><ul><li>$54.45 billion in pool </li></ul>
  9. 9. COMMUNITY INVESTMENT FUND PROPOSAL <ul><li>Seeking feedback on $20 M Community Investment Opportunity </li></ul>
  10. 10. CIF OBJECTIVES <ul><li>Maintain security of invested capital </li></ul><ul><li>Provide return equivalent to GOC 5-year bond rate </li></ul><ul><li>Low investment risk through government guarantee of principal (TBD) </li></ul><ul><li>Support community economic growth and asset development </li></ul>
  11. 11. FINANCIAL STRUCTURE <ul><li>Returns/Asset Class: Equivalent to GOC 5-year bond rate </li></ul><ul><li>Risk: Principal guaranteed by government (TBD) </li></ul><ul><li>Liquidity: A vailable 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)  </li></ul><ul><li>Governance: Oversight provided by intermediary (Vancity) and proposed Investment Committee (2/7 reps are investor appointments); both investor reps must be in agreement </li></ul>
  12. 12. CAPITAL FLOW Investor A Investor B Investor C Investor D Intermediary: Vancity Credit Union Investment Committee Credit Unions (3) Loan Funds (3)
  13. 13. LENDING CRITERIA <ul><li>Project must be in Western Canada </li></ul><ul><li>Conventionally sound and viable investment </li></ul><ul><li>Strength of the borrower </li></ul><ul><li>Strength of the project </li></ul><ul><li>Loan projects must be community/FN; CED impact </li></ul><ul><li>Terms of no more than 5 years </li></ul>
  14. 14. INVESTMENT STRATEGY <ul><li>Company characteristics </li></ul><ul><li>Small businesses that diversify and strengthen local economies </li></ul><ul><li>Community real estate including affordable housing, community facilities and construction financing, non-profit asset development </li></ul><ul><li>Businesses with less than $10 million in annual revenues and less than 100 employees </li></ul>
  15. 15. INVESTMENT STRATEGY CONTINUED <ul><li>Deal Characteristics </li></ul><ul><li>Debt financing </li></ul><ul><li>$2 M maximum </li></ul><ul><li>Borrowers include individuals, partnerships, societies, co-operatives or corporations </li></ul><ul><li>Excluded: tobacco, pornography, franchises, multi-level marketing schemes, gambling casinos or bingo halls (to be aligned with government restrictions) </li></ul><ul><li>Reasonable security and equity components </li></ul>
  16. 16. INTERMEDIARY <ul><li>Vancity Credit Union: </li></ul><ul><li>$10.5 billion in assets; largest community-based credit union in the world </li></ul><ul><li>Citizens Bank, wholly owned subsidiary, offers commercial loans; national license with offices in Vancouver, Calgary and Toronto </li></ul><ul><li>Proven track record in social economy </li></ul><ul><li>$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 </li></ul><ul><li>Leading ethical fund managers; major wealth management division including full service brokerage </li></ul><ul><li>$300 M Victoria real estate project </li></ul><ul><li>Range of community development finance vehicles </li></ul>
  17. 17. PARTNERSHIP OPERATING TERMS <ul><li>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 </li></ul><ul><li>Investment Approval: 4 out of 7 in agreement; both investor representatives in agreement </li></ul>
  18. 18. PARTNERSHIP OPERATING TERMS CONTINUED <ul><li>Transaction Size: Minimum transaction size of $50,000 with maximum of $2,000,000 </li></ul><ul><li>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.) </li></ul>
  19. 19. LOAN DIVERSIFICATION <ul><li>Asset Target </li></ul><ul><li>Commercial and non-profit loans: 25 – 50% </li></ul><ul><li>Community real estate (including </li></ul><ul><li>affordable housing): 50 – 75% </li></ul>
  20. 20. GEOGRAPHIC DIVERSIFICATION <ul><li>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. </li></ul>
  21. 21. DEAL FLOW <ul><li>Targeted deal flow: $4 – 5 M per year in business financings </li></ul>
  22. 22. RISK CONTROLS <ul><li>Government guarantee of principal </li></ul><ul><li>Loans will be secured by an appropriate combination of mortgages, chattel mortgages, general security agreements, personal property security agreements, promissory notes and personal guarantees </li></ul><ul><li>Double diligence for larger transactions </li></ul><ul><li>Diversified investment pool </li></ul>
  23. 23. PRINCIPAL TERMS <ul><li>Fund size $20 million </li></ul><ul><li>Commitment Minimum $1 million </li></ul><ul><li>Term 5 year minimum (for Investors) </li></ul><ul><li>Management fee 1.25% </li></ul>

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