When the New York State Common Retirement Fund topped up its in-state investing programme with $200 million in 2015, comptroller DiNapoli said the pension fund had two priorities: “generating returns for the pension fund… and helping to boost the state’s economy”. We would now recognise this dual purpose as a form of impact investing: the fund channels capital to underfunded communities in the state (typically outside New York City).
Many other state retirement systems, including Florida, New Mexico, North Dakota and Indiana, have also launched in-state investment programmes. It is not just US investors; in the UK, Local Government Pension Schemes such as South Yorkshire, Greater Manchester and Clwyd have ‘local/impact’ allocations for private equity, credit or real assets.
Typically, these investors have started small and increased as the programmes evolved. MassMutual, for example, started with a $50 million allocation as “first hypothesis testing” and added a further $100 million this month, as head of impact investing Liz Roberts told New Private Markets.
In some cases, they have generated below-market returns: NYSCRF’s in-state private equity allocation, for example, reported an IRR of 11 percent in March 2022, while its general private equity bucket returned 19.9 percent in the year to March 2022. “Returns might be on the lower side” for Greater Manchester’s local venture investments, assistant executive director Paddy Dowdall said last year, but he described the local venture portfolio overall as “reasonably successful”.
There are other complexities for these investors. Greater Manchester reported “concern[s] that we are unable to measure the impact… [and] that we do not publicise our activities effectively” in documents accompanying last week’s board meeting. Alaska Permanent Fund is shuttering its in-state private equity allocation this month following a spate of local criticisms around recent investments.
Pledging to support local economies as well as pension members – categories which largely overlap – means that locals have both higher expectations and stronger influence. “What happens if one of the managers decides to lay off 10 percent of its staff from one of their investments? Can you imagine the headlines and pressure on us to step in and prevent that from happening?” Alaska board member Steve Rieger said.
Investors are finding they need to implement more robust governance for their local impact allocations. Greater Manchester, for example, has recruited impact consultant The Good Economy to address its measurement and publicity concerns. NYSCRF uses Hamilton Lane as an adviser to deploy its in-state allocation; Hamilton Lane performs “an additional layer of due diligence and evaluation for these funds to make sure we are partnering up with the right management team… [and] supporting a good story”, David Helgerson, the co-head of impact investments at Hamilton Lane, told affiliate publication Buyouts.
Local impact allocations could play a vital role in community generation and can provide investors with rare access to lucrative and untapped deals. But such allocations don’t always work, as Alaska’s case has shown. For them to survive, investors should be prepared to give these programmes more attention, and expect more scrutiny, than their traditional investments.