Insurance companies usually join forces as Limited Partners in funds or collaborate around commercial mortgage investment. When six of America’s largest insurers got together to set up their own asset manager back in 1998 it was unusual. The fact that manager was focused on socially responsible impact investment across healthcare, affordable housing and SME finance in underserved communities was positively unique.
Today, San Francisco-based Impact Community Capital’s (IMPACT) has around $2 billion invested in communities across the US of which one of its most successful and enduring allocations is a $1 billion investment in affordable and community housing. Via a pooling and securitising strategy IMPACT’s six founders invest in affordable multifamily rental housing, allowing people earning below average income across 40 US states to spend less on rent, giving them more to go on other necessities like childcare, groceries, healthcare and education.
As attention in impact investment grows so the complexity and challenges on the road to good intentions get more airtime. Responsible investment is littered with acronyms that complicate its message and definition, investors worry impact compromises risk and return, that it doesn’t fit with their fiduciary duty to policy holders or beneficiaries, and where to place it in their portfolios. Yet IMPACT and its founding insurers’ proven model shows one way to channel more capital for impact. It’s a success they are keen to share.
“We have this little gem and we want to share it and create more impact but it’s a tough thing to sell because it is unique,” says Michael Moran who leads real estate investment at Allstate Investments, the $89 billion investment division of The Allstate Corporation, one of America’s largest so-called personal lines insurers providing cover for things like property and casualty risk, and one of IMPACT’s six founders alongside Farmers Insurance, Nationwide, Pacific Life, Teachers Insurance & Annuity Association and 21st Century Insurance Company. They have a combined AUM of $760 billion.
The strategy
Impact’s owners rely on the company to originate and manage the investments for their common benefit, a fairly unique arrangement among large insurance companies who traditionally directly manage their real estate investments. Allstate, for instance, outsources the allocation because it’s niche and it can’t be expert in all areas. Other real estate allocations Allstate has, such as a $4.5 billion investment to commercial mortgages and a $2.5 billion allocation to real estate equity, are all run internally by a team of 20. We can’t match IMPACT’s operational expertise in originating, managing and making day-to-day decisions, says Moran.
Allstate is also too big to go it alone in impact where investment in affordable housing is small dollar amounts with loans typically around $2 million. In their model investment is made via closed end funds packaged up into securitisations, providing essential scale.
“By securitising a large number of small loans, we create a small number of much larger securities in a familiar investment structure that allows institutional investors to invest at a sufficient scale ($20+ million). A securitisation allows IMPACT to achieve scale, reach new investors and to recapitalise so that we can in turn make more loans and achieve greater scale,” says Jeff Brenner, president and chief executive at the manager.
“The number of qualified fund managers that offer market returns on a risk-adjusted basis on something that is scalable is very limited. The opportunity set here is very small, particularly when it comes with a clear line of sight on impact,” says Moran.
Launched in 2003, just a few years after IMPACT was founded, the strategy strives for long duration asset preservation that can weather market cycles and fits its founding investors’ income and yield-generating priorities. The debt investment has limited volatility, making it a low-risk proxy for corporate bonds.
“It’s both high yield and low volatility. This is why we like it,” says Moran who declines to name the amount Allstate has invested in the allocation over the years or the returns – other than state the insurer’s repeated investment since 2003 is testimony to the strategy hitting its target market rate returns.
The risks come with any rise in interest rates and its illiquidity.
“Cash flow from affordable multifamily is generally more stable than cash flow from market rate multifamily housing due to occupancy rates that are more stable and the lack of competitive alternatives for renters. On the other hand, there may be limits on a landlord’s ability to raise rents on an affordable multifamily property that don’t exist for market rate properties,” flags Brenner.
But he points to stark figures to illustrate the strength of demand.
“For every 100 extremely low-income renter households, there are only 37 available rental homes.”
IMPACT also specialises in projects benefiting from Low Income Housing Tax Credits, an important and significant part of the total capital stack that provides strong insulation against default. The LIHTC subsidises the acquisition, construction, and rehabilitation of affordable rental housing for low- and moderate-income tenants.
Measuring impact in the allocation is also relatively straightforward because it is tangible.
“We measure our impact on the community in the number of affordable units we create,” says Moran.
IMPACT also produces an impact report quarterly, and on an ad hoc basis when needed, that doesn’t just detail the number of houses built (45,000 to date) but also lists the level of affordability, the degree to which veterans, seniors or those with special needs have benefited, and the properties’ sustainability credentials. The impact priority is to reduce the cost of housing so that people are spending no more than 30 per cent of their income on housing.
Board control
The six founders have seats on IMPACT’s board where Moran, Allstate’s representative, describes the culture as “engaged.” Regular meetings focus on strategy and growth of the business, new funds and investment ideas and the right structures and underwriting approach.
“I can’t imagine a group of investors with more aligned interest,” he says.
Today that support and counsel is honed on helping IMPACT open the platform to new investors outside the six. IMPACT is expanding its team, growing its brand and building an investment approach that has the flexibility to meet different investors’ needs. For example, Brenner is looking at new opportunities in workforce housing for essential workers in inner cities, and different investment vehicles beyond closed end funds like separately managed accounts.
“We think we’ve created a platform that institutional investors will find appealing and we want to leverage it to bring new investors into this sector,” says Brenner. “Beyond our legacy investors, we are having increasing numbers of discussions with investors interested in the space but seeking greater flexibility and more alternatives beyond the typical fund approach.”
The future
Their model doesn’t fix all the enduring challenges of impact investment. Insurance companies are often public or mutual institutions with stakeholders that don’t’ share an impact mission. It makes justifying impact investment, particularly without the recourse to beneficiaries that pension funds have, difficult. They are also big institutions which take time to change.
“For impact investment to become a meaningful allocation for institutional investors, there have to be more opportunities and the breadth of the offering needs to grow,” says Moran. “As much as we see the benefits of this structure and its opportunities, it is going to take time to make it live outside our ownership group and for others to align with it.”
Yet he is also convinced this is starting to change, recently evident in the Business Roundtable’s pressure that large corporations should be run not just in the interests of shareholders, but also in the interests of stakeholders. “There is a shift in corporate responsibility to stakeholders like employees and communities in addition to our stockholders,” he says.
Now progress depends on more investment managers and opportunities to meet this need and opportunity to scale – something IMPACT is ready and waiting to provide.
