Investing in America s Emerging Markets. Global Conference 2010

Transcription

1 Investing in America s Emerging Markets Global Conference 2010

2 Investing in America s Emerging Markets Monday, April 26, 2010; 2:30-3:45 PM Moderator: Betsy Zeidman, Research Fellow and Director of the Center for Emerging Domestic Markets, Milken Institute Speakers: Frank Altman, President and CEO, Community Reinvestment Fund, USA Nancy Andrews, President and CEO, Low Income Investment Fund Austin Beutner, First Deputy Mayor and Chief Executive for Economic and Business Policy, City of Los Angeles Alicia Glen, Managing Director, Urban Investment Group, Goldman Sachs Nancy Pfund, Managing Partner, DBL Investors 2

3 Emerging Domestic Markets (EDMs) Definition People, places or enterprises with growth potential that face capital constraints due to systematic undervaluation as a result of imperfect market information 3

4 Examples of EDMs Ethnic- and women-owned firms Urban and rural communities Companies serving low- to moderate- income populations 4

5 Community Reinvestment Act Definition Passed in 1977, a U.S. federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods 5

6 Community Development Finance Institutions Definition A non-governmental for-profit or nonprofit entity that has a primary mission of community development, is predominantly a financing entity, provides development services in conjunction with financing, and principally serves and is accountable to a target market 6

7 New Markets Tax Credit (NMTC) Definition Established in the Community Renewal Tax Relief Act of 2000, provides investors (individuals, financial institutions, other corporations, etc.) with a tax credit for investing in communities that are economically distressed or consist of low-income populations 7

8 Low Income Housing Tax Credit (LIHTC) Definition Tax credit created under the Tax Reform Act of 1986 that gives incentives for the utilization of private equity in the development of affordable housing aimed at low-income Americans 8

9 Low Income Housing Tax Credit (LIHTC) Definition Source: U.S. Government Accountability Office. 9

10 CDFI Assessment and Rating System (CARS ) Definition Comprehensive methodology for rating community development financial institutions (CDFIs) developed by Opportunity Finance Network Rates CDFIs in the areas of impact performance and financial strength and performance Aids investors and donors in their investment decisionmaking process 10

11 Size of community development banking sector Community development banking institutions = (NCIF estimate) Certified CDFI banks = 62 All banks and thrifts = 8,247 Minority depository institutions = 217 Community development banking sector Source: Adapted from National Community Investment Fund. 11

12 Federal Reserve analysis found no connection between CRA and subprime problems Nearly 60 percent of higher-priced loans went to middle- or higher-income h i borrowers or neighborhoods h About 20 percent of the higher-priced loans that were extended in LMI areas, or to LMI borrowers, were loans originated by lenders not covered by the CRA Only 6 percent of all higher-priced h i loans were made by CRAcovered lenders to borrowers and neighborhoods targeted by the CRA Source: Elizabeth A. Duke, CRA a framework for the future, speech at the Revisiting the CRA Policy Discussion, Washington DC, 24 February

13 CDFIs tracked by the CDFI Data Project created wide-ranging social impact in 2007 CDFIs' community impact Number Affordable housing units constructed or renovated 57,274 Jobs created or maintained 34,276 Responsible mortgages to first-time and other homebuyers 15,546 Alternatives to payday loans 14,480 First bank accounts opened by low-income individuals 7, Community facilities in economically disadvantaged communities constructed or renovated 687 Source: CDFI Data Project, Community Development Financial Institutions: Providing Capital, Building Communities, Creating Impact (July 2009). 13

14 CDFIs continue to face capital constraints and high demand 4Q 2009 survey of CDFIs Respondents reporting: Percent Being capital constrained 50% Originations did not keep pace with demand 53% Developing new products to meet changing demands 35% Average portfolio-at-risk 13% Expectations that demand for financing will increase 68% Expectations of new liquidity and/or operating challenges next quarter 67% Source: Opportunity Finance Network, CDFI Market Conditions Report: Fourth Quarter 2009 (March 2010). 14

15 Future population growth due to ethnic population Population (millions) 250 Non-ethnic Non-Ethnic 200 Ethnic Ethnic Source: Minority Business Development Agency. 15

16 Projected growth of U.S. ethnic populations Percent of total population 60 Asian American 50 Hispanic/Latino African American Source: U.S. Census Bureau. 16

17 Emerging domestic markets Better risk profile than international emerging markets Emerging Emerging Risk factors domestic international markets markets Political risks - Expropriation - Regime volatility - Legal contract Currency risk Market risk 17

18 EDM investment opportunities Across asset classes Public equities Fixed income Alternative investments Real estate Private equity Cash 18

19 Continuum of EDM investments Cash Fixed Public Alternative income equity assets Deposits Bonds Bond funds Asset-backed securities Direct public equity Screened funds Direct private equity Private equity funds VC funds Urban real estate Grants Recoverable grants/ guarantees Loans Community development venture capital Fund of funds Buyout funds Philanthropic return Financial return 19

20 Green jobs Definition Jobs involved in economic activities that help protect or restore the environment or conserve natural resources. These activities generally fall into the following categories: Renewable energy Energy efficiency Greenhouse gas reduction Pollution reduction and cleanup Recycling and waste reduction Agricultural and natural resources conservation Education, compliance, public awareness, and training Source: Bureau of Labor Statistics. 20

21 Clean energy investments of $150 billion per year could produce major benefits to the poor More jobs 870,000 jobs for workers with low education credentials Increased earnings 2% increase in earnings Reduced living costs Up to 4% through h retrofits Up to 4% by improving access to public transit 10% for households able to replace a car with public transit Source: Robert Pollin Jeannette Wicks-Lim, and Heidi Garrett-Peltier. Green Prosperity: How Clean-Energy Policies Can Fight Poverty and Raise Living Standards in the United States (June 2009). 21

22 American Recovery and Reinvestment Act Community development-related investments U.S. Small Business Administration $1.04 billion* Temporary elimination of fees on SBA-backed loans; increase in SBA's guarantee percentage New loan program to help small businesses meet existing debt payments Expansion of SBA s Microloan program Technology systems to streamline SBA s processes Expansion of Surety Bond Guarantee program U.S. Department of Housing and Urban Development $13.6 billion Public Housing Capital Fund Native American Housing Block Grants Assisted Housing Energy Retrofit Lead Hazard Reduction Tax Credit Assistance Program Community Development Block Grants Project-Based Rental Assistance Neighborhood Stabilization Program Homelessness Prevention U.S. Department of the Treasury $162 billion** Economic Recovery Payments CDFI Fund New Markets Tax Credits Grants to states for low-income housing projects in lieu of LIHTC allocations for 2009 Tax-relief programs Sources: Recovery.gov, U.S. Department of the Treasury, U.S. Small Business Administration, U.S. Housing and Urban Development. Notes: *SBA originally received $730 million through ARRA, but received an additional $305 million to continue some of its recovery activities. **The Treasury had allocated $162 billion in Recovery funds as of February 28,

23 Allocation of ARRA funding for residential energy efficiency The $16.8 billion designated for the Office of Energy Efficiency and Renewable Energy Energy Efficiency and Conservation Block Grants; $3.2 billion Energy Efficiency Research; $2.5 billion Others; $3 billion Weatherization Assistance Program; $5 billion Retrofit Ramp-Ups in Energy Efficiency; $ 454 million State Energy Programs; $3.1 billion Note: ARRA = American Recovery and Reinvestment Act of Source: U.S. Department of Energy. 23

24 SBA Recovery Act funding Original allocation Funds Program purpose p (US$ millions) Fee reductions in 7(a) and 504 lending programs $299 Increased guarantees in 7(a) lending program $76 Microloan lending to intermediaries $6 Microloan technical assistance $24 Business Stabilization (ARC) Loans $255 Surety Bond Guarantee Revolving Fund $15 Improving technology $20 Administrative expenses $25 Inspector General $10 TOTAL $730 Source: U.S. Small Business Administration. 24

25 Actions to support small business through the American Recovery and Reinvestment Act Improved access to credit Increased SBA weekly loan volume by over 90% through higher loan guarantees, fee eliminations and efforts to unfreeze the secondary market New reporting requirements for small business lending Larger SBA loan sizes and low cost capital to community banks and CDFIs Lower small business taxes Extension of enhanced small business expensing Five year carryback of net operating losses Exclusion of small business capital gains Estimated tax payment relief Support through contracting programs 29% of Recovery Act contracting dollars have gone to small businesses 25

26 SBA loans funded by the Recovery Act As of March 31, 2010 Program Loans approved (US$ millions) Jobs created / maintained (estimate) 7(a) $13, , $4,487 90,817 ARC $225 52,517 Microloans $2 357 Surety bonds $ Source: U.S. Small Business Administration. 26

27 Small Business Lending Fund Announced February 2010 Proposed by the Obama Administration; requires congressional approval Would transfer $30 billion from the Troubled Asset Relief Program to a program that will support small business lending Would support lending among small- and medium-sized banks (with assets under $10 billion) These banks account for over 50 percent of all small business loans nationwide, even though they make up only 20 percent of all bank assets. Would contain an incentive structure, such as a reduction in the cost of capital as lending increases Source: U.S. Department of the Treasury. 27

28 TARP initiative for CDFIs Announced February 2010 Expands the program announced in October to provide government capital to CDFIs Allows CDFIs to receive capital investments at a dividend rate of 2 percent, compared to the 5 percent rate offered under the Capital Purchase Program Allows institutions to apply for Treasury investments of up to 5 percent of riskweighted assets An institution that might not otherwise be approved for participation will be eligible if it can raise enough private capital that when matched with Treasury capital up to 5 percent of risk-weighted assets it can reach viability. Source: U.S. Department of the Treasury. 28

29 "Pathways Out of Poverty" grants Authorized by the American Recovery and Reinvestment Act of 2009 $150 million in green jobs training grants Support programs that help disadvantaged populations find employment in energy efficiency and renewable energy industries Targeted populations will receive supportive services, including: Recruitment and referral services Basic skills, work-readiness and occupational skills training Services to help overcome barriers to employment Source: U.S. Department of Labor. 29

30 Healthy Food Financing Initiative Initiative of the Obama Administration, announced February 2010 Goal: To bring grocery stores and other healthy food retailers to underserved ed urban and rural ral communities across America that currently lack those options Funding would come from three agencies: Treasury: $250 million in New Markets Tax Credits and $25 million for CDFIs devoted to helping finance healthy food options USDA: $50 million supporting $150 million in public and private investments Department of Health and Human Services: $20 million in grants to community development organizations Source: U.S. Department of Health and Human Services. 30

31 10,000 Small Businesses Goldman Sachs Five-year effort providing underserved small business owners with access to capital, business education, mentors and networks $200 million to program partners (e.g., local community colleges) to provide scholarships and build educational capacity $300 million in lending and philanthropic support to CDFIs Based on the broadly held view of leading experts that: Small businesses are a leading source of job creation in the U.S. A combination of education, capital and support services best addresses the barriers to growth for small businesses. Source: Goldman Sachs. 31

32 Small businesses account for lion s share of private sector job growth Source: BLS. 32

33 Ten largest U.S. state economies all depend on small business job growth Source: SBA. 33

34 Small business private sector job growth hit hard in current recession Quarterly, 1993Q2 2009Q2 Sources: BLS, NBER. 34

35 Small businesses believe they will lead the U.S. out of current recession Sources: U.S. Small Business Outlook 2010: Lessons Learned A Case for Greater Optimism, CIT in association with Forbes Insights. 35

36 Net percent of small business survey respondents with difficulties obtaining credit Monthly, Jan Feb Sources: National Federation of Independent Business, Economy.com, NBER. 36

37 SBA loan volume down 57% since 2007 Fiscal Year, Source: SBA. 37

38 Small businesses depend largely on bank loans and credit cards for financing Source: National Small Business Association Survey (December 2009). 38

39 Small and medium sized banks commit larger share of assets to small business loans YTD (12/31/2009) Source: FDIC. 39

40 60 percent of current decline in job creation stems from small businesses versus 26 percent in previous recession Percent Job creation with <100 employees Job destruction with <100 employees Q Q Sources: Bureau of Labor Statistics, Moody s Economy.com. Q Q

41 Industrial and commercial loans by all depository institutions declined in 2009 Quarterly change, US$ billions Q Q Q Q Q Q Q Q Q Q Q Q4 Source: FDIC. 41

42 Loan issuance in the United States Quarterly, Q to Q US$ billions Investment grade Leveraged Highly leveraged Source: Dealogic. 42

43 Bank lending continues to decline, while businesses and individuals draw upon existing credit lines US$ trillions Unused commitments Net loans and leases Q Q Q Q Q Q Q Q Q Q Q Q Q Q3 Sources: FDIC, Milken Institute. 43

44 Yield on the 10-year Treasury note is rebounding Yield on the 10-year Treasury note, percent Source: Federal Reserve. 44

45 More businesses in bankruptcy Number of businesses filing for bankruptcy 70,000 60,000 50,000 40,000 30,000 20, ,000 0 Source: U.S. Courts

46 Volatility: Still above pre-crisis level VIX Chicago indexboard Options Exchange Volatility Index (VIX) Pre-crisis average, 2004 to June 2007: Source: Bloomberg. 46

47 Total credit market debt/us GDP 1916 to 2009 Percent Great Depression Today Sources: Federal Reserve, Historical Statistics of the United States, Bureau of Labor Statistics, Milken Institute. 47

48 Jobless recovery in the United States? Total employed, millions Civilian unemployment rate, percent /1/2007 5/1/2007 9/1/2007 1/1/2008 5/1/2008 9/1/2008 1/1/2009 5/1/2009 9/1/2009 Source: Bureau of Labor Statistics. 0 48

49 A liquidity crisis Leveraged loan market: Minimal capital available to loan market from Hedge Funds, CLOs, Banks Subprime: Defaults & losses lead to uncertainty & loss of confidence Hedge funds: Marked-to-market losses, conditions to equity withdrawals and liquidations Liquidity Crisis SIVs & Conduits: Loss of confidence results in disappearance of short term funding/abcp market forcing some SIVs holding LT portfolios into default and liquidations CLOs: Bank warehousing lines frozen, AAA lender disappears, closes ABS market Source: Ares. Banks: Illiquidity and disappearance of lenders leads to overhang of loans on bank books causing markdowns and secondary price decline 49

50 Differentiating CLOs versus CDOs CLOs The Good CDOs The Bad High quality product Low quality product No AAA CLO has lost principal value More suitable leverage Ability to access underlying collateral Contributor tor to lower cost of bank debt CLOs act like a synthetic bank Provides meaningful benefit to the U.S. economy Ratings agency did not understand the correlation risks Imprudent leverage Impossible to access underlying collateral leading to decreased ability to fix systemic problems associated with the product Destroyed balance sheets of banks 50

51 U.S. real GDP expanding as economy recovers Quarterly, 1990Q1 2009Q4 Sources: BEA, NBER. 51

52 U.S. household net worth beginning to rise Quarterly, 1995Q1 2009Q4 Source: Federal Reserve. 52

53 2009: first time on record that total U.S. household debt fell year-over-year Annual, Source: Federal Reserve. 53

54 Panelist slides 54

55 Frank Altman President and CEO Community Reinvestment Fund, USA 55

56 NMTC Green Building Loan for businesses For small businesses seeking financing for energy efficiency upgrades in low-income communities Includes energy retrofits, energy efficient heating and cooling equipment, weather stripping, solar panels Funded by New Markets Tax Credits Utilizes green underwriting standards d from Capital Markets Partnership Pilot program 56