Investing people out of their homes
The risks of public pension fund investment in private equity
It’s the latest example of public pension funds investing in private equity at the expense of human rights. Pretium private equity is one of the targets of a congressional investigation, over its landlord companies reportedly filing evictions of residents at significantly higher rates in majority-Black counties than in majority-white counties. Last year, Canada’s Public Sector Pension Investment Board (PSP) entered in to a $700 million joint venture with Pretium, despite existing concerns over its track record.
“We can think of no better partner to expand our presence in this increasingly attractive asset class,” Pretium said in the announcement of its deal with PSP. The venture “demonstrates the increasing level of interest in SFR [single family rentals] from leading institutions as the asset class has delivered strong performance and is poised to benefit from meaningful secular tailwinds” (aka a social or economic trend that will drive strong returns over the long-term).
Pretium was founded by Don Mullen, former Goldman Sachs partner who shorted the 2008 mortgage crisis. “Sounds like we will make some serious money,” he said as the crisis loomed. During the pandemic, Pretium’s landlord companies moved to evict tenants at least 1,750 times, despite evictions moratoria being in place. And they did so at seven-times the rate in two majority Black counties in Georgia than in two comparable income majority white counties in Florida.
Testimony by the Private Equity Stakeholder Project highlighted other companies as well. Invitation Homes, for example, moved to evict at least 932 tenants, including disabled veterans and transportation workers, while experiencing a 30% increase in profits during 2020. Pretium and Invitation’s approach contrasts with others that have much lower eviction rates, like American Homes 4 Rent and Oaktree Capital.
The PSP-Pretium deal reflects wider trends, not only of private equity investments in housing, but also of pension fund investment in private equity. In March 2020, The Real Deal reported that four of the largest New York and California pension funds committed more than $30 billion to private real estate funds held by Brookfield Asset Management, Blackstone Group, Apollo Global Management and the Carlyle Group. Many of these funds are heavily invested in multi-family rental housing: the report flagged the tension between the pension funds’ search for high returns for pensioners and their stated social responsibility commitments, given the risks of being associated with evictions of rent-protected tenants.
Chasing high pension fund returns from private equity does not necessarily pay off in the long run. Recent reporting by Philadelphia Inquirer has shown how the Pennsylvania Public School Employees’ Retirement System (PSERS)’s early big bets on “alternative assets” including real estate (and its related high expenditure on external advisers) have come back to bite it while traditional stocks have boomed – its 10 year returns were the fifth worst in a 24 fund group. With the poor investment results, an FBI investigation underway (over specific real estate transactions, and mis-reporting returns) and an attempted takeover by disgruntled trustees, Pennsylvania legislators are now introducing bills to reform the pension fund.
As Shannon Rohan, Chief Strategy Officer of SHARE Canada said this month to Responsible Investor about the Pretium case:
“Unfortunately, raising rent and other occupancy-related fees are too often the central strategy to leverage capital and produce profits. Research on real estate investment trusts (REITs) show that displacing tenants, ‘repositioning buildings’ by making renovations and then raising rents for incoming tenants, is at the heart of many REIT business models. If we’re serious about equity and inclusion, pension funds should be engaging with their real estate portfolio companies on tenure rates and eviction rates, not only on a global level but broken down by jurisdictions.”
In “A private equity accountability gap”, I cover the ways that a) private equity globally is undergoing a major growth spurt, b) it’s fueled by investment from pension funds, development agencies and other institutional investors, c) it cuts across many sectors, though real estate is the largest and d) that given the current model of private equity with a stark lack of transparency and accountability, this has implications for a whole range of social and environmental impacts – from the right to housing, to workers’ rights (people working directly for companies bought out by PE firms, and people working throughout their supply chains), to the climate crisis.
So what’s to be done?
The response needs to be multi-faceted (more exploration of this and other related issues to come in future newsletters). Civil society groups and trade unions can work together on joint strategic research and campaigns, bringing some transparency and accountability where it’s lacking. The burden should not fall on them, however. Governments can regulate to curb the excesses (the Stop Wall Street Looting Act in the US, for example – while likely to face strong opposition – aims to strengthen the legal liabilities of general partners among other reforms; while in Europe cities are introducing and exploring measures to curb real estate speculation). And pension funds and other institutional investors can shift finance into investments that have medium to long-term returns that are closely connected to local communities’ needs.
As the quote from SHARE Canada indicates, investors should engage with the impacts of portfolio companies at the level of specific localities and jurisdictions – something that the channeling of investment through privately managed funds makes extremely difficult. One of the areas in which this link is clearer is through municipal bonds. In April this year Activest published “Social Justice Bonds: A New Model for Equitable Infrastructure Investment” with specific ways in which municipal bonds can mitigate risks to local communities, bring social benefits and contribute to redressing past injustices. A few months later the UN Principles for Responsible Investment (UNPRI) published its guidance: “ESG Integration into Sub-Sovereign Debt: The US Municipal Market” recognizing that:
“Momentum is building for investors in US municipal bonds (munis) to incorporate environmental, social and governance (ESG) factors systematically in their analysis and valuations.”
Another area that ties investment to positive local outcomes is the growing interest in “place-based impact investing”. The real impact of impact investing, however, depends a lot on how it takes place: it’s key to ensure that the “impact” is defined and shaped by the people who are impacted rather than distant investors; that the expected rate of return is not so high as to be extractive capitalism under a different guise; and that the investments are not seen as solutions in and of themselves, devoid of the need for economic policy change.
Google, for example, just published the 2021 report on its sustainability impact bond. It refers to its 2019 commitment to invest $1 billion in housing (of which $70 million was allocated this year). But when broken down - aside from the fact that constructing new housing is just a small piece of the wider puzzle - the numbers pale in comparison to the impacts that Google, along with other tech firms, has had on driving up housing prices and homelessness in the areas where they have a big presence. The investment is “expected to enable the development of at least 20,000 residential units, of which at least 5,000 will be affordable” the report reads.
For more perspectives on impact investing and its limitations - check out these two pieces in Harvard Business Review and Open Democracy.
Housing is just one area impacted by the growing role of private finance in the economy. But it is one with implications for so many others. The right to adequate housing is an “enabling right”, with direct implications for the rights to physical and mental health, to a family life, to privacy, and more. The more that investors realize and respond to the multiple implications of their decisions on people’s ability to have a decent place to live, the better.