Pension Funds Cautious on Making Bank Investments
Fajt, Marissa, American Banker
Byline: Marissa Fajt
With trillions of dollars to invest, pension funds would appear to be an attractive source of much-needed capital for the banking industry.
Yet despite encouragement from bank regulators, few pension funds are making investments directly into banks - and fewer still are willing to make infusions into community banks with less than $10 billion of assets.
The reasons for the cold shoulder from pension funds are varied and complicated yet industry watchers basically say that fund managers lack the wherewithal - because they don't have enough staff or expertise - to choose and manage their own investments.
Despite the potential for higher returns from direct investment in banks, pension funds are unlikely to look to individual banks.
"Pension funds are faced with many issues," said Dory Wiley, the president and chief executive of the investment banking firm Commerce Street Capital LLC - which operates bank-focused private-equity funds - and a former board member of the Teacher Retirement System of Texas.
"One, they only have a certain amount of bandwidth. Two, there is a little space between pension funds and consultants - the opportunities are difficult for them to get their hands around, and finding what is real expertise in the sector is difficult," he said. "Several have thrown their hands up and said it is just too hard."
Wiley said retirement funds, such as the $100 billion Texas teachers fund, are interested in investing money in the banking sector, but because they don't have the knowledge and staff to make the investment and then monitor it, they are looking for private-equity funds as partners.
Still, finding a private-equity fund with expertise in the banking sector isn't as easy as pulling out the Yellow Pages.
Wiley said pension funds typically have long-term relationships with those managing the private-equity funds in which they invest; taking on a new manager can be difficult.
"Pension funds wonder 'How do I work another relationship into what I am doing?'" he said. "They all know there are opportunities out there, but the question is how do they spend the time to deal with the relationship."
Typically, pension funds have chosen to make investments in the banking sector via stock purchases on the open market or through private-equity funds, which oversee the investment.
Wiley said he is currently working with several pension funds interested in putting money into his private-equity fund, but he cannot identify them.
Also, the New Jersey State Investment Council said it is considering private-equity and hedge funds that would have banks as part of their investment portfolio.
Yet there is an incentive for pension funds to bypass private-equity managers - they can save on fees by cutting out the middleman.
Also, the lackluster results from private-equity funds recently may have motivated some pension funds to reconsider paying for this expertise.
Meanwhile, industry observers say the Federal Deposit Insurance Corp. is encouraging investment by pension funds in banks, though the FDIC would not comment or make representatives available to discuss the issue for this story.
Industry watchers said regulators are encouraging direct investments in banks from the pension funds because they would be better bank investors - with more interest in long-term investments - than private-equity funds that are willing to take on more risk for higher returns.
While most pension fund managers are expected to continue using money managers, at least one pension fund has agreed to make a direct investment in a bank holding company.
The Oregon Investment Council voted in February to commit $100 million to Community Bancorp LLC in Houston. Community Bancorp was formed by Sageview Capital, an asset management firm with $1.4 billion under management and experiencewith bank investments. …