PSP Investments Putting Profits Over People?

Richard Warnica of the Toronto Star reports that already controversial for its ownership of Revera, one of Canada’s largest pension plans has just announced a $700-million joint venture with an architect of ‘the big short’:

Maya Abood grew up in Stockton, California, a historically poor community just far enough outside San Francisco to have only caught the tail end of the 2000s tech boom. For a brief, wild moment in those years, Stockton, which has been called America’s most diverse city, rebranded as a commuter town. “It’s like, a very far exurb,” Abood said — a distant hub for affordable(ish) housing on the far edge of the hottest market in the world.

Of course it didn’t last. Abood was in college when the economy collapsed in 2008. The housing market fell everywhere that year, but in Stockton, it cratered. Prices in some neighbourhoods dropped by as much as 75 per cent. Foreclosures piled up at the fastest rate in the nation. “Most people I knew were losing their homes,” Abood said. In 2012, Reuters called Stockton “the town the housing boom broke.”

The foreclosure crisis had a profound impact on Abood. After college, she took a job organizing tenants in South Los Angeles, the area that used to be known as South-Central. She was working with people who had, in many cases, already lost the homes they owned and were now facing eviction from the ones they rented. “That was the time of Occupy Wall Street and a lot of critical thought about the role of the financial markets in communities and in achieving housing stability,” she said. “They had a very personal connection to that moment in time.” 
Eventually, Abood decided to go back to grad school at MIT. She wanted to find out what had happened to all those foreclosed homes, in Stockton and Los Angeles and all over California. She wanted to know what the long-term impacts of the crisis had been on things like community ownership and wealth creation. What she found, to her surprise, was a whole new industry that had sprouted up to take advantage of the crash.

“Millions of homeowners were stripped of wealth and that wealth was primarily redistributed,” she said, not to other homeowners, but to the same industry that caused the crash in the first place. “Not every foreclosed home ended up in the hands of these Wall Street firms,” Abood said, “but many did.”

More than a decade after the crash, on the other side of the continent, across the border in a business world mired in a pandemic fugue, a Canadian Crown corporation signed a massive partnership with a hedge fund called Pretium Partners. The deal, a joint venture worth $700 million (U.S.), dropped the Public Sector Pension Investment Board, or PSP, into the world Abood had spent all those years studying. If the housing crash made a sound, Pretium’s business is the echo, and now PSP, which manages the pension funds of federal employees, the RCMP and the military, was right in the heart of it.

From the outside, the timing seemed curious. The last year had been something of an annus horribilis for PSP. Before the pandemic, it was not a particularly prominent institution. But COVID-19 had shone a new, less than flattering, light on the fund.

PSP owns one of Canada’s largest for-profit operators of long-term-care homes, a company called Revera. Since last spring, the fund has been inundated with calls to sell the company or even make it public. “We want our pension investments made in the best interest of our members, but also in the public interest as well,” said Chris Aylward, the national president of the Public Service Alliance of Canada, the union that represents most federal employees. “And what Revera is doing is anything but in the public interest.”

The Pretium partnership, announced Jan. 28, represents another jump into another controversial sector, at a time when PSP is already under unprecedented scrutiny. It underlines questions, italicized by Revera, about how exactly a pension fund should behave. For PSP, those questions are existential. They get to the heart of how it operates and why. They raise issues of governance and ethics and what exactly it means to succeed as a public body charged with making gains on the private markets.

For now, for PSP, the main question might be this: Should it be investing for the public good, or just for good returns?

If the housing market collapse was, for most of the world, a calamity of pain and hardship, for some on Wall Street, it was an opportunity. Beginning in the depths of the crash, Wall Street firms began buying up foreclosed or deeply discounted single-family homes, sprucing them up and renting them out on a massive scale. Across the sunbelt, in suburbs outside cities like Dallas, Phoenix, and Atlanta, buyers for these new firms began appearing at courthouse auctions in droves. “They would literally be having these agents and auction participants with duffle bags full of millions of dollars in cashiers’ cheques buying every house that fit their criteria of what they wanted,” said Ryan Dezember, a Wall Street Journal reporter who wrote a book about the industry called “Underwater,” which came out in July.

The new firms developed software to scour listings. They pioneered algorithms to predict revenues vs. costs. Soon, they were selling new securities backed, not by mortgage payments, but by rents. At first, the plan was to hold the assets and flip them when the market rebounded. But soon the business plan evolved. “They realized that there was money to be made,” Abood said — big money, not in selling the homes, but in renting them out for good.

Twelve years ago, the financialized single-family rental business basically didn’t exist in the United States. Today, it’s worth billions. Some of the largest institutional investors in the world have a stake in the industry. Meanwhile, some familiar figures from the crash have become major players in the business.

In 2012, Donald Mullen Jr., a long-time senior partner at Goldman Sachs left the company to found Pretium Partners, a hedge fund dedicated initially to buying up and renting out single-family homes. To close followers of the financial crisis, Mullen was something of a celebrity. He ran the unit at Goldman that had bet heavily against the housing market — the trades that became known as “the big short.” In 2007, as the housing market began to collapse, Mullen wrote to a colleague “sounds like we will make some serious money.”

Mullen’s entry into the new single-family rental market didn’t go unnoticed. “A guy whose most famous trade was a successful bet on the full-scale implosion of the housing market is now swooping in to pick up the pieces on the other end,” Kevin Roose wrote in New York Magazine. “Alas, such is the Wall Street circle of life.”

But the bad press didn’t deter Mullen. Pretium raised an initial $1.2 billion in 2012 to sink into rental homes — which it operates under the name Progress Residential — across the southwestern and southeastern United States. The company raised another $900 million in 2014, according to Dezember’s reporting, and another $1 billion in 2016. By the end of 2020, after swallowing up a rival company, Pretium was billing itself as the second largest owner and operator of single-family residential homes in the entire United States. “A big short,” Dezember wrote in 2016, “is going long on the U.S. housing market.”

The deal signed with PSP in January will allow Pretium to expand even further. The joint venture will invest an initial $700 million into single-family rental homes across the southwestern and southeastern United States, according to a press release. “We can think of no better partner to expand our presence in this increasingly attractive asset class and look forward to working with Pretium to deliver compelling results for our beneficiaries,” Carole Guérin, PSP’s managing director of real estate said in the release.

But if single-family rentals have a history of delivering solid returns, they’ve also proven, from the very beginning, to be incredibly controversial. The industry has been associated with a host of disturbing practices and trends, according to researchers, advocates and academics. “When you have these financial interests driving their strategies it puts a lot of people at harm,” said Nemoy Lewis, the Provost’s Postdoctoral Fellow in the department of geography and planning at the University of Toronto. For Lewis, an investment in the SFR industry is an inherently troubling one. “These types of investments are investments in the displacement of vulnerable people,” he said.

The core criticism of the finance backed SFR industry boils down to this: The companies have to deliver returns to their investors and to do that, they have to endlessly pull out more revenue on the one hand and push for lower costs on the other. “There’s all these kind of disciplining structures in that system to make sure those investors get paid,” Abood said. “They nickel and dime all the time.” That can mean ever-higher rents, escalating fees, delayed maintenance and aggressive eviction policies. “People are actually being kicked out of their homes right now,” said Pilar Sorensen, an investment analyst at the Private Equity Stakeholder Project.

Sorensen and her colleagues released a report in the fall showing that large corporate landlords had filed for almost 10,000 evictions in five states in the weeks after the CDC imposed an eviction moratorium in September. Not all of those are from single-family homes. But according to an updated database Sorensen provided, Progress and Front Yard Residential, a company Pretium acquired in January, have filed for nearly 1,000 evictions between them since the beginning of the pandemic.

In response to questions about the SFR business model and its own practices, a spokesperson for Pretium wrote, in part, “Progress is committed to providing residents with high-quality homes and superior service.” He said the company aims to respond to all work orders with 24 hours of being notified and that Progress is not currently evicting residents “if they file a declaration that meets the CDC’s eviction moratorium criteria.” He added, however, that Progress has a “fiduciary responsibility to take appropriate steps in accordance with the law to try and collect rent owed.”

For Martine August, an associate professor of planning at the University of Waterloo, the idea that a Canadian public pension fund, and a Crown corporation at that, is investing in this kind of financialized, housing is deeply disturbing. “Companies are acquiring this housing because of what they can get from it, not what they can put into it,” she said. “That money is not coming for free. And it’s harming people. And so to me, that’s out of step with what the objectives of public pension funds should be.”

PSP did not respond to questions related to the Pretium investment. A spokesperson did point the Star to a recent joint statement PSP signed saying the organization is committed to strengthening disclosures on environmental, social and governance issues and to “allocating capital to investments best placed to deliver long-term sustainable value creation.”

For PSP, the Pretium investment, like the one in Revera, is fundamentally about balancing value and values. And for pension managers, that isn’t always an easy thing to do. On the one hand, some members of the plan might be uncomfortable investing in a deal with one of the architects of a trade that has become shorthand for how Wall Street always wins. On the other, the fund managers have a fiduciary, legal duty to make money, to grow the fund and to keep the plan solvent.

A move by the government to force PSP to divest itself of Revera or avoid Pretium or any other partner could have dire consequences, some pension-watchers believe. “We are contributing to the best pension funds in the world, precisely because they got the governance right. They operate like investment firms at arm’s length from the government. And they have added tremendous value over public equities and bond benchmarks,” said Leo Kolivakis, the publisher of Pension Pulse and a former senior analyst at PSP and senior economist at the Business Development Bank of Canada. “If they start messing with the governance model, they’re going to destroy Canada’s pensions.”

But Pretium and Revera are far from the only controversial investments by a Canadian pension fund. And the issue of values in investing is one that almost every pension fund of any significant size is grappling with, said Mike Simutin, an associate professor of finance and the associate director of research at the International Centre for Pension Management at the Rotman School of Management at the University of Toronto. “I don’t think there is a hard and fast rule that suggests this is the way we’re supposed to approach these questions,” Simutin said.

“One line of thought, is if I’m a pension manager ... I’m investing on behalf of my investors or shareholders or my future retirees, and I want to deliver the best long-term financial outcome for them. And if that means that I should invest in let’s say, tobacco stocks, then I’m going to invest in tobacco stocks, because otherwise I’m violating my fiduciary duty. Of course the flip side to this argument is that investing in certain assets, like tobacco stocks is not in the long-term benefits of my constituents. And what I should be doing is divesting from them.”

For Toronto lawyer Randy Bauslaugh, who leads McCarthy Tétrault’s pensions and benefits group, the legislation is clear. “The Income Tax Act says that a registered pension plan has to have as its primary purpose the provision of lifetime retirement income,” he said. “So I would argue that is a financial purpose. So anything that’s relevant to that purpose, fiduciaries can take into account.” Beyond that, though, it starts to get fuzzy.

“The notion of fiduciary duty is a bit like Plasticine,” said Benjamin Richardson, a professor of environmental law at the University of Tasmania who has studied the impact of fiduciary laws on environmental investing around the world. “It can be moulded and shaped in response to changing social value. It’s a bit of an empty vessel. It doesn’t say very much. Essentially, what it means is a duty to be loyal to your client or purpose.”

So the question then is, what is PSP’s purpose. Should it be maximizing returns at any cost? If not, where should it draw the line? Who decides, in other words, what values apply? For his part, Lewis thinks PSP members, at the very least, should be disturbed by their pension plan’s decision to get into bed with Pretium and Mullen, thereby helping a man who profited from the foreclosure crisis keep profiting after the crisis too. “I would say no, I don’t think that they should feel good about it,” he said. “They shouldn’t be comfortable about these investments, because in order for their retirement to be secured, they’re displacing others.”

For Abood, who spent years studying the sector, it’s a question of reckoning. At the very least, she believes, anyone who invests in the single-family rental home business, including, PSP, should have to face up to what the industry can be.

“You’re investing in this extreme commodification of housing that is potentially putting tenants and communities at risk,” she said. “It is not a model of housing ownership that is going to, in any way, create more equitable outcomes.”

Let me first thank the public sector union folks in Ottawa for sending me this article.

The reporter, Richard Warnica, was very nice when he contacted me and even though we spoke at length, he never once asked me about this specific deal with Pretium Partners.

If he did, I would have told him that the Blackstone Group, the world's best known private equity firm, exited the single-family rental space in November 2019 after receiving flack from then Democratic presidential candidate Elizabeth Warren:

Blackstone Group Inc. is exiting its post-recession bet on single-family rental homes, selling off an investment in Invitation Homes Inc. that has drawn the fire of Democratic presidential candidate Elizabeth Warren.

The sale of Blackstone’s remaining stake in the single-family landlord is for $30.10 per share, according to a statement, and will bring in roughly $1.7 billion. The firm controlled more than 40% of Invitation Homes before it starting selling shares in March. It made about $7 billion from the stock sales and dividends, more than twice what it invested.

The timing of the sale, coming days after Warren criticized Blackstone, was “merely coincidental,” according to a note from Bloomberg Intelligence analyst Jeffrey Langbaum.

Blackstone and other firms started buying homes in the aftermath of the foreclosure crisis and turned them into rentals at a time when many Americans were struggling financially. The private equity giant took Invitation Homes public in 2017. The same year, Invitation merged with Starwood Waypoint Homes, creating a rental-house behemoth comparable in size to all but the largest apartment landlords.

Prior to private equity’s single-family rental push, institutional investors had shied from that corner of the housing market. Blackstone helped prove the case that the properties could be managed efficiently. These days, there’s little distress in the housing market, meaning investors can no longer build portfolios with cheap homes. Still, a shortage of starter homes for younger buyers has Wall Street firms eyeing new bets on the asset.

“Blackstone has been an exceptional partner, nurturing the growth of our industry,” Dallas Tanner, chief executive officer of Invitation Homes, said in a statement.

Warren accused Blackstone and other firms on Nov. 18 of “shamelessly” profiting from the housing crisis, arguing that Wall Street’s investment in single-family homes was a “huge loss for America’s renters.”

Blackstone countered that its investment in rental homes helped stabilize housing markets, creating better options for families who needed to rent. The $10 billion spent acquiring homes and $2 billion more for repairs spurred economic growth and created jobs, it said in response.

“We are proud that our investment provided a high quality rental housing option, helped stabilize local housing markets, spurred economic growth, and built a $25 billion company, while delivering value to our investors, which include retirement systems for millions of teachers, firefighters and other pensioners,” Ken Caplan, Global Co-Head of Blackstone Real Estate, said in a statement.

Let me state off the bat, I agree with Blackstone, not Elizabeth Warren, their investment in single-family homes helped stabilize the housing markets, and it also helped create jobs in these disadvantaged communities because they hired locally to renovate and manage these properties.

Did Blackstone make a killing in the process? You bet it did and many US, Canadian and global public pensions investing with Blackstone's funds (they all do) also enjoyed the gains from these properties.

I didn't hear any US public pension fund raise a peep back then as long as Blackstone was printing money. And most reporters didn't cover it, or if they did, it was from a totally biased leftist perspective which goes like this: Blackstone = evil capitalist profiting off human misery, not Blackstone = good capitalist making profits by stabilizing housing market and creating jobs in communities that need them.

Whenever you read these articles, always look at a few things: who is the reporter, what is their angle, what is the target audience?

Newspapers across North America are honing into the anger and outrage of growing wealth inequality out there and they're delivering content which panders to the growing discontent and disenchantment.

The problem? Reporters typically present one side of the story, not both sides, and they taint their articles to appeal to a certain demographic (young, disenchanted, socialist environmentalists, etc.).

I'm not being cynical or facetious, when is the last time you read an article praising capitalists? 

And now they're going after "pension fund capitalism", the new target is public pension funds which invest in  private equity funds which make huge profits and allow these pensions to remain solvent, at least in the case of Canadian public pensions (US public pensions are hopelessly underfunded).

Truth be told, I'm a little irritated when I read these articles but hardly surprised. 

I told Richard (the reporter) that I'm against all these political groups with their own axe to grind and agenda putting pressure on Canada's public pensions. 

I specifically told him I like Big Oil as an investment and I don't like when environmental zealots force their agenda on Canada's large pensions. 

In fact, it really irks me. As long as CDPQ and CPP Investments invest in renewable energy, the environmental cheerleaders come out, but the minute they or others strike a pipeline deal, they're heavily criticized.

The politicization of our public pensions is something I'm dead set against.

And unfortunately, I see it every day and it's a function of social media and how everyone now thinks they're an expert on pension investments.

They're not, apart from tobacco, there's really no strong case to divest from any investment, especially oil and gas. 

If you don't believe me, listen to CalSTRS which put out a report stating:

We believe divestment is a last resort action that can have a lasting negative impact on the health of the fund,” the report said, “while severely limiting our ability to shape corporate behavior for long-term sustainable growth.”  

CalSTRS says it “is imperative” to continue to actively engage companies on climate change issues, both fossil fuel and non-fossil fuel companies.

“We are focused on understanding and responding to the risks that climate change presents to our portfolio and to sustainable economic growth,” the report said. 

In other words, divesting sounds cool but it's counterproductive and could really jeopardize the overall health of your plan.

Now, getting back to PSP Investments and this deal with Pretium, it was covered in Benefits Canada along with another deal CDPQ engaged in:  

The Public Sector Pension Investment Board is entering a $700-million joint venture investing in single-family rentals in the U.S.

The new venture with Pretium Partners will initially fund units across major markets in the southeastern and southwestern U.S., according to a press release.

“Pretium has a proven track record of generating robust, uncorrelated returns by applying its specialized, resident-centric and scalable approach to its large and growing portfolio of homes,” said Carole Guérin, managing director of real estate at the PSP, in the release. “We can think of no better partner to expand our presence in this increasingly attractive asset class and look forward to working with Pretium to deliver compelling results for our beneficiaries.”

In a separate transaction, the PSP is investing in a new 17-storey mixed-use office building in Boston. The building’s main tenant is Inc., which will occupy 630,000 square feet of office space, according to a press release. The building, part of the 33-acre Boston Seaport project, is expected to be completed in 2024 and is Amazon’s second full-building lease within the development.

“PSP Investments is pleased to join our partner WS Development in expanding Amazon’s presence in Boston’s Seaport,” said Kristopher Wojtecki, managing director of real estate at the PSP, in the release. “Amazon’s expansion will further enhance the innovation ecosystem and creative economy in this powerful technology and life-sciences cluster.”

And the Caisse de dépôt et placement du Québec is investing $60 million in a Quebec-based manufacturer of accessibility solutions. The investment in Savaria Corp. will go toward funding its acquisition of Handicare Group, a Sweden-based manufacturer of stairlifts, vehicle adaptations and repositioning aids, according to a press release.

“We’re delighted to support the international expansion strategy of Savaria, a Quebec manufacturer that has recorded significant growth over the years,” said Kim Thomassin, executive vice-president and head of investments in Quebec and stewardship investing at the Caisse, in the release. “With the acquisition announced today, the company joins the ranks of global leaders in its industry, with significant market share in North America and Europe and a wide range of products.”

You can read PSP Investments press release here and CDPQ's press release here.

I honestly like both deals, especially the Savaria one because it helps people with disabilities:

Handicare provides mobility solutions to increase the independence of physically challenged or elderly people. The company manufactures and sells curved and straight stairlifts, transfer, lifting and repositioning aids, and vehicle accessibility products. Handicare is a global company with sales in approximately 40 countries and has primary manufacturing locations in the United Kingdom, the Netherlands, the United States, and China. For the fiscal year ended December 31, 2020, Handicare reported preliminary sales of EUR205 million (CAD317 million) and adjusted EBITDA(2) of EUR24 million (CAD37 million). The successful completion in 2020 of the structural cost reduction initiatives as part of Handicare’s “Lift Up” program contributed to the overall improvement in profitability.

Of course, no reporter cites all the good things our public pensions invest in, that doesn't sell newspapers, but PSP teaming up with the guy who was the  'architect of the big short' to invest in single-family housing, that's predatory capitalism and that sells papers!!

I'm right of center in my economic views and proud of it. Whenever I read the CBC or any Canadian newspaper, I filter out all the BS and remain very objective and I'm extremely troubled by what I've been reading over the last few years.

In fact, it's time for PSP Investments, CPP Investments and others to go on the offense and state very clearly what your objective is (balancing assets and liabilities by maximizing returns without taking undue risks), how independent governance is critical in obtaining this objective and why you essentially run a huge conglomerate of businesses and while ESG permeates all these businesses, it is done to enhance returns, not detract from them.

The prime purpose of every pension is to have enough assets to meet future obligations.

To all the public-sector unions that have an axe to grind with their own pension, please do your due diligence, and realize how lucky you are to be part of great pensions that are the envy of the world.

Can they improve? Sure, PSP needs to beef up its communications and be more transparent and tackle all issues, even thorny ones, head on. 

But to be honest, whenever you speak to a reporter, it's a double-edged sword.

Why? Because they already have their story angle worked out to target their audience to sell newspapers, and they can use and misuse your quotes to make their case.

At least, Richard Warnica quoted me right:

A move by the government to force PSP to divest itself of Revera or avoid Pretium or any other partner could have dire consequences, some pension-watchers believe. “We are contributing to the best pension funds in the world, precisely because they got the governance right. They operate like investment firms at arm’s length from the government. And they have added tremendous value over public equities and bond benchmarks,” said Leo Kolivakis, the publisher of Pension Pulse and a former senior analyst at PSP and senior economist at the Business Development Bank of Canada. “If they start messing with the governance model, they’re going to destroy Canada’s pensions.”

No matter your political ideology, keep your grubby political hands off our pensions!

Lastly, I do feel bad for Maya Abood who grew up in Stockton, California, which has been called America’s most diverse city, rebranded as a commuter town.

America has a serious inequality problem which is more prevalent among blacks and Latinos. 

The question is how can we best address long historical injustices and make a long lasting difference?

It's not by pointing the finger at private equity and hedge funds investing in single-family homes, it's by creating jobs, meaningful jobs with good wages and benefits (like a DB pension).

The foreclosure crisis that hit many US cities after the Great Financial Crisis was terrible, it exacerbated inequality, just like this pandemic has exacerbated inequality once again.

At one point, Wall Street has to be part of the solution as we can't just rely on governments to help bridge the gap. It's up to the private sector to do all the heavy lifting here, at least that's what I fundamentally believe.

Alright, let me wrap it up there, if you have any comments, just reach out:

Below, an older (2013) clip looking at the facts Invitations Homes and Blackstone. 

It's a biased clip with some ominous voice that pops up from time to time and it's meant to portray Blackstone and its partners as evil capitalists. Total nonsense but still worth watching to see all the good they did back then.

And by the way, Invitation Homes is a publicly listed company (INVH) which continues to thrive, renting single-family homes to millennials.

Lastly, Blackstone has been making some noise in the single-family housing market again, announcing  back in the third quarter of 2020, that it was going to lead a $300 million syndicate to invest in Tricon Residential, an owner-operator of over 30,000 single-family and multifamily properties.

More recently, Blackstone announced it is acquiring Interior Logic Group Holdings, LLC (ILG) for $1.6 billion.

It certainly looks like Blackstone is getting back into the single-family game. It also seems as if the firm just unloaded Invitation Homes so it could have some dry powder to get back to what it was doing in 2012.