Sunday, July 22, 2018

Navajo Nation’s Master Trust Program & Permanent Trust Fund

TSW Community

In light of the recent offer of up to $525M in cash from the Navajo Nation to purchase Remington Outdoors, I'm reading more about the Navajo Nation's trust structure.

Current State:

According to the Navajo Times, the Navajo Nation's Master Trust Program ended 2017 with $3.28B in assets under management (AUM). The trust portfolio is currently made up of 41% in domestic equities, 33% ("about one third") in fixed income, 6% in real estate and about 20% in other strategies.

The largest fund is the Permanent Trust Fund. Other earmarked funds include Chapter Government Nation Building Fund, College Scholarship Fund, Vocational Education Scholarship, Handicap Trust Fund, Elderly Senior Citizen Trust Fund, Navajo Academy/Preparatory School, Land Acquisition Fund and Veterans Trust Funds.

Management:

The Master Trust is managed by the six members of the Nation's Investment Committee, made up of the following individuals (source):
  1. Controller of the Navajo Nation
  2. Appointee of the Navajo Nation President
  3. Chair of the Navajo Nation Budget & Finance Committee
  4. Appointee of the Navajo Nation Budget & Finance Committee
  5. Auditor General of the Navajo Nation 
  6. Attorney General of the Navajo Nation
The investment committee currently uses Portland, Oregon-based RVK for investment consulting services. RVK charges a flat consulting fee vs a fee based on assets under advisement (e.g., 10 BPS), and helps manage more than 20 fund managers across the asset classes.

Inception:

According to a presentation from former Navajo Nation President Peterson Zah, the roots of the Trust started with $217M received from renegotiated royalties (coal, right-of-way, oil and gas) following the successful case against Kerr-McGee. That year, the Navajo Nation council passed resolution CJY-53-85 authorizing the creation of a permanent fund. 

The Permanent Trust Fund, which makes up the majority of the Master Trust Program, was established in 1985 with an investment of $26M. In establishing the Permanent Trust Fund, the objective was to diversify income streams away from the Nation's largely natural resources-based revenues AND protect future generations.

Governing Rules:
  1. Each year, the Nation would deposit 12% of annual revenue into the fund.
  2. For the first 20 years (1986-2007) the fund would have a spending policy of 0% (i.e., no distributions from the fund; 100% reinvestment of all returns). This would allow for the maximum benefit of compounding interest to growth the assets of the fund.
  3. After 20 years, 95% of the annual income generated by the fund (not the corpus of the fund) can be spent according to a 5-year plan approved by the Council.
  4. After 20 years, 5% of the annual income generated by the fund must be reinvested in the fund.
  5. All expenses incurred by the fund (administration, advisors, etc) would need to be paid by the fund.
Initial Spending Committee:

In 2002, a Permanent Fund Work Group (PFWG) was established to determine the details of the spending policy which was to begin in 2007. The work group recommended 50% of annual income would go to a Local Governance Trust Fund (LGTF) for certified chapters*, 45% of annual income would be reserved to plan for by the PFWG, and 5% would be reinvested according to the original guidance. 

The group then sought to test its recommendations through public hearings. Overwhelmingly, the public advised the work group and Council to reinvest the income (at least until AUM reached $1B) and to add financial controls to restrict the spending of the principal or corpus.

From these sessions came 5 recommendations:
  1. Develop a vision / strategic plan for the Navajo Nation
  2. Reinvest PF income for 5 years
  3. Repeal recommendation for 50% diversion to LGTF
  4. Resist further diversion and collateralization of PF
  5. Establish a mechanism for determining future expenditures of PF income
Protection of Assets:

Out of the recommendations came additional layers of financial control. Layer one requires a two-thirds vote by the Navajo Nation Council to authorize a referendum vote. The second layer requires approval by two-thirds of Navajo voters before the principal / corpus can be touched.

All-in-all, the Navajo Nation have been successful in the establishment and growth of their permanent fund. They took a deliberate step to establish the institution and save a portion of their wealth for the future, have been consistent with their strategy, and have been diligent on protecting the corpus through downturns in markets. They would be a good model to research if you're thinking of forming your own TSWF.

In Perpetuity,
-Jay


* The Navajo Nation government is broken down into Agencies (regional governments) and Chapters (local governments).

Remington Rejects $0.5 Billion Cash Bid from Navajo Nation

TSW Community,

Did you see the news lately?

According to The New York Times, Cerberus rejected an offer valued up to $525M from the Navajo Nation to purchase Remington Outdoor (the gun manufacturer). Remington Outdoor is currently in Chapter 11 bankruptcy.

Navajo's plan for the business included both impact and return-oriented initiatives:

  • Impact Driven:
    • Eliminate AR-15 rifles
    • Eliminate consumer business except hunting rifles and shotguns
    • Invest in R&D around fingerprint "smart" gun technology
    • Shift assembly to the Navajo Nation to create jobs
  • Return Driven:
    • Focus sales efforts on law enforcement and military
    • Leverage minority ownership for contract preference
The Navajo bid was rejected after two months of consideration by the Remington Board of Directors.

The Navajo used the services of turnaround bankers Teneo Restructuring and was advised by attorney Drew Ryce, who was also involved in the attempt by Morongo to acquire gun-maker Colt out of Chapter 11 bankruptcy in 2015.

Both the Colt and Remington pursuits included a core thesis of helping the businesses qualify for government contracts under tribal / minority ownership. Generally, this is through the Small Business Administration's (SBA) 8(a) program. As a program of the SBA, any 8(a) advantages would be subject to size standards (i.e., the maximum size to be considered a "small" business) such as total revenue or number of employees. Assuming the use of NAICS code 332994 (small arms, ordnance and ordnance accessories manufacturing), the SBA states the size standard is 1,000 employees (link here for size standards). A quick google search shows Remington has more than 3,000 employees (source) and, as of Q3 2017, had $467M in revenue YTD.

As for the smart gun technology, NPR's Planet Money and Huffington Post both recently covered the challenges surrounding the technology.

The Navajo Nation made the offer in cash from its $3.3B investment trust. Had the transaction been completed, the single holding would have made up about 16% of the trust portfolio. According to a recent report from the Navajo Times, the trust portfolio is currently made up of 41% domestic equities, 33% in fixed income, 6% in real estate and about 20% in other strategies. RVK advises the trust committee as an investment consultant.

The Master Trust is managed by the six members of the Nation's Investment Committee, made up of the following individuals:
  1. Controller of the Navajo Nation
  2. Appointee of the Navajo Nation President
  3. Chair of the Navajo Nation Budget & Finance Committee
  4. Appointee of the Navajo Nation Budget & Finance Committee
  5. Auditor General of the Navajo Nation 
  6. Attorney General of the Navajo Nation
Interestingly, the President of the Navajo Nation has publicly expressed his concern on the offer:













This would be an interesting case study for future board members and managers of TSW Funds. 

What are your thoughts? How would you weigh the potential risks and rewards? How would you think about portfolio concentration and diversification? How would you balance impact and return-driven objectives? How would you balance the need for confidentiality and transparency? What diligence would need to be done to make you comfortable w/ the deal?

In Perpetuity,
-Jay





Wednesday, May 23, 2018

Event: Commonfund Institute June 25-29, 2018

TSW Community,

If you're interested in learning more about sovereign wealth and portfolio management, a good educational event is the upcoming Commonfund Institute which will be held June 25-29, 2018 at the Yale School of Management in New Haven, CT.

The Institute is geared towards sophisticated investors representing endowments and foundations, pension funds, healthcare systems, charities and other investors. Its an intensive, five day series of classes, lectures from leading practitioners and case studies.

For 2018, the focus is on "Exploring Leading Edge Theory and Practice", with topics including (as of posting):

  • The Evolution of the Endowment Model of Investing
  • The Art and Science of Strategic Asset Allocation: Optimizing for Drawdown Risk and Recovery
  • The Eco-System of Nonprofits: Financial & Operational Metrics that Influence Asset Allocation
  • Insights on Spending Policy: Assessing the Right Approach
  • Best Practices on Development and Fund Raising for Non-Profits
  • Understanding the True Costs of Portfolio Management
  • Governance Best Practices: Does Your Board Measure Up
  • Designing a Sound Investment Policy Statement
  • The Role of Diversity in High Performance Boards
  • The Psychology of Tail Events
  • Governance Case Study
  • Principles of Effective Portfolio Construction
  • Risk Management in Investment Policy: Measures and Management
  • Applying the Quantitative Tools of Portfolio Management
  • Building a Global Equity Portfolio: Alpha, Factors and Beta
  • Optimizing Duration and Credit in Fixed Income Portfolios
  • The Evolution of the Private Capital Investment Environment
  • Private Capital Case Study Review
  • What it Means to be a Responsible Asset Owner (and Why it Matters as a Fiduciary)
  • The Economics of Sustainability
  • ESG Case Study
Commonfund was founded in 1971 as an independent nonprofit asset management firm with a grant from the Ford Foundation. Commonfund today manages customized investment programs for endowments, foundations and public pension funds.

I will be attending the Institute in June. Please let me know if your tribe, ANC or NHO is planning to attend and we can touch base while we're all in CT. The event is invitation only, but if you're interested in attending on behalf of your group please drop me a line and I can likely get you a seat or two (assuming there is space available).

Know of any other events the community should know about? Send them my way!

In Perpetuity.
-Jay

Want to Make Private Market Investments? Make Sure Your TSWF is an Accredited or Qualified Investor!

TSW Community:

If your Tribal Sovereign Wealth Fund (TSWF) has hopes to make private market investments, especially with organized funds, your TSWF will need to be seen as an accredited investor and - in some instances - as a "super-accredited" investor.  In many cases, you will be able to self-certify your TSWF as a qualified investor, but you'll likely need to sign representations you are qualified in the subscription agreement and investor questionnaire. This varies from manager to manager - some will ask, some won't. The bigger and more "institutional quality" the fund, the more likely they'll ask.

If private market investments are part of your strategy (assuming you have a growth objective - as discussed here), I'd suggest making sure you meet these qualifications BEFORE you start looking at opportunities and spending money on diligence / document reviews.

First off, you'll need a legal entity from which to invest. Also, under the current policy, you cannot qualify as a sub-unit of a tribal government as there are no qualified investor definitions for tribes (or any government body, for that matter). To make it simple, legal entity options could include LLCs, C-Corporations or Section 17 Federal Corporations.

A good summary on the various accreditation levels can be found around the web, and I particularly liked the overview presented by the Strictly Business Law Blog here, so I'm going to paraphrase some of it below.

Let's go over a few of the "levels" of accreditation you may be faced with when trying to make a commitment to a private fund (or limited partnership):

Level 1: Accredited Investor

If you're considering an investment in a fund (limited partnership or LLC), the investment will be considered a security by the Securities and Exchange Commission (SEC). In many cases, the fund manager will look to exempt the security from registration (and make his/her life easier) by issuing the security as a "Reg D" offering (Securities Act of 1933, Regulation D, Rule 506(b)).

In order to do this, the fund manager must limit the offering to Accredited Investors. In other words, he/she can't just advertise the investment opportunity to anyone - they must have a minimum level of income or wealth (as a proxy for investment savvy and risk tolerance).

Rule 501 defines who is an accredited investor - including qualifiers for individuals and entities. For purposes of this discussion, we'll focus on the entity qualifier most TSWFs will want to use. Your TSWF will be considered "accredited" if:

  1. it is not formed for the specific purpose of acquiring the interest in the fund (i.e., it has or intends to make other investments) AND 
  2. has total assets in excess of $5M.

So what does this mean? Basically, it means you'll need to contribute at least $5M to your TSWF entity before you're going to be able to qualify for most private market investments, and your commitment to any single investment will need to be less than your total fund size (obviously, because you're diversifying, right?).

Level 2: Qualified Client

Fund managers typically get paid in two ways: (1) management fees and (2) performance fees. The management fee is based on a small percentage (generally 1-3% per year, depending on the fund type) of  your capital commitment or the total invested assets, and typically goes down over the life of the fund once the investments have been made. For example if you commit $100 and the management fee is 2%, then the manager collects $2/year for the management of your assets. The performance fee (normally referred to as carried interest) is manager compensation realized on the profits of the fund, and is based on a percentage (generally 10-30%, depending on the fund type) of capital realization. In other words, if you invest $100 in a fund with a 20% carried interest and the fund value appreciates to $300, then the manager is entitled to 20% x $200 = $40.

In certain cases, particularly if the fund manager is registered with the SEC and/or located in particular states, they aren't allowed to collect performance fees from an investor unless the investor is a Qualified Client. Per the Investment Advisors Act of 1940, Rule 205-3, your TSWF will be considered qualified if you meet any of the following criteria:

  1. it invests more than $1M in the fund OR
  2. it has a net worth of more than $2.1M prior to the investment OR
  3. it meets the criteria of a Qualified Purchaser (see below).

So what does this mean? Basically, your TSFW could be an Accredited Investor but if the manager meets certain criteria, the manager may not want your TSFW as an investor in his/her fund if your TSFW doesn't meet the qualified client criteria. After all, he/she won't be able to get paid on performance, which is often the biggest component of their compensation.

Level 3: Qualified Purchaser

Just like the Securities Act of 1933 allows for a securities registration exemption if all investors are Accredited Investors, the Investment Company Act of 1940 allows for investment company registration exemption if it has less than 100 investors and isn't making a public offering of securities.  Most smaller funds leave it at that.

However, certain funds expect more than 100 investors and/or have legal counsel who are a bit more conservative in nature. Typically, these are funds catering to larger, institutional investors. These funds use a separate section of the Investment Company Act of 1940 to authorize their exemption, but it requires all investors to be Qualified Purchasers. Your TSWF will be considered a qualified purchaser if:
  1. it is not formed for the specific purpose of acquiring the interest in the fund (i.e., it has other investments) AND 
  2. has total assets in excess of $25M.
So what does this mean? Basically, its the same thing as qualifying as an Accredited Investor, but the asset threshold is quite a bit higher - five times higher, to be exact. It also means that if your TSWF is capitalized in phases (like an annual capital contribution), you need to be aware of the timing and the requirements put further by the particular fund in which you'd like to invest. If the fund requires qualified purchasers and your TSWF is sitting at $20M in investable assets, you'll likely be out of luck unless they make an exception (which they may be able to do, by the way). A better approach would be to have this discussion at the outset and start with a $25M initial capital contribution.

Bottom line. If you want access to certain funds, you'll need to start out with a decent amount of investment capital either deposited or committed (w/ a binding contract from the tribe) to the TSWF.

In Perpetuity,
-Jay

NOTES:

  • I'm not a lawyer and this is not legal advice. If you're considering a private market investment in an unregistered security, I'd suggest you have a qualified attorney take a look at the documents. Need some suggestions, give me a shout.
  • On performance fees like carried interest, I ignored hurdle rates, clawbacks, etc to simply the examples. Talk to someone who knows the various terms before you agree to any fee structure.


Wednesday, May 9, 2018

Sovereign Finance Annual Economic Development & Investment Conference

TSW Community,

This week I'm at Sovereign Finance's Annual Economic Development & Investment Conference at Talking Stick Resort (Salt River Pima-Maricopa Indian Community) in Scottsdale, AZ. If you're new to investing or want an overview of what's involved, this would be a pretty good conference to attend.

Important Note: Sovereign Finance is an investment advisor, so they would obviously like to have your business in addition to hosting pure-play "education" focused event. I haven't worked with them in a professional setting (no endorsement implied) - but they seem like good folks and they're 100% native (individual) owned.

On the agenda are two tracks:

(1) "Economic Development" (i.e., Direct Investing in Private Companies)
(2) "Investments" (i.e., Overall Investment Portfolio Management & Manager Selection)

In the Economic Development session, they are discussing the processes and approaches to direct investing in private companies. Basically, venture capital (investing in pre-revenue and/or pre-profit startups) and buyouts (taking control ownership of profitable, private companies). Guest speakers include two tribal groups - one focused on real estate investments (primarily hotels).

In the Investments session, they are focused on the management of a diversified, long-term portfolio of investments - including stocks, bonds and other private investments (mostly through external managers). Speakers included Carmel Wellso, Director of Research for Janus Henderson, who gave an in-depth market overview. I especially liked how the Sovereign folks started with a talk about risk and gave good structured examples of how to frame the investment discussion.

In Perpetuity.
-Jay

Friday, January 5, 2018

Event: Commonfund Forum March 11-13, 2018

TSW Community,

If you're interested in learning more about sovereign wealth and portfolio management, a good educational event is the upcoming Commonfund Forum March 11-13 in at the JW Marriott in Orlando, FL.

The Forum is geared towards sophisticated investors representing endowments and foundations, pension funds, healthcare systems, charities and other investors. Its a three day series of plenary sessions and breakout meetings focused on key issues of investment policy, strategy, risk management and governance. Each year, there are about 60 outside speakers, representing leaders from the investment community, academia, government, public policy groups, endowments and foundations.

This year's forum features former Secretary of Defense Robert Gates and former Secretary of the Treasury Robert Rubin, among others.

Commonfund was founded in 1971 as an independent nonprofit asset management firm with a grant from the Ford Foundation. Commonfund today manages customized investment programs for endowments, foundations and public pension funds.

I attended the Forum in 2016, along with leaders from a Native Hawaiian Organization, and thought it was of value. 

Commonfund also has a trustee and board member training program called the Commonfund Endowment Institute, which at one time was held annually at Yale University. I don't believe they held the institute last year, but assuming they hold it this year I will plan to attend.

I will likely attend the Forum in March. Please let me know if your tribe, ANC or NHO is planning to attend and we can touch base while we're all in Orlando.

Know of any other events the community should know about? Send them my way!

In Perpetuity.
-Jay

NOTE: I'm now realizing the Commonfund Forum may be a invitation-only event since folks haven't been able to see the 2018 agenda or registration link just by going to the Commonfund website. If you're having trouble registering, drop me a line and I'll touch base with the Commonfund folks.

Tuesday, January 2, 2018

Cobell Legacy: Trust Settlements as Catalyst for Tribal Sovereign Wealth

TSW Community,

If you're not familiar with Elouise Cobell, you should be.

In 1996, Elouise Cobell filed a class-action lawsuit against the federal government (Interior and Treasury) regarding their mismanagement of trust assets on behalf of Native Americans.

In December 1999, along with the Native American Rights Fund (NARF), Cobell won a precedent-setting ruling that required the federal government to conduct an accounting of all funds held in trust.

In December 2006, NARF filed a class action lawsuit seeking an accounting of billions of dollars in tribal trust funds. The class action sought to represent more than 250 tribal government and coincided with several other individual lawsuits filed by more than 100 other tribes.

2006 was important as the statute of limitations to file trust accounting lawsuits expired on December 31, after the 109th Congress refused to extend it amid opposition from the Bush administration.

In late 2009, the Cobell case was settled for $3.4B, with $1.4B going to individual plaintiffs and another $2B going towards the repurchase of fractionated lands stemming from the Dawes Act.

Also in 2009, attorneys for many of the tribes wrote to President Obama and asked his administration to expedite settlement discussions. In April 2010, Obama administration officials, including then-Associate Attorney General Tom Perrelli, met with the attorneys and started a settlement process.

In 2011, the Obama administration agreed to pay the Osage Nation (a tribe with significant oil and gas assets) $380M in a settlement. 

In 2012, the ball started rolling when the administration settled 41 tribes for more than $1B. At the end of 2012, that number increased to 61 tribes.

In 2014, the Choctaw and Chickasaw Nations settled for $184M ($46.5M to Chickasaw, $139.5M to Choctaw). Navajo Nation also settled in 2014 for $554M.  Including the Navajo Nation the Federal government has paid more than $2.61 billion in settlement to 80 tribes.

The IRS has a running list of tribes who have settled their trust lawsuits.

Just as the Alaska Native Claims Settlement Act of 1971 helped capitalize 13 Regional Corporations and more than 200 Village Corporations with approximately 44 million acres and nearly $1B in cash (more than $6B in todays $$), the settlements enabled by Cobell have the potential to push Indian Country into a new era of self-sufficiency, self-determination and sovereignty.

Did your tribe negotiate a settlement via the Cobell legacy? How are these fund being invested? Let me know or just leave a comment!

In Perpetuity,
-Jay