Pension Funds and Alternative Strategies for Investing in the Economy
Authors: Canadian Labour and Business Centre
Collection: Research Materials
The everyday business of institutional investing often generates “collateral benefits”, or positive effects in the economy that are ancillary to the primary aim of obtaining optimal earnings in a prudent manner.
In the majority of instances, collateral benefits will happen incidentally, meaning that while pension funds and other institutional investors have allocated assets solely in the pursuit of financial returns, they have inadvertently created non-financial ones. These can include growth or jobs, among other social goods. Of course, being incidental doesn’t make benefits any less valuable.
The attraction of targeted investment programs developed in Canada and the United States is that the considerable assets of large institutional investors can be directed strategically so as to bring specific benefits to targeted communities, populations and economic sectors. Thus, the successful targeted program can be seen as both a financial instrument that achieves market-grade returns and as a tool of social and economic development.
Economically targeted investments, or ETIs, are an American invention, and as such is most widely practiced in capital markets in the United States. Nonetheless, Canadian institutional investors, including some of the larger public sector pension funds, are beginning to venture into this field.
As illustrated by the examples profiled in this report, targeted investing may bring optimal returns to institutional investors. At the same time, such investments may, for example, contribute to bridging financing gaps that hinder the growth of small companies in technology sectors (CDP Sofinov; Western Technology Seed Investment Fund) or provide much-needed capital to small businesses, either to finance critical "modernization" activities such as restructuring, consolidation, turnaround, modernization, and so on (Texas Growth Fund) or to rescue viable firms, often with unionized workforces (KPS Special Situations Fund).