Stronghold solutions can finance targeted investments & activities for pensions funds providing access to new tools for managers to realize enhanced risk adjusted returns.
Pension Fund Challenges & Current Strategies
Challenge
Pension funds face the central challenge to meet their responsibilities to pensioners over time — a challenge made more difficult by economic conditions since the financial crises.
Current strategies
In the current economic environment, pension funds try to: (1) increase contributions and (2) seek higher returns by taking more risk.
Current return side strategies include:
Allocating more to illiquid assets (private equity, real estate, and infrastructure), while attempting to identify attractive risk-return profiles;
Diversifying exposure to other risk factors as a means of mitigating equity risk;
Optimizing the risk return profile of investments;
Increasing dollar-duration of assets, and
Managing currency exposure.
Private equity strategies have begun to focus on partnerships, investment platforms, and value creation through operational expertise. Pension funds have applied similar approaches in infrastructure, by building leading expertise to enable them to participate in infrastructure projects from start to finish. Where Pension funds have not developed required expertise in areas, such as sectoral or geopolitical risk, they have begun to partner with third party experts.
Non-traditional fixed income strategies have emerged placing more emphasis on credit and specialty finance taking some equity risk to generate returns dependent on business and financed projects performance.
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Stronghold solutions introduce new tools, which complement and advance such strategies.
Transaction Overview
Transaction steps at Closing
Protected cell
1. Issues bond;
2. Funds the issuing protected cell's:
Performance Investment &
Reserve Assets supporting Embedded Credit Insurance with Permitted Securities in Trust (Collateralized Insurance Reserves);
3 Finances Selected Investment(s);
Performance investment selection
In Stronghold programs bond buyers can propose performance investments or evaluate investments presented by Stronghold. Suitable investments include: project investment &/or financing; equities & equity indexes; high yield bonds; hedge funds; private equity; or off-loading distressed assets (see Risk transfer below).
Investment limits & policy guidelines
Stronghold solutions provide targeted finance benefits beyond their associated investment return, supporting safe investment exposure outside of policy guidelines. This application can increase diversification, capture opportunities not otherwise available, and increase yield on investment grade portfolios.
Risk transfer
Stronghold programs can transfer risk and volatility off of an investor’s balance sheet and on to the designated protected cell’s balance sheet. At closing: (1) the bond buyer purchases an investment grade bond then (2) in an arms-length transaction, the issuing protected cell would purchase identified assets at an agreed price. The price paid for the identified assets only depends of the bond buyer’s investment portfolio capacity.
Liability Driven investing (LDI)
The designated protected cell’s balance sheet holds long dated collateral reserves creating an important off-balance sheet LDI asset, without the need or requirement to mark-to-market. In all possible scenarios affecting the instrument the buyer owns or receives the value of this off-balance sheet asset at maturity or as part of a compensated pre-payment.
As example, whereas, pension liabilities have a typical duration of 12 to 13 years and the Barclays Aggregate Bond Index currently has a duration under 6 years; Stronghold solution’s collateral reserves at 30 year nominal maturity have over 5 times the duration of the Barclays Aggregate Bond Index.
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Stronghold solutions de-risk investment more than any solution previously available, while providing a utilization of capital and assets never before possible.
Stronghold solutions have a capacity equal to the challenges facing pension funds and institutional investors.
Alternative to Alternatives
Stronghold has developed an efficient approach to increase yield, an Alternative to Alternatives. In this application, pension funds would purchase a series of Stronghold designed bonds over time. The performance investments of the protected cell issuing each respective bond could in turn purchase a 1.5X S&P 500 Index exposure.
Historical analysis
A 45 year historical analysis initiating such instruments monthly from 1976 to the present computes the time for each issuance to meet the prepayment target of delivering a cumulative return on rolling 1 year U.S. Treasury Bill index plus a fixed 200 bp. The instrument accrues interest obligations rather than paying a coupon, which would otherwise represent a partial liquidation of the performance investment. The simulated issues deliver the excess return, on average, within 5 years.
Strategic use of the solution
Purchasing a series (ladder) of such bonds over time (quarterly or monthly) would enable pension funds to realize a reliable risk-adjusted return at low cost and provide for rolling liquidity, which the pension fund can reinvest in future Stronghold bonds or deploy to other investments.
Value proposition
Stronghold believes this solution supplies the best risk-adjusted return currently available in the industry and at far less cost and risk than alternative investments in private equity or hedge funds. The solution can operate at a scale relevant to the need.
Overview
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ERISA Compliance Empowering Unions
Stronghold has engaged in discussions with senior management of major U.S. unions. Union leadership has specific interests and objectives, which led them to seek out Stronghold. These interests and objectives include:
Union pension fund purchase of 5 freight airlines and 1 passenger airline, all unionized operations in need of recapitalization;
Stabilization of ship financing at the U.S.’s largest capacity unionized shipyard; and
Making inroads into the unionization of fast-food operations.
Please see: Unions for a more detailed discussion.