Opportunities, concerns grow with CLO direct investments in private companies
Posted On March 24, 2022
As much as 5 percent of Oklahoma’s $4 billion “land commission” trust fund — a pool of money generated by state-owned real estate and earmarked for public education — can now be invested in private development projects. While the secretary of the Commissioners of the Land Office has asked lawmakers to exempt propriety project details from the Open Records Act, legislative leaders have said that exemption will not be granted this year.
Under a policy change approved by the obscure-but-powerful CLO’s governing board in a controversial 2-1 vote Dec. 16, the constitutional agency could invest up to $200 million in commercial or industrial development projects, according to CLO Secretary Elliot Chambers. Direct investment projects carry more risk than traditional mutual fund investments, but Gov. Kevin Stitt believes diversification of the agency’s portfolio can increase returns and will provide a hedge against major stock market downturns.
“Basically, if you look at any huge pension plans — Harvard, all the different major pensions — they can allow some direct investments, up to 5 percent of the funds,” Stitt told NonDoc on Feb. 22. “So that is what we authorized them to do: 5 percent of your overall fund can be invested in non-marketable kind of direct investments, basically, instead of just traditional stock market stuff. That is going to allow us, I think, to increase returns in a safe manner, and so that is the whole reason to do that — to just further diversify that portfolio and make sure that we are protecting the taxpayer.”
CLO request bills stalled in Legislature
What taxpayers will be able to learn about the projects selected for investment remains less clear. This session, the CLO requested a pair of bills aimed at exempting business plans, financial details and other documents submitted by investment-seeking companies from the Open Records Act. The measures, however, appear to have stalled.
“Hard to say right now,” Chambers said March 2 when asked about the two Open Records Act exemption proposals and other CLO-requested legislation. “Folks that we have talked to understood them, and they certainly have support, but that’s in flux.”
Three influential legislators — Senate Appropriations and Budget Chairman Roger Thompson, House Appropriations and Budget Chairman Kevin Wallace and House Majority Floor Leader Jon Echols — told NonDoc that the CLO bills would not be considered further during the 2022 session.
Wallace, who has carried legislation expanding the CLO’s authority in recent years, said March 3 that Chambers has made a pair of controversial valuation decisions that affect Wallace’s House district and that he might consider rolling back some of his past legislation “until we get a better handle on what’s going on over there.”
“I expanded how much property they can have in their portfolio. I ran the bill that allowed them to shop for multiple banking institutions, and we have expanded that commercial position twice since I’ve been here,” said Wallace (R-Wellston). “I also put in statute that all state agencies had to go to CLO first before they look for property, and I also put in statute that the CLO had to be involved in the property search in Tulsa for replacing the Kerr-Edmondson Building. But I am going to start unwinding that stuff just because I don’t see the constituents of Oklahoma being treated fairly by the CLO.”
Echols (R-OKC) had filed three bills requested by the CLO this session, but he transferred HB 4197, HB 4198 and HB 4199 to Wallace “because Chairman Wallace wanted them.”
“Deadline week came and went, and those bills didn’t move,” Wallace said. “There’s an old saying that if it’s a good bill this year, it will be a good bill next year.”
Thompson (R-Okemah) confirmed that he would not be advancing his SB 1159, which would provide the Open Records Act exemption, even though it had already passed a Senate committee.
“We’re not going to move it forward. The reason they asked for it is they are having to do some business deals,” Thompson said. “The reason I’m not moving forward is I don’t have time, and I just didn’t want to mess with it.”
Initial direct investment effort fell apart
Appointed to lead the Commissioners of the Land Office in July 2020, Chambers first attempted to invest CLO funds into a private development project in June 2021. The proposal involved a Colorado company called Bye Aerospace, which was considering whether to build a manufacturing and testing facility in Oklahoma.
“The deal from last June, I had heard of that from the Department of Commerce here,” Chambers said. “I had worked on it five months before it got to the commissioners for their approval.”
During a special meeting of the CLO board on June 28, the commissioners — Stitt, Lt. Gov. Matt Pinnell, Superintendent of Public Instruction Joy Hofmeister, State Auditor & Inspector Cindy Byrd and Secretary of Agriculture Blayne Arthur — voted unanimously to support up to a $30 million investment in Bye Aerospace, “payable according to certain milestones being reached” and in conjunction with a separate $5 million of state award from the Oklahoma Quick Action Closing Fund.
“CLO legal staff, external counsel and a consultant, Victorum Capital, have vetted the transaction and analyzed the terms of the investment,” the June 28 meeting minutes state.
The Bye Aerospace project, however, fell apart, Chambers said. CLO never made its investment in the company, but Chambers continued to review other opportunities for diversifying his agency’s portfolio with direct investments.
Over time, CLO attorneys, the agency’s investment committee and Chambers determined they should codify specific authorization for direct investments into the agency’s rules. A vote to do that occurred at a special meeting Dec. 16, but how it unfolded became a matter of controversy.
“Changes to the investment plan are an update to the real estate section and creation of a section to allow for direct investments, also known as non-marketable securities,” minutes from the Dec. 16 meeting state. “Secretary Elliot Chambers recommends approval of the changes to the CLO investment plan as recommended by the investment committee and the staff as presented.”
For the Dec. 16 special meeting, Hofmeister and Arthur were absent, meaning only Stitt, Pinnell and Byrd were in attendance to vote on the proposal. Stitt and Pinnell voted in favor, but Byrd voted against. Board staff said the motion carried 2-1.
“Commissioner Byrd objected to the statement that the motion carried. She interpreted the absence of two of the commissioners as two automatic nay votes,” the minutes state. “(CLO legal counsel) Bennett Abbott stated that he believed a motion carried with a majority vote of the commissioners present. (…) The governor’s general counsel researched the issue and consulted with Bennett Abbott, general counsel for the CLO. [Title 64, Section 1034] controls and the motion passed by a majority of the members present.”
The board’s January meeting was cancelled, but when they met on Feb. 10, Hofmeister raised questions about the actual requirement of Title 64, Section 1034, which reads:
A permanent minute record shall be kept of all proceedings had by the Commissioners of the Land Office. No action of the Commissioners of the Land Office shall be valid unless voted by at least three members. No action taken, or which may be taken by the Commissioners of the Land Office, may be rescinded except by a three-fifths (3/5) vote of the full membership of the Board of Commissioners of the Land Office.
Hofmeister said the attorneys’ interpretation of “voted by at least three members” might require a second opinion.
“That potentially would mean that only two people are affirming a decision on anything that comes before this board, and there is nothing in statute or in our rules that says there must be a majority of those present, so that is where I have some questions still,” Hofmeister said. “So I would ask whether you would consider (seeking) an Attorney General’s Opinion that would be binding that would explain for us to then know (…) if that is proper or not, just to protect the board in the future.”
Chambers and other CLO staff said they would consider Hofmeister’s suggestion. As statewide elected officials, either Hofmeister or Byrd could also request an AG’s Opinion directly.
As of Wednesday, Madelyn Sheriff of the Attorney General’s Office said no opinion request had been received on the topic.
‘More important that the board is doing its job’
Amid months of private discussions among state leaders about the CLO policy change allowing direct investments, Byrd’s vote against the Dec. 16 motion stands as the most public rebuke of the effort.
Asked why she voted against authorizing direct investments of CLO funds in private projects, Byrd declined to comment.
Wallace, meanwhile, said he also has concerns about the new direct investment plan.
“It concerns me if they start making higher-risk investments where they could actually lose money instead of continuing to increase the return for education,” Wallace said.
Stitt, however, called CLO direct investments “a natural hedge” in the agency’s portfolio.
“We don’t think it is any more risky,” Stitt said. “We think it is actually diversification and a better play because, hey, if the stock market tanks, you need some other alternative type of investments that are going to go up that are a natural hedge when this is going down.”
Echols agreed that direct investments make sense to him.
“I think the direct investment concept is a good idea, but you have to have a lot of faith in the [secretary], and you want to do that to a small percentage of the trust,” he said. “So 5 percent on the direct investment, I have no issue with that.”
Echols said exempting corporate documents obtained by the CLO from the Open Records Act will ultimately be necessary, but he said Chambers and the CLO will need “to work that through the legislative process.”
“Due diligence financial information that comes in from a company, that has to be kept private or nobody is ever going to give you any information,” Echols said. “Now the final agreement is different. The final agreement — it’s taxpayer dollars — so the final agreement has to be public information. So the question becomes, ‘What is the in-between?’ There are a billion steps between due diligence and final agreement.”
Echols said that if Chambers is driving the train on reviewing and determining projects for direct investment, the CLO’s board of statewide officials will need to ask tough questions and pay particular attention to such proposals.
“If the board is doing their job, then that’s a CEO making a decision and answering to a board, and I don’t have an issue with that,” Echols said. “But it will make it even more important that the board is doing its job. Eventually, somebody has to make a call.”
Pinnell, who chaired the February meeting while Stitt was at a conference in Texas, said Chambers has done a good job of pursuing the governor’s goals to diversify the CLO portfolio and increase financial returns, which are paid directly to public school districts and into the state’s coffers for education appropriations.
“The governor’s vision for the CLO when he hired the new CLO secretary was to take a look at both direct investments and the mutual fund portfolio overall,” Pinnell said. “So I think you have Secretary Chambers looking at everything, all of the above — the full buffet, as we kind of call it on the CLO.”
Pinnell said he believes Chambers is “aggressively trying to make sure that that fund is as robust as possible where we are allowed legally to do that.”
“What his directive from the governor is is to be as aggressive as possible in increasing that fund where we are legally able to do it and using more people from inside the state of Oklahoma as well,” Pinnell said.
Chambers, however, said the $200 million available for direct investments will not be subject to geographic boundaries.
“Our focus is return and cash flow. It doesn’t have to be in Oklahoma. A lot of what we have invested in the market is frankly all over the place, and that is good,” Chambers said. “I would love for some of this $200 million to have an in-state positive impact besides the interest that CLO earns off of it, but that is not our main charge.”
He said the new investment plan rules state that no single project will receive more than 50 percent of the 5 percent portfolio portion — about $100 million currently — at any one time.
“I’m not looking to fill the bucket as fast as we can. It takes a lot of analysis for these types of deals,” Chambers said. “I do not expect that it will be filled completely ever, much less filled substantially within the next year.”
Chambers said he could not speak to why Byrd voted against authorizing direct investments.
“Her decision is her decision. It would be disrespectful of me to try to characterize that,” Chambers said, noting that he and his staff want to provide Byrd with any additional information she desires and answer relevant questions as they arise. “Cindy Byrd is an important part of the commission. I will always talk to her about these things. Her feedback will always be super important as to how we think about these. Every commissioner is important, and we spend a good amount of time with each one of them, and their opinions and feedback are always welcome.”
Pinnell said CLO members “have every right” to vote against proposals or ask questions about the complex agency’s operations.
Pinnell said he recognizes that direct investments carry more risk than typical mutual fund portfolios.
“Elliot was very honest about that — that direct investments are a little bit more aggressive, but he also explained to us as members why he thought it was a good investment, and after his explanation and after hearing his thoughts, I agreed with him and so did a majority of the board. So that’s why we did it,” Pinnell said. “From every conversation that I’ve had with him and in my briefings or in our meetings, he has been very open and honest about that: ‘Hey, this is the directive from the governor that he wants us to be more aggressive in this area. Let me lay it all out for you, here’s why I support this.’ And so that’s why I support it after I got that explanation.”
Pinnell agreed with Echols that starting direct investments will place additional oversight obligations on the CLO board, as well as its Investment Committee, which typically meets the day prior to full CLO meetings.
“It’s why we meet as regularly as we meet, and we can get reports any time we ask for a report,” Pinnell said. “It’s not the kind of investment that we can let sit there and only review once a year even. It’s something that I think on at least a quarterly basis we need to be reviewing.”
Chambers said he recognizes the momentous responsibility facing him as he reviews potential direct investments for the CLO portfolio. He said he puts in “lots of analysis and due diligence that would certainly be more than what you would do with a marketable security investment.”
“The trust isn’t a riskless entity. We take risks with our investments and our legacy assets every day. Those wild swings (in the market) are risky in and of themselves,” Chambers said. “I view it as appropriate diversification with a very strong eye on making sure the due diligence is thoroughly analyzed and also that the structure and the returns make sense.
“It’s about making sure that we have the right investments to maximize returns.”
The March meeting of the CLO board was cancelled, but the board is scheduled to meet next at 2 p.m. Thursday, April 7.
Other 2022 proposed bills regarding the CLO
HB 4197 and SB 1679 would both rename the Commissioners of the Land Office as the Oklahoma Education Investment Trust;
HB 4199 would allow the CLO to select investment managers without first receiving a solicitation of bids.