Fundfire: Pension's Payday Lending Investments Come Under Fire

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An advocacy group is asking the $17.6 billion Montana Board of Investments (BOI) to reconsider its relationship with a private equity firm that owns a payday lending company, given the state’s laws limiting the practice.
The Montana Organizing Project, a faith-based community advocacy organization, has presented at three of the BOI’s meetings this year, including its August 21 board meeting, raising issue with the state’s exposure to payday lender ACE Cash Express. 
BOI, which manages the state’s nine pension funds, committed $25 million to a JLL Partners fund in 2004, according to pension documents. JLL’s Fund V purchased ACE Cash for $455 million in 2006, giving BOI direct exposure to the payday lender. 
Montana curtailed payday lending activities in its state after nearly 72% of participants in a 2010 referendum voted to cap annual interest rates for these loans at 36%. As a result, there are no payday lenders licensed in the state, according to the state’s banking website.
“We’re invested in products that are illegal in the state of Montana,” says Katie Sutton, director of the Montana Organizing Project. “When the Montana people say they don’t want to participate in an industry that’s predatory, then it behooves us to be more cognizant of how we spend our money.”
ACE Cash, in some jurisdictions, charges up to 661.7% interest on 14-day loans, according to its site. In 2014, ACE Cash paid out $5 million in restitution to customers and $5 million in fines to the Consumer Financial Protection Bureau (CFPB) for “pushing payday borrowers into a cycle of debt” and “pressuring overdue borrowers into taking out additional loans they could not afford.”
Since the settlement, BOI has committed an additional $25 million to other JLL funds. It’s unclear what, if any, action BOI will take regarding its investment, though it has been open to dialogue, says Sutton.
At a May meeting, BOI Executive Director David Ewer acknowledged the concerns but noted the board has a fiduciary duty to uphold. He added that while BOI is not indifferent, as a fiduciary there are “any number of areas of capitalism that are controversial,” according to minutes from BOI’s April board meeting.
“The board is mindful of its reputation and its need to conduct its business to the highest ethical and professional standards,” Ewer said in a June letter to the advocacy organization. “State law requires the board to act solely in the interest of and for the economic interests of its beneficiaries.”
Ewer did not immediately respond to a request for comment.
ACE Cash has gotten smaller since JLL’s purchase more than a decade ago. In 2006, it operated nearly 1,600 stores across 38 states and Washington D.C., according to a statement. Now, it operates around 950 stores across 22 states and D.C., its site says.
Being a well-managed company doesn’t necessarily preclude great performance, says Jim Baker of the Private Equity Stakeholder Project.
“If you think about it from the perspective of an investor, a company like ACE paying a $10 million settlement to the CFPB isn’t beneficial to investors,” says Baker.
JLL has been a lower third or fourth quartile performer in four of its last six funds, including the 2015 fund that BOI committed to, according to Pitchbook data. That fund comes in at the bottom of the fourth quartile, and it missed the median benchmark, according to the data.
“From the outset it does require taking a closer look at whether or not firms are actually strong performers,” Baker adds. “When you look at JLL’s performance overall, it’s not been a top-quartile performer.”
There is precedent for plans exiting these investments as well, as reported. In 2016, the New Jersey Division of Investment sold its stake in the JLL fund that owns ACE Cash on the secondary market. Payday lending is illegal in New Jersey and the sale came after it came under similar scrutiny for its investments in the space.