Can investment capital return a community?

Mutual funds pool funds collected from many investors to invest in a set of instruments in trying to produce capital gains and income for the fund’s investors. Typically, a professional money manager, whose job optimizes returns and minimizes risks, selects a group of specific instruments, stocks, bonds, REITS etc.  based on a set of key objectives.  Of course without risk there’s no reward. So high risk funds pay higher returns unless of course the risk gets realized.

Historically, private equity funds and merger and acquisition firms have been masterful at this game and consequently their earnings have been quite generous.  Among these firms Kohlberg Kravis and Roberts (KKR) and Goldman Sachs continued survival adds to their legend, so why are they dabbling in the mutual fund market?

FRANCESCO GUERRERA writing for the WSJ August 13, 2012 offered this explanation.

“KKR’s first two mutual funds will have much lower barriers to entry, probably in the $2,500 range. But they will invest in the likes of distressed debt and “junk” bonds, assets that can earn juicy returns and/or sleepless nights.”

No surprise, that to meet growth expectations , you have to assume some risks.  KKR choice of risks caught my attention as they plan to invest in distressed businesses and bolster assets expecting that the returns and  annuities generated will permit them additional investment options.

Goldman Sachs, like KKR , announced they will  create mutual funds to increase and diversify their funding base too.

“For Goldman, the goal is to curb its reliance on capital markets’ funding, thus reducing the risk of being caught short….”

I remember the 1980s well, when the junk bond kings reigned creating derivatives to swap debts and their subsequent fall when insolvency came to companies over leveraged.  Today’s landscape riddled with debt appears similar.  Unlike the 80s, today’s professional investors must temper investor risk a little differently.  Perhaps government should  sell EPA cleanup deals, why not, if you agree to pay to clean up a toxic site then you can have it.

Well, the straight swap of risk for assets doesn’t work that way does it.

So when a long neglected real estate situation came to my attention, I wondered why it has failed to prove golden.  The Rosenwald homes on the south side of Chicago, just north of Hyde Park where President Obama retains his private residence,  found a place on the historic registry and though once very beautiful, now sit vacant deteriorating for close to 20 years.   This full block, long abandoned residential building challenges the surrounding neighborhood’s  economic viability .

What if they succeed in cleaning up the site? What if the investment does restore it and the surrounding community?  Estimates of restoration costs greatly exceed any possible long-term payout. In other words, how long will investors wait to get some payback?  If property values rise, then the sale of the property would have to recover the investment in cleanup costs but also the debt service costs.  Today’s property valuations are close to zero, especially because the abandoned site serves as a crime magnet. The security costs and the demolition costs exceed the land value.

Hey Goldman Sachs, or KKR, you willing to buy in?