Tax Equity & ESG Investing – Discover the Dual Benefits

George Strobel
Featured Image: Tax Equity & ESG Investing – Discover the Dual Benefits

Welcome to another addition of the Insurance AUM Journal podcast. My name is Stewart Foley, and I’ll be your host. And we are talking about a subject that we’ve never addressed on this show, tax credit equity, with a couple of experts from Monarch Private Capital, George Strobel and Billy Huger. Gentlemen, thanks for being on.

Billy: Thank you for having us.

George: Great to be here.

Stewart: For those who aren’t familiar with Monarch Private Capital, can you just give a little background on the firm please?

George: Sure, Monarch started back in 2004. We began as just an opportunistic firm with Robin Delmer, one of our co-founders and me, the other co-founder. Robin was a low income housing developer and I was a former Arthur Anderson tax partner. And we hooked up to place a new brand of credits that were hitting the Georgia marketplace, which was a Georgia low income housing credit. And we were able to do that successfully in the initial year. And we decided, well there’s a business opportunity here. So, we kept on working together in this area. And before long, we expanded into film credits in Georgia, and then we expanded into credits in other states. And then we expanded into federal credits so that we ended up placing credits in low income housing, renewable energy, as well as historic renovations now pretty much across the country.

Stewart: That’s a great start. Now here’s my question. As the guy on the call that needs a serious education, what is tax equity? You’ve mentioned a number of different tax credits, but just to kind of start off at 50,000 feet, when we say tax equity, what are we talking about

George: So let me handle that one as well (this is George again). And I’m going to actually regress a little bit and give you probably more background than you want. But in any event, beginning in the mid to late 1980s, the federal government established a federal historic tax credit. So, it’s been around for a long time. And what that was meant to be was a public-private partnership whereby the government provided incentives to rehabilitate historic buildings throughout the country. And in the case of the historic credit, its actually monitored and run by the National Park Service. But the point of it was that there would be an incentive created to redevelop a financial incentive to invigorate and motivate the private sector to spend money on rehabilitating historic buildings.

Now, most investors like our former President or most real estate developers, like our former President, don’t pay any tax because they have a number of benefits from their real estate businesses or other businesses where they don’t pay any tax. So, to those people, this new incentive doesn’t add any value or didn’t add any value unless they could market that opportunity to a third party taxpayer, mostly corporations, but to a third party taxpayer that could use those benefits. And so, a tax equity investor is an investor in a project generating tax credits that also generates some tax losses, but generally at a minimum it’ll have tax credits. And that investor is going to be a taxpayer in whatever jurisdiction these credits are applicable to. And that’s just the name of the investor that comes in to receive the tax benefits that are granted by the government to motivate or to incentivize the particular investment. It could be in the form of renewable energy. It could be in the form of a rehabilitation. It could be in the form of low income housing.

And the whole purpose of it is, is basically the tax equity investor is the one that receives the incentives, and they pay for them. And what they pay for them, for those incentives, is part of the capital stack so that the developer doesn’t have to fund nearly as much money to make that project happen. And in fact, in some instances in the low income housing area, sometimes the developers don’t have to contribute anything to the capital stack to make a project work. And so, it’s an important part of the capital stack of any of these types of investments.

Stewart: So, when you outline these tax credit types, so we’ve got renewable energy, we’ve got historic housing, we’ve got low income housing, do all of those provide a credit for the same tax? Is it all federal tax? Is it state tax? Most of our listeners are insurance companies, what about premium tax? I don’t want to ask too many questions at once, but you know kind of where I’m headed here.

George: Sure, so there are three basic federal credits that we work with, which we see commonly, which are the low income housing – which insurance companies acquire a ton of these, and we’ll talk about that in more detail later on I’m sure, historic renovation credits, and then renewable energy tax credits. And all of those are attractive to any insurance company that’s paying federal taxes. And I think in these times, most of them are paying tax, so they would be attractive to any insurance company. On the state side, insurance companies pay premium taxes rather than income tax. And on the state side, all state low income housing credits basically offset that state’s premium tax obligations. Likewise, many historic credits or similar types of credits, even if they don’t qualify for the federal credit, will offset a state’s premium tax. And then in the case of renewable energy, if there is such a credit available in that particular state, they typically also offset a premium tax that an insurance company would pay. So, the federal credits, there’s no federal level premium tax, it’s just an income tax. At the state level, the credits are used by insurance companies to offset premium taxes.

Stewart: Thanks. And I’ve actually spent some time working at an insurance company and I know what a labyrinth of confusion premium tax statutes are state-to-state. But in talking in preparation for this call, you work with some insurance companies to put together a package of tax credits that fit their state premium tax obligations on sort of a customer bespoke basis. Is that accurate?

Billy: Yes.

George: Go ahead, Billy, elaborate there.

Billy: Yes, that is accurate. Insurance companies will come to us with essentially a run of what their tax liabilities are in given states and ask us to create a portfolio of projects in those states that match against the liabilities to help them mitigate their expenses. And we will build them portfolios that will either be multi-asset multi investor portfolios, single investor multi-asset portfolios. It can be single asset multi investor, doesn’t matter. But we are a solution for provider to help them mitigate those liabilities.

Stewart: And so, one of the things that you mentioned, Billy, is the multi strategy versus single strategy. Why is one better than the other?

Billy: Well, there is no one better than the other. It comes down personal preference as it relates to the various companies and tax paying entities. We obviously offer a spectrum of opportunities across really the three disciplines we’re talking about, be it affordable, renewable and historic. And in our world being a solution provider, they can come to us and they can buy them as a single strategy investment, or they can buy them as some multi-strategy investment. We can put them together as a group of two or a group of three. And what has happened today is each of these various disciplines have become certified ESG investments. Corporations have found real value in having exposure to them as their stakeholders want to have them be exposed to them. And they can make one investment in a composite portfolio of all three at one time and be able to go back and say, “We are now exposed to what are socially good investments in historic and affordable as well as environmental investments in renewable.” Does that help you?

Stewart: Yeah, absolutely. And I mean, it leads me to my next question which is one of the things that we talked about in preparation for this podcast was the idea of, and I did not know this at all, is the ESG component of tax credit equity. It’s a big topic. Everybody’s talking about ESG. Everybody’s talking about the insurance industry in the US trying to catch up with Europe and Asia in that way. Can you talk a little bit, or extensively, about how a tax credit equity investment can be used in a way that is ESG friendly or meets ESG objectives

Billy: Well, you touched on two very important topics that seem to be in the mainstream of conversation, one of them being ESG, the other one being insurance companies, and the third one that everybody’s sensitive to when they’re a taxpayer are taxes. And what has happened in our world is there’s a convergence between what we have done historically, which is to provide really asset management in these government sanctioned private-public partnerships to allow the taxpayer to mitigate their tax liabilities, now to not only do it to where it benefits them on the tax side, but to where it also benefits them on the ESG side. And it is that convergence of two very important topics that have allowed what we do now to become really important to insurance companies. Insurance companies did not realize that they could use tax dollars to essentially help them move closer to their ESG goals until now.

Stewart: And you mentioned this to me prior, where is the investment coming from? These are funds that have been set aside to pay tax. Is that where on the balance sheet, the investment is going to come from? How does that work? I mean, educate me like I’m the CFO of a $5 billion insurance company and we’re talking about this, and I go, “Well, how am I going to fund this?”

Billy: It’s pretty simple, the CFO of an insurance company has two pockets of capital. One pocket is money that he has saved to create wealth in the company that’s been going into private investments, stocks, bonds and related assets that are to appreciate and have an annualized rate of return. On the other side of the coin, he’s got a pocket of money that he’s been saving to pay his taxes. If he writes a check to the government, his rate of return on his investment to the government is zero because he just wrote a check to pay 100 cents on the dollar that he was billed for. He now has an opportunity to invest in a sanctioned, private-public partnership that allows him to lower his tax bill, therefore have a return on his capital. So, every penny that he saves on his tax bill is a positive rate of return.

So, this is the first time he can actually take tax equity tax dollars that he is saving to pay his tax bill, reallocated into a private-public partnership that will mitigate his tax liability while at the same time being able to move closer to achieving his ESG goals.

George: Yeah, so to kind of elaborate on that point is you’re able to use dollars that you’ve already set aside for tax payments, that instead of just writing a check to Uncle Sam, you write a check to this investment. You get a return on your tax dollars, as Billy just said, most importantly. But you haven’t done anything, you haven’t impacted or impaired any of the rest of your capital that you invest for the benefit of your policy holders and your shareholders. So, at the end of the day, this is just accretive financially in terms of cash flow. It’s also accretive towards your ESG goals.

Billy: Let me interject one thing, as a CEO of a corporation said to me, he said, “This actually allows me to retain my discretionary at-risk dollars to be reallocated or allocated to more strategic investment opportunities for the company that are higher yielding.”

Stewart: Yeah, and I think that’s well put. The reason that tax credits are given or allowed by the government is because of the exactly the incent private capital to be used on projects that benefit socially. That is the reason that it happens. It’s the reason the tax exempt munis are tax exempt, because you use the money to pave roads and run waterline and all that sort of stuff. And so, what I’m wondering, I guess, is: given the clean energy push that you’re seeing that’s mainstream conversation today, are you seeing a difference in demand between the E, the S, and the G? Is there any increase in demand in any one of those strategies based on this clean energy push that you’re seeing

George: Yeah, that’s actually a very good question. We probably see a surge in demand for renewable energy projects. I would say we’ve seen an increase in that demand, particularly in the last 12 months, but really over the last two years. Frankly, there was a freeze in demand caused by COVID because everybody was nervous about, “Are we going to be making any money? Are we going to even be paying any taxes in the first half of 2020?” But after companies came to grips to the fact of, “Yeah, things are going to be from a business standpoint, just as profitable as before,” we’ve seen then a real surge and demand for renewable energy investment opportunities because of those ESG characteristics that they want to highlight.

Stewart: So, in 2021, Monarch Private Capital issued a $235 million social bond. Can you explain, just to help me understand, what is that social bond? Why did you issue it, and what’s the benefit?

George: Well sure, we’re happy to. It’s the first of its kind, so it would be under the S characterization as you have mentioned. But it’s basically a bond that is backed solely by low income housing and in our case, in-state low income housing tax credits that was issued to – frankly, all three of the investors of it were insurance companies. I’m not at liberty to say who they are, but the entire issuance was absorbed by three different insurance companies. And it’s something we intend to follow up on and issue more bonds. We used the proceeds to basically finance additional acquisitions and to, it’s just a source of capital for us at a relatively low cost of capital is why we’ve done it. But it’s backed entirely by credits from low income housing projects.

Stewart: It’s a really interesting strategy. When we first started talking, I’d become familiar with tax credit equity many years ago, but it’s come a long way. I mean, I did not understand how prolific and how sophisticated, when you can put together a package of loans and put together a package where you can address a multi-state premium tax, provide a solution there, anybody who’s tried to figure that out knows the value there. So, let me ask this, when we talk about the future of ESG tax equity investing, where do you think it’s headed? Monarch Private Capital has been around a long time. You’ve got a great deal of experience here. My question is what’s the future of ESG tax equity investing? Where do you think it’s headed?

Billy: I’d be very surprised if we don’t have a significant amount of growth in the industry as it relates to those users who want to get the dual benefit out of it. And I will say that the amount of capital that will probably come into the tax equity market from those trying to get the dual benefit, might not be able to get everything they want because this market is capacity limited.

Stewart: That was going to be my next question.

Billy: Yeah, it’s going to be those who understand the value proposition not only on the tax side, but the ESG side, and understand the need to move quickly are going to be the ones that are going to be able to reap the benefits the best and the fastest.

Stewart: And if you said, “Okay, who’s the perfect fit for a tax credit equity investment?” It is a fit for insurers, we know that. Can you give a perfect fit on the insurance side? And then just more generally, what does a model client for you look like in terms of their business and tax obligations?

George: So let me take a stab at that one, if I could. Let’s talk about low income housing credits rather than federal or state. Those credits are awarded in a manner, at least on the state side we can chop them up into any duration, but on the federal side they’re issued over a 10 year span and investors invest in them over a 10 year life cycle. And the returns to that investor are relatively modest in the scheme of things. I would say anywhere in the current market, anywhere from five and a half to six point a half percent rate of return, IRR, over the life of the investment. And that’s really attractive to two industries. One is the insurance industry because they, especially on the life side, you’re looking for a longer duration investment to match some of your liabilities. And a 6% yield is an attractive, maybe even above market return for an insurer. Especially on a risk adjusted basis, it’s a very high rate of return to that insurer to provide them a return to both the policy holders and the shareholders.

The other big competitor for low income housing credits are banks. Banks sometimes will pay more than an insurer would because the credits also offset a bank’s community reinvestment act needs. So, it becomes a regulatory issue for a bank if the credits happen to be in a part of the marketplace where they are doing business. So sometimes banks will pay non-economic terms for those credits because they need them to meet their regulatory requirements.

And then you move into the other credits and then they can be of a shorter duration of anywhere from one to five years, and so the returns are much higher with those credits after tax IRRs that are double digits or possibly a little higher, anywhere from that. And then what you see there, those become very competitive for any corporate investor. Even if the after tax return is like a 6% or 8%, a one year return of 6% or 8% after tax is very attractive to an investor in the current business environment. So, you’ll see any number of different public companies want to come in and take those credits. Obviously, it’s easier for somebody that has liabilities in multiple jurisdictions to come in and invest in portfolios that have multiple jurisdictions because you get a larger size, a larger critical mass that makes it easier for them to justify their investigation of the investment opportunity. And so, there are economies that scale that benefit larger entities versus smaller ones. But really anybody should be interested in those other credit types.

Stewart: So, I want to go back just a quick second to ESG. And can you help me, and Billy, I want to ask you this, what’s the difference between a traditional ESG fund and one that Monarch, a tax equity ESG fund? Can you walk me through the differences there?

Billy: So that’s a very good question. Let me kind of address it this way, first generation and second generation. We’re second generation. First generation is what is talked about and seen the most in the marketplace as it relates to ESG funds that are suitable for corporations and/or individuals. More often than not, you’re talking about something that is in a mutual fund structure or something that is in a liquid security structure of a separately managed account with bonds and/or equities in them, and all of those equities and underlying assets are picked by some screening method that they are “ESG certified”. But most of the investors in those traditional first generation vehicles, those are indirect investments that are to them and vehicle they’re passive to. They are not active. They are not what one would consider to be a direct investment that has full transparency where they know what they’re doing and there’s a direct impact on their dollars. They’re riding along in a market rate investment that is a speculative investment that has a return characteristic that is one, social or environmental but ESG oriented. And then another one that’s financial. And the financial side of it is a speculative investment.

George: And I think more importantly too is the ESG benefits are speculative and unknown too. I just would emphasize that point. Go ahead though, Billy.

Billy: No, that’s exactly right and a good point, George. Because the framework and the scoring in that first generation and most visible type is something that is very opaque. It varies as to having framework and standards around it. If we move into the second generation of what we are doing, we offer an investment that is direct into an underlying asset, a real estate project of affordable housing, renewable energy project of a solar farm, historic rehabilitated building. Each one of those are funded with tax dollars which are non-speculative dollars. We’re not pulling dollars from an at-risk market rate category like stocks, bonds, hedge funds, et cetera. What we are doing is we’re funding these direct investments that are scored by certified third parties as being your ESG oriented exposures. Does that help you

Stewart: Absolutely. Yeah, absolutely. And it’s not the social piece of it, there’s some public considerations too. Right, George? Could you give me a couple of examples or give our listeners a couple of examples of the sorts of projects that you’re talking about?

George: Sure, so as Billy was saying, in addition to the direct scoring in ESG benefits that are quantifiable, that we would provide our investors anyway, it’s certainly in terms of jobs created, dollars spent in the community, tax revenues generated, those kinds of things, the impact on GDP in that area. We have projects, I’m not saying every one of them is going to be like this, but there will be projects that somebody’s going to say, “I want to advertise that my company invested in this project to make that project possible.” For example, our firm has invested in the Women’s Hall of Fame building in Seneca falls, New York. We were the driving for the tax equity in that particular project. We’re working on the Peel building in Baltimore, Maryland, which is the oldest museum building in the United States. I believe it dates back to 1814. That’s something that somebody could say, “Hey, I’m really proud of participating in that.”

In the affordable housing area, for example, we’re venturing with basically providing the tax equity in what’s called Silo City, which is part of Buffalo. And Silo City is where, back in the 1800s, like 1880s, 1870s, all the grain from the Midwest was shipped up the Great Lakes to Buffalo where it was then collected and milled into flour and other goods. And that was done in Buffalo. And that’s not done any there anymore, obviously, but all these tremendous grain silos have been fallow there for a long time. And that’s being converted into a vibrant community in terms of both retail and affordable housing for the residents of Buffalo, as an example.

We also participated in the climate pledge arena, which is where the new Kraken ice hockey team in Seattle is playing, which is supposed to be the first environmentally, I guess, zero emission stadium or net zero stadium in the country. And that was something we were fortunate enough to invest in. And then there’s a project in Indiana, a similar solar project in Indiana, that’s gotten a lot of returns because it’s had a beautiful array of habitat around the facility that is very conducive to bees and other wildlife. For example, it’s been very ecofriendly, not just in terms of the fact that you’re creating renewable solar energy, but that it’s been incredibly ecofriendly to the environment around it, and it’s received awards for that.

But there are other examples, but those just quickly are examples of the kinds of things that, “Hey, I invested in this type of thing. I just want to publish that information. I don’t care what my ESG score is. I just want to people to know that we’re a part of making the success story.” But you also get the ESG benefits as well.

Stewart: Yeah, I think it’s really helpful to put some concrete examples in there. Those sound like cool projects. So, I appreciate the tax equity education today, guys. It’s been very good. We always end this podcast with the same question. And so, I’m going to start with you, Billy. I want to take you back to a day that I know you’ll recall well. It’s your graduation day of your undergraduate institution. And regardless of what festivities may have taken place the evening before, you are bright-eyed, and bushy tailed and ready to go. So, your name’s in the front half of the alphabet, so you’re kind of waiting there and they call your name. Up the stairs you go, across the stage. The crowd at this point is just going crazy. You get a quick handshake and a photo op with your diploma, and down the stairs you go. At the bottom, you meet Billy Huger today. What do you tell your 21 year old self?

Billy: My gosh, you sure have done a lot in those years, between 58 and 21. Some things were great achievements, and some were a total waste of time.

Stewart: That’s it. George, what would you tell your 21 year self?

George: Man, I don’t know. What I would tell myself is I have been darn lucky, and I’ve had a blessed life and I have no complaints. It’s been a lot of challenges and pitfalls, but I’ve been lucky and blessed is all I can say. So, it’s been a beautiful business to be associated with as something we’re all of us who work here are very proud of.

Stewart: That’s fantastic, and a great way to end. Thanks so much guys for being on. George Strobel, Billy Huger of Monarch Private Capital. Thanks guys.

Billy: Thank you.

George: Thank you.

Stewart: So, thanks for listening. If you have ideas for a podcast, please email us at My name is Stewart Foley, and this is the Insurance AUM Journal podcast.

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