This LGIP Just Changed Managers. LGIPs rarely change managers. Sure, when a manager is sold this is viewed as a change under Federal law and triggers client approval, but the sale is usually described as “new owner, same dedicated employees.” Advisory agreements are normally renewed when they expire, perhaps with the board undertaking some diligence around terms, but full-blown RFPs and manager searches are rare.

A few state-sponsored LGIPs have external managers and those that do, conduct periodic RFPs to select them. Perhaps the difference in procurement between state-sponsored and local-sponsored programs is because these contracts are with the treasurer and thus are more closely linked to a state’s procurement rules.

But for the most part local-sponsored LGIPs handle hiring a manager like the way mutual funds operate: by hiring the original pool “sponsor” and approving subsequent contracts with the same manager sans an RFP.    This leads to the perception that LGIPs are “owned” by their managers/sponsors.

This is similar to the perception in the mutual fund industry. Mutual fund managers, the financial services firms that sponsor funds, are beholden to the fund board, which by law must be independent of the sponsor. But how often does a mutual fund board conduct an RFP or replace a manager?

In the LGIP world this means that if a firm wants to enter the market or expand its LGIP business the normal way to do so is to establish a new LGIP by encouraging some local government officials to form one, fronting the start-up costs and becoming the manager of the new fund. This is different than the way private companies generally grow their share of a particular business (say selling gasoline or engineering services) with governments.

One interesting exception to this is when a manager of an LGIP in a particular state buys the manager of a competing fund. The buyer is likely to seek the merger of the funds. If this fails, then one of the funds would seek to replace its manager.

This is what happened with FL SAFE (the Florida Surplus Asset Fund Trust).

The $1.7 billion LGIP had been managed by PMA Asset Management, an Illinois-based advisor and fund administrator. PMA apparently has been purchased by Public Trust Advisors—there has not been any public announcement of this purchase—but the FL SAFE board considered merging with PTA-managed FL CLASS, which had $7.8 billion in assets at the end of 2023. Boards may not look favorably on a merger because they believe their way is better than the competition. That would appear to be a natural reaction to the idea of merger and may be behind the action by the FL SAFE board.

FL SAFE board minutes describe the merger with FL CLASS as one of combining boards, with FL SAFE having a minority of bord seats. The merger proposal was not satisfactory so to remain the LGIP business the FL SAFE board did an RFP and hired Chandler Asset Management as its new manager effective October 1.

Chandler is a California-based adviser focused on the public sector with $36 billion of assets under management. Most of its assets are from public agencies, and it has Florida governments among its clients, but had not previously managed an LGIP.

Now it has one LGIP under its belt.

Colorado:  A New LGIP in a Mature Market. Colorado has had a locally sponsored LGIP, COLOTRUST, since 1985, so it was an early adaptor of the government investment pool structure. COLOTRUST, managed by PTA, had $15.8 billion of assets as of June 30. Two other LGIPs, CSIP, managed by US Bank Asset Management (formerly PFM Asset Management) had about $2 billion of assets, and CSAFE, managed by Morgan Stanley, had about $6.7 billion.

Colorado has a sizeable local government investment presence, but it is also a mature market. One observer recently estimated that public agencies have about $38 billion in financial assets. The three LGIPs would have nearly two-thirds of the assets. Given that public agencies need banks to conduct their business, there would not seem to be much room to grow the LGIP share of investment assets, but Colorado is a growing state and with growth comes expansion of local government financial assets.

One view might be that there is no opportunity for a new LGIP in Colorado. Yet as of July Colorado had a fourth LGIP:  Centennial State Liquid Investment Pool (CSLIP). CSLIP was organized by Centennial Government Advisors LLC, which was founded by Ben Mendenhall, who in the past worked for PFM Asset Management, PTA (and Chandler).

The new pool hired State Street Global Advisors to manage its assets. State Street is an investment management behemoth (assets under management of $3.6 trillion) whose first venture into the LGIP business was in 2023 when it became manager for CalTRUST, a California LGIP.

Mendenhall is the driving force behind the new venture. He is passionate about the business and, when asked, saw the opportunity to attract assets from the other Colorado LGIPs by offering his version of service.  An element of his marketing pitch is that the other LGIPs are based on integrated services of well-established (mature?) firms where investment management, marketing and administration are provided by the same company. In Mendenhall’s view, separating the functions will open the business to specialist companies that can bring “the best of the best.”

Time will tell, but the “closed” nature of the LGIP business model has not deterred managers from venturing into mature markets. Last year the Georgia Treasurer created Georgia Fund 1 Prime and hired Federated Hermes to manage it. Earlier this year Meeder  Public Funds, a subsidiary of  Meeder Investment Management, created Texas-Connect to enter the large, growing and very competitive Texas market ( where seven LGIPs offer 14 portfolios)  

Bottom line: In much of the government procurement space eager competitors bid for existing business (selling gasoline or engineering services to governments) through a competitive bid or RFP process. The hybrid nature of the LGIP business--where the fund is a government or quasi-government institution but the business model is closely aligned with the mutual fund business model--results in financial services firms “creating” new LGIPs to enter markets/expand their business.

We expect the recent trend to continue with new LGIPs springing up to provide financial services firms with new business opportunities and investors with more alternatives.