Mission, Money & Markets: Capital for communities and efficient, impactful opportunities for investors
By Joe Evans
In 2016, our Social Investment Practice made a commitment to invest $30 million through a standard loan offering in Community Development Finance Institutions (CDFIs) and Development Finance Agencies (DFAs) working in ways aligned with Kresge program strategies to expand opportunity and equal access to capital in America’s cities. We called the effort Kresge Community Finance (KCF), launched an RFP and wondered whether the field would welcome a standardized loan product offering patient capital.
The answer was a resounding “Yes.” We received requests for nearly $300 million.
We will soon announce that the $30 million is fully committed in loans to 14 CDFIs and DFAs (cue the balloons and champagne).
This is an important accomplishment that will continue to pay program and operational benefits to Kresge for years to come.
The goals of KCF were to:
Invest $30 million in capital to program-aligned projects.
Provide $1.5 million in equity grants (5 percent of each loan).
Create learning opportunities for Kresge staff.
Produce loans that are efficient to make and manage.
Create investment opportunities for new investors.
It also, we hope, will serve as a demonstration to other investors of an easy and efficient approach to social investing. And it might be just the beginning – we are working to see if, through KCF, we can extend an investment opportunity to interested but hesitant socially minded investors looking to participate in the community development finance space, from donor-advised funds, to family offices and other foundations.
Let’s step back. At Kresge, where we have been working on social investments for nearly a decade, we hear these kind of statements from other investors all the time:
“We’d love to make (more) social investments, but they are so time consuming to source, structure and manage.”
“We’d love to steer some of our investment capacity toward mission, but it’s too risky and inefficient.”
“At that rate of return, we only have short-term money to invest, but the need appears to be long term.”
So we asked ourselves: How might we help motivated investors address these challenges?
The answer, of course, is nuanced, but what we have done with KCF is to offer an example of a structured, efficient approach that:
Demonstrated there is demand in America’s community development markets for longer-term, fixed-rate capital, subject to standard processes and documentation. We received 130 applications requesting $280 million for our $30 million offering;
Developed a set of standard loan terms and documentation, a “fill-in-the-blank” approach to lending to CDFIs, which makes this work a lot more efficient to document, process and manage over time; and,
Organized this cohort of standard loans into a pilot investment opportunity for social or impact investors.
In putting together this pilot, we are mindful of what we have heard from investors and are working to balance efficiency and liquidity needs to craft something that is appealing to investors, impactful on the ground, and that plays well with the existing investment marketplace infrastructure.
If we’re successful, we believe this will unlock new sources of capital and promote a more equitable capital and investment reality for low-income people in cities, which is our team’s overarching goal. And we see the existing community capital providers as the right on-the-ground lending and investment partners. This includes CDFIs, the most well-known and familiar type, but also DFAs, community banks and credit unions. These are the established channels through which capital for impact can flow to where it is most needed, to places that are cut off from the standard financial system due to a history of disinvestment and structural racism.
There are vast resources available, and people who want to invest for good, but we need more accessible investment opportunities to offer those investors an entry.
Why the equity grants?
Good question! CDFIs in particular are constrained when it comes to increasing equity. They have two options – earnings or grants, that’s it, and with missions to the most good possible, it can be hard to prioritize earnings. As lenders/investors in this space, we look to CDFIs to maintain minimum equity ratios, or the amount of equity the organization owns as compared with its total assets. So as they take on more debt, they need more equity. Our 5 percent equity grants are planned with this in mind. We as a social investor trying to demonstrate good investment strategies and techniques need to kick in a little toward the equity needed to take on our investment. In doing so, we help the organization and more importantly, highlight this issue for the investor community.
What does it look like on the ground?
The 14 organizations selected, 11 CDFIs and three DFAs, are working to advance equitable access to capital in neighborhoods across the country, particularly those populated by people of color with low-income and low community wealth.
In Detroit and in Memphis, we are working to convince the existing economic development system that its assets and expertise are needed in neighborhoods outside of the commercial cores.
In Massachusetts, we are supporting investment in the most disinvested areas of already disinvested cities, by building on existing cultural assets and leveraging regional and state development plans.
In California, we are helping to pave the way to a more client and community-focused approach to the provision of health care and basic health services.
In Connecticut, we are demonstrating the impact of resilient clean power systems, (solar + storage), and working to jump start demand, innovation and cost effectiveness.
In North Carolina, we are working to grow healthy, sustainable and community-led food systems.
And in Milwaukee, we are supporting increased community development and capital capacity in some of the nations most disinvested neighborhoods.
We’ll share stories of their work as it unfolds and will be announcing the second set of investees in the coming weeks. Feel to reach out if you if you have questions, comments or advice.