Introducing non-grant forms of investing has unlocked more than $1 billion for cities, nonprofits

In 2009, Kimberlee Cornett received a call from a recruiter. A foundation in Michigan was interested in starting what they were calling then an  “innovative finance” practice and wanted to talk. She flew to Detroit to learn more. 

Kresge’s then-new President and CEO, Rip Rapson, proposed that expanding the foundation’s financial tools beyond capital challenge grants would allow it to make a greater impact with its resources. 

Intrigued by what she heard from Rapson and Trustee Jim Bildner and ready to apply her years of experience in the tax credit market to philanthropy, Cornett became the first managing director of this new line of work.

The surprises soon followed. 

“In one of my first meetings, an advisor told me that calling this practice “innovative” was perhaps a stretch,” Cornett said. “Kresge wanted to do impact investments or program-related investments. This was well-trodden ground in other places but was very new there.”

Very new, and also not universally understood or appreciated. Although some board members, led by Bildner, supported expanding the financial toolbox, others considered it “downright evil,” Cornett said, to loan money to nonprofits and expect them to return it with interest. 

“It was pretty bumpy for the first two years,” Cornett said. “There was tension about the impact investing work diverting resources out of the payout and reducing the grant budget. That was a big issue we had to overcome.”

Today, what’s now called the Social Investment Practice is firmly entrenched in the foundation’s DNA despite that challenging start. The first impact investments came through a series of no-interest loans in 2008 to human services organizations struggling to survive the recession. Sixteen years later, more than $500 million has been committed to advancing Kresge’s mission through tools like debt, equity and guarantees. Those investments have generated more than $1.2 billion in leveraged funds.

Non-grant capital has played a central role in a variety of marquee Kresge-funded projects, including the transformation of the Marygrove campus in Detroit into a cradle-to-career educational hub, the attempt to bring inclusive community development to the Memphis Medical District and Detroit’s Midtown Woodward Corridor, and more recent work advancing the just energy transition through the adoption of solar in low-income communities.

Getting to this point of alignment took time, effort, and a persistent examination of the foundation’s tolerance for risk.

Finding the early adopters

In Cornett’s mind, the first significant success of the Social Investment Practice came through the Health Program and its former managing director, David Fukuzawa. She calls him the hero of the story. While some inside Kresge felt the emergence of non-grant forms of capital was a distraction, Fukuzawa saw an opportunity.

After the Affordable Care Act passed, millions of newly insured Americans needed a place to get health care. Federally qualified health centers, which are government-backed medical centers that serve low-income communities, meet that need. They faced an onslaught of new patients and needed to ramp up and expand quickly. Grants alone wouldn’t be enough to achieve that.

“David was saying, ‘You’ve got money over there, and you seem to know something that I don’t,” Cornett said, “‘and we’ve got this big problem with all these newly insured patients coming to Federally Qualified Health Centers.’ He wanted to work together on that.”

As Fukuwaza recalls, “We adopted social investments as a key instrument or tool very early on as part of our health program strategy. We knew that social investments could make a big difference.”

This partnership came to fruition in the Healthy Futures Fund. Established by Kresge, Morgan Stanley, and the Local Initiatives Support Corp., the fund started with $100 million and grew to $200 million. It leveraged Low-Income Housing Tax Credits and New Market Tax Credits to bolster health and housing for low-income communities by co-locating FQHCs in affordable housing developments.  

That $6 million program-related investment in 2012 marked one of the first co-created investments between a Kresge Program team and the Social Investment Practice. The funding supported federally qualified community health centers in underserved neighborhoods and new low-income housing developments integrated with health services. 

“That built momentum,” Cornett said. “The board saw we could do big things with different partners using these tools.”

Another early win came through the Woodward Corridor Investment Fund in 2013. The fund tackled two major issues holding back development in Midtown Detroit – a lack of commercial lenders willing to take on long-term commitments in a distressed market and a dearth of available comps for sales.

The Woodward Corridor Fund raised $30.25 million to meet that challenge. Kresge provided a credit enhancement guarantee to attract traditional investors and CDFI partners to put their money on the table. 

“It wasn’t a lot of money,” Cornett said, “but it was some of the first institutional money to return to Detroit. And it was hard. Super hard. When we got to closing, it was novel. To Rip’s credit, his statement about being the “guarantor of value” carries a real element of boldness. That was true in this transaction.”

Growing in sophistication

Former Kresge Social Investment Deputy Director Kim Dempsey joined the team as an originator in 2014, bringing 10 years of community development financing experience with her. She quickly learned that the bridge-building work inside Kresge still needed to be addressed before she could unleash her deal-making skills.

She “smoothed my rough edges,” Cornett said, and helped bring the social investing team closer to the center of the program team’s work.

“Understanding our Program strategies was the crucial first step,” Dempsey said. “It was clear from the outset that these strategies were the driving force at Kresge, propelling us toward our ultimate vision. I couldn’t effectively develop a pipeline without grasping the intricacies of creative placemaking, climate adaptation and mitigation, or creating pathways to college.”

Learning moved in multiple directions at that time. The social investing team organized training sessions for interested staff to understand better their toolbox of debt, equity investments, and guarantees. Social investment officers began leading with questions like, “What problem were they trying to solve? What solutions had program officers prioritized with their grants? And, only then, was any of that investable?” 

As these internal bonds tightened, in 2015, the Kresge Board voted to devote 10 percent of the endowment, totaling $350 million, to the social investing work. Until then, it had funded the work annually on top of the payout. Cornett said this marked a milestone.

“That solidified what had started as an experiment at the foundation,” Cornett said. “It cemented it as a membrane in how the organization works and achieves its mission.”

Social Investments through the years

Finding the center

Foundations that make impact investments employ a range of operational approaches. Some “carve out” resources from their endowment. Some create a team of financing professionals who work separately from the program teams. Others work from one pool of resources, competing for dollars with every grant proposal or investable opportunity. 

At Kresge, a distinction in its approach is the assignment to find investments that land in the “bullseye” of its seven program strategies. The Social Investments team has its own budget but no independent strategy; its goal is to make investments that further the program team’s goals.

“When I joined the foundation in 2016,” said current Social Investment Practice Managing Director Aaron Seybert, who came from a traditional banking background, “I thought I was coming in to make deals, mainly in Detroit. But I learned quickly that we were not trying to do deals for the sake of doing deals; our challenge is to do the “right deals” that advance program strategies in a way that grant-making alone can’t accomplish. We were trying to reach systems, not make stand-alone investments, even if they are highly impactful in and of themselves.”

Finding investable opportunities that hold fidelity to program strategies and outcomes is certainly a challenge. Every investment goes before an approval committee and needs program buy-in to proceed. The first question asked is whether a given investment advances program strategy. Also considered are the grants that have been layered alongside the investment to ensure other complementary work is also resourced. 

Along the way, the social investment team did find opportunities to innovate and use its tools in groundbreaking ways. 

In Detroit, a Kresge guarantee brought together a wide range of actors to attempt to solve the appraisal gap issue in the single-family real estate market. Detroit Home Mortgage ultimately didn’t result in as many mortgages as stakeholders hoped. Still, it was successful in other important ways, including receiving an unprecedented ruling from the Office of the Comptroller of the Currency.

“Bank regulators are notoriously unwilling to bend their rules regarding what banks can and cannot do,” Dempsey said. “That OCC letter allowed a bunch of banks to do a kind of lending in Detroit that they would be disallowed from doing anywhere else. That was a huge win, recognizing that the Detroit market needed a different set of rules so that we could bring it back.”

On the Marygrove campus, more than a half dozen guarantees have removed risk and summoned tens of millions of dollars in traditional investment to save a college campus from shuttering and to remake it into a beacon of educational opportunity for the entire surrounding area.

Cornett remembers balking at the first discussions when Rapson asked her to investigate what it would take to help the college resolve its financial issues.

“I was like, ‘Are you nuts?” Cornett said. “…But his sentiment about what would happen to the neighborhood if that campus fell was persuasive. Having leaders in the building like (Detroit Program Managing Director) Wendy Lewis Jackson and Aaron Seybert made something unimaginable possible. That is some of the most extraordinary work I’ve seen.”

Dempsey said no other foundation has used guarantees at the rate Kresge has. To date, it’s made more than 80 guarantees. Even its former Chief Investment Officer, Rob Manilla, was a fan, going so far as to pen a plea to his peers to consider using the tool. 

“I’d encourage other foundations to expand their toolkit to include guarantees,” he wrote in 2018. “We have shown that they catalyze other capital, the cost can be estimated, and the market is receptive.” 

Such firm belief in the power of putting a foundation’s balance sheet into play to achieve its mission led Kresge to incubate and help launch the Community Investment Guarantee Pool in 2019. This brought more than a dozen foundations together to pool guarantee commitments, giving those who need risk mitigation a one-stop-shop place to find it. 

The next step – going to the ground

Seybert became managing director of the practice in 2019, only a few months before the COVID-19 pandemic began. Amid the tumult of 2020, the Social Investment team asked the Kresge board to renew its support for social investing as the five-year, $350 million commitment came to its close. They agreed, and the impact investing work has remained resourced at a similar level. The team has moved its focus further into deals that center on equity for people of color, especially in places like Detroit, New Orleans, Memphis and Fresno.

Examples of this recent work include the Ebiara Fund in Detroit, the 22 Fund, MoCaFi, and a suite of investments to advance solar+storage technologies in low-income and communities of color so they don’t get left out as billions of dollars in the Greenhouse Gas Reduction Fund begin to flow. Investment partners in that work include Collective Energy, Cap Solar, Together New Orleans, Re-Volv, Clean Energy Credit Union, Posi-Gen and others. 

This work is highly aligned with Kresge’s Environment Program, which uses grants to bolster policy change and to resource environmental justice groups. 

Increasingly, Seybert sees his team as the bridge between critical community-centered work on the ground such as policy change, narrative change and power building — things grants are well suited to address — and his team’s efforts to bring the capital markets to bear on the solutions the community identifies as its priorities. 

“We have to map our strategies to the massive influence the private market has on the lives of everyday people,” Seybert and, “and consider what it’s going to take to make structural changes in the economy, to turn it from being an inequality engine to an opportunity engine. If we ignore that, it’s to our peril.”