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SIP team reflects on favorite deals of 2017

Social Investment Practice

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As 2017 comes to an end, our Social Investment Practice team members look back at what deals or impact investment advancements they saw launch into the market – both from Kresge and in the field beyond – that had them excited about seeing capital deployed in new, innovative ways toward social issues from the environment to neighborhood revitalization.

Kimberlee Cornett, Managing Director

Favorite deal at Kresge: The National Housing Trust’s High Opportunity Fund is a first-of-its-kind investment that intends to demonstrate that developers can create affordable housing units in Blue Ribbon school districts. NHT and its development partners will accomplish this by acquiring market-rate apartment buildings and, through partnerships with local housing authorities, opening 20 percent of the units to Section 8 voucher holders. This investment builds from research that shows that children who move to high-opportunity neighborhoods often experience improved social and economic outcomes. While creating new, affordable housing projects can be slow and expensive and sometimes lead to community resistance, this strategy introduces affordability via mixed-income buildings. Grant support for this investment will track the outcomes achieved. I especially liked this deal because it “wedges in” affordability into high opportunity neighborhoods and builds on important research about the benefits for kids in resource rich communities. Learn more here. 

Favorite deal elsewhere: Since 1990, more than 30 million acres of working forestland has been lost – with 45 million acres at risk for development. Grants alone cannot address the scale of this conservation challenge. The Conservation Fund and the Richard King Mellon Foundation pioneered an investment model to acquire working forests, manage them until a permanent conservation easement that allows sustainable forestry can be sold, then resell the underlying land and timber to a private timber investor. This was possible with $65 million in PRIs and grant support allowing 333,000 acres valued at $265 million to be acquired. The land is permanently protected as working forest and will yield the Conservation Fund approximately a 4.5 percent IRR.  I love this deal because it represents a new model that brings impact investing to bear on the greatest land conservation challenge in the country today. Learn more here. 

Joe Evans, Portfolio Manager

Joe Evans, Portfolio Manager, Social Investment Practice, The Kresge Foundation

Favorite deal at Kresge: Each year the U.S. Treasury Department, through its CDFI Fund, has authority to issue up to $1 billion (with a B) dollars in long-term, low-rate financing for community and economic revitalization in distressed communities. It’s what’s known as the CDFI Bond Guarantee Program (CDFI Bond). In theory, that money could go a long way to solving capital gaps everywhere that Kresge works. But in practice, a very low (read: zero) tolerance for risk has meant only a fraction of that money hits the street. I’ve seen time and again that the true barrier to change ends up being perception of risk rather than actual risk and the amount of work it takes to manage that perception of risk over time. Our team has worked for years to try and unlock this potentially game-changing source of capital.

All which leads into my favorite Kresge deal this past year: a $3 million guarantee in support of a $100 million application to this financing program by Stabilizing Urban Neighborhoods (SUN), a program of the Boston Community Capital – one of the truly great actors in our space.

SUN’s application presented the CDFI Bond program with several challenges and was a perfect case for our efforts to expand the asset classes and permitted uses of CDFI Bond capital. SUN’s work led to an innovation within the CDFI Bond program known as the CDFI-to-CDFI model, which will hopefully help facilitate greater access to this financing source.

The foreclosure crisis is not over in the communities where SUN works: urban and low-income neighborhoods and communities of color. The year-over-year foreclosure rate continues to increase across many of these communities. SUN purchases foreclosed mortgages in these neighborhoods in bulk and at a discount and then provides new mortgages, right-sized and appropriately structured, to the existing homeowners who have a demonstrable external reason for falling into foreclosure (e.g. job loss or medical issue). As these homes are saved and reinvested in, neighbors follow suit by reinvesting in their own properties and neighborhoods are stabilized and transformed.

You can read more about SUN’s transformative work here, and more about the CDFI Bond Guarantee Program here.

Favorite external deal: People with low incomes often lack access to low-cost/high-quality financial services. They don’t use banks or banking accounts. When they do open one, overdraws are common. The bank processes the largest transaction first, and the account holder then gets hit with $35 fees for multiple small transactions. This is often the end of their banking relationship. How do you get a loan or build credit without a bank account? Answer: you don’t.

The fee-based and check-based banking model is deeply entrenched in the industry, even at the best community banks. What is needed is a new approach to the challenge of providing credit and transaction services to people with lower incomes.

That’s why my favorite external deal is an equity investment in The South Carolina Community Bank made by the new CEO, a long-time champion of the underserved and someone with a plan to provide that new approach. Step one is to stabilize and grow the bank in its home market. But the real potential and promise is the following step, the longer-term vision of creating a new banking service that combines a credit, savings and transaction account into one, low-fee and check-free account designed to meet the needs of under- and unbanked individuals. The South Carolina Community Bank is one to watch in the years ahead. Learn more here.

Kim Dempsey, Deputy Director

Kim Dempsey, Deputy Director, Social Investment Practice, The Kresge Foundation

Favorite deal at Kresge: In early November, we approved a $750,000 convertible loan to Fresh Coast Capital (FCC). FCC is a for-profit, mission-driven project developer that helps cities to develop and finance community-focused green stormwater infrastructure (GSI). With project development expertise, a model based on deep community engagement, commitment to achieving and measuring project co-benefits, and an exclusive focus on low-income and climate-vulnerable communities, FCC is an ideal partner to help advance the Kresge Environment Program’s Climate Resilient & Equitable Water Systems (CREWS) strategy. This enterprise-level investment will provide critical growth capital to FCC, helping the company to accelerate the development of its team, lines of business and customer base. The successful demonstration of FCC’s approach for both publicly- and privately-held land is expected to attract additional players to the emerging market, helping to further increase adoption of GSI and the related positive impacts on low-income communities. Learn more here. 

Favorite external deal: My favorite external deal was a first-of-a-kind pay-for-success (PFS) deal at Washington, D.C.’s water utility, DC Water. DC Water’s goal was to better offset and manage the risks of a proposed stormwater management project. DC Water needed an experienced, creative broker with a proven and efficient structuring method and turned to impact investing advisory firm Quantified Ventures (QV) to model and advance this transaction. Together, QV and DC Water applied the PFS model to green stormwater infrastructure (GSI) and structured the financing to transfer core project risk to investors. Through an iterative process of outcomes research, analysis and collaboration across disciplines (e.g., finance, engineering, legal), the result was the nation’s first Environmental Impact Bond (EIB), a $25 million tax-exempt bond sold in a private placement to Calvert Foundation and Goldman Sachs Urban Investment Group.

While standard municipal bond holders invest in issuers’ ability to repay on schedule, investor returns on the DC Water EIB are tied to project outcomes. If GSI performs as expected during this initial pilot project, DC Water can build the remaining GSI with an evidence-based understanding of expected outcomes, costs and risks. If outcomes are better than expected, DC Water can modify the design of its plan, presumably saving money. In this case, both DC Water and investors share in the savings. If GSI underperforms, then investors make a “risk share” payment back, providing DC Water with “free” insurance. DC Water is then armed with the information it needs to decide whether to continue with GSI or go back to its alternative grey infrastructure tunnel solution. By identifying, quantifying and transferring project risk, DC Water’s EIB created the incentives to deploy an innovative solution to a common infastructure challenge for cities. Learn more here.

Aaron Seybert, Social Investment Officer

Aaron Seybert, Social Investment Officer, The Kresge Foundation

Favorite deal at Kresge: I’m excited about the expansion of our Detroit Home Mortgage (DHM) program with a new product designed to support small, minority-owned development firms in Detroit. In this pilot, these firms will receive a flexible line of credit from one of two banks backed by a Kresge guarantee. Kresge will guard against the market risk of developing for-sale single family homes in the city. If successful, we hope to dramatically increase the number of move-in-ready homes in the city, boosting the market value of homes and increasing the number of DHM-financed homes in focus geographies. The goal is to close the appraisal gap in these neighborhoods quickly, so we can push out into more distressed neighborhoods. Learn more here.

Favorite external deal: In April 2017, the Ford Foundation announced it will invest $1 billion of its corpus into mission-aligned investments. This was a landmark move by a foundation of Ford’s size.  Other foundations have taken meaningful steps to align their corpus to their values, but Ford’s move is really the first of a foundation that size with a very explicit carve-out for MRI investing with measured targets and stated asset class allocations. Its announcement underlined recent research released by the Global Impact Investing Network and others noting that impact investments have not only met but in some cases exceeded return expectations for many investors over the measuring periods. With this new infusion of capital, the sector has an opportunity to show how it can reach scale and meaningful impact on a global stage with an investor as prominent Ford. Learn more here.

Thanks for reading Mission, Money & Market in 2017 and stay tuned to this space for more articles on social investing in 2018.