doing economic development finance differently
TRANSCRIPT
Doing Economic Development Finance Differently: A Primer
June 2, 2015
Prepared by:
Lisa Richter, principal
Context: Impact Investing
Risk Management & Leverage
Frontier
Discussion
$
3
Wealthworks Background & Context
How to
mobilize,
structure and
leverage
regional
financial
capital for
regional
wealth
creation?
4
Mobilizing Development Finance Capital via Impact Investments:
Social Thesis + Investment Thesis
Impact
Investment
Investment
Thesis
Repayment?
- Revenue?
- Savings?
- Growth?
- Liquidity?
Social
Thesis
Build local wealth
via value chains
5
Impact Investing: Investor Entry Points
Investing into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.1
• Any asset class or structure (cash, fixed income, equity, etc.) • Any expected financial return (interest rate, dividend, capital gain) • Same fiduciary care as any institutional investment
Program-Related Investment / PRI Mission-Related Investment / MRI
BELOW MARKET-RATE INVESTMENTS2
Higher Risk Lower Risk
Lower Risk Higher Risk
MARKET-RATE INVESTMENTS
Alternatives
Alternatives
Cash
Fixed
Income
Public
Equities Fixed
Income
Grants &
Recoverable
Grants
Cash
1Global Impact Investing Network, www.thegiin.org. 2F.B. Heron Foundation
6
Investor
Local
State/R
egion
Nat’l/G
lobal
Demand
Local Stakeholders ✔ Local wealth via value chains; includes
Community Development Financial
Institutions (CDFIs), firms, orgs, individuals
Community Foundation ✔ ✔ Vibrant, healthy community for all
Private Foundation ✔ ✔ ✔ Place and/or Program
Faith-Based ✔ ✔ ✔ Vibrant, healthy community for all
Health System ✔ ✔ ✔ Vibrant, healthy community for all
Banks ✔ ✔ ✔ Fulfill CRA*
Pension/Insurance
Company
✔
✔ ✔ Pre-empt CRA
Other Corporation ✔ ✔ ✔ Brand Value / Market Share
Government ✔ ✔ ✔ Incentivize / protect / leverage private sector
* Community Reinvestment Act of 1977
Investor Demand
7
Foundation PRI by Program Area 2006 – 07 / Total = $738 Million
Investor Demand
Source: Foundation Center 2009
Education $177MM, 24%Econ & Comm Dev $140MM, 19%Housing & Shelter $103MM 14%Environment & Animals $81MM, 11%Public Affairs $52MM, 7%Human Services $44MM, 6%Health $37MM, 5%Arts & Culture $37MM, 5%Religion $30MM, 4%Interational Affairs $30MM, 4%
8
Investor Demand: Mapping Sectors to Opportunity Across Asset Classes
Guarantee Cash Debt Fixed
Income
Public
Equity
Private
Equity
Venture
Capital
Micro, Small & Growth
Business Finance
Ag & Food Systems
Health & Nonprofit
Facilities
Arts & Culture
Infrastructure &
Transit-Oriented Dev
Open Spaces
Affordable / Supportive
Housing
Early Childhood
Development
Quality Education over
the Life Course
9
Implications for Wealth Building: Screening
Geography
Access / Networks / Value Chains
Ownership
Wealth
Building
Populations Served
Governance
Screen
ing
Portfolio
Track
ing
Metrics
10
Implications for Wealth Building: Metrics
There is an opportunity to systematically apply social metrics to inform investment strategy and
track advances in equity, wealth, health and environmental sustainability.
of affordable transit-oriented
housing units built or preserved # of affordable transit-oriented
housing units built or preserved
# of vulnerable patients served
# of square feet of community clinic
or other facility space built
#
of low-income child care and
school slots added and/or quality
enhancements for the underserved
# of square miles of park space
accessible to low-income people
# of people with increased access to
healthy food
#
and quality jobs created for low-
income residents and/or residents
of color
#
and amount of small business and
other loans to people of color &
rural residents
Break-
Even
Point
Start-up Proof Expansion Sustainable of Concept Growth
Organizational Growth
0
50
100
150
200
250
300
350
Revenue
ExpenseCapital needed to fund growth
Break-Even Point
#2
Take-Off
Adapted from George Overholser, Third Sector; previously Nonprofit Finance Fund
Risk Management & Leverage: Over Time
Break-Even Point
#1
Risk Management & Leverage: “Capital Stacks” - from a Moment in Time
Credit Enhancement
First loss tranche
-- often grants or public subsidies
“Junior,” subordinated tranche
-- often foundation PRI
“Senior” tranche or layer
-- Conventional capital + foundation MRI
Risk Management & Leverage: Broad Strategy
Risk Management Leverage capital to: Build capacity among individuals/organizations Foster value chain expertise, competitive advantage and anchor strategies Forster value chain skills transfer
Foster communications to promote local development Preserve clean sites and buildings Promote transit-oriented development, infrastructure Support policy that mobilizes private capital
Foster local philanthropy, capital markets and ownership
14
Risk Management & Leverage: Qualifying Demand via Business Plans
1. Business Description and Impact Investing Potential:
Social Thesis + Investment Thesis
2. Market Assessment and Competitive Analysis
3. Marketing and Sales Strategy
4. Management, Board and Organization
5. Financial Projection
6. Risks and Mitigation
7. Implementation Plan
14
Way Forward
Multiple Capitals Driving Systems Change
Healthy,
Wealthy,
Equitable,
Sustainable
Communities
Bank
CRA
+ MRI
+ Others
Concessionary
Investing
PRI
Grants
& Subsidy
Subsidy Return
Innovation: Greater Real or Perceived Risk “Impact”
Scale
Technical Assistance / Capacity Building Supports:
• Value Chains / Data / Technology / Shared Lessons
• Financing Links / Credit Preparedness
• Innovation
• Active Ownership Strategies
Leadership: Vision / Policy / Positive Messaging
16
Timeline of U.S. Impact investing by Sector & Support
1960s 1970s 1980s 1990s 2000s 2010s
IMPACT INVESTING SECTORS
Community and
economic development, including affordable
housing
Microenterprise
(primary launch overseas)
Environmental
conservation
Education / Charter
Schools
Asset Building (Family Economic
Security / Financial Inclusion)
Technology: - Clean Tech
- Edtech
Health
Food Systems
Transit-Oriented Development
Arts & Culture
PARALLEL DEVELOPMENTS
PR
IVA
TE
SE
CT
OR
Ford Foundation Community
Development Corporations; Program-
Related
Investments
Community Development
Financial Institution(CDFIs launched;
formalized in 1990s)
Sullivan
Principles (anti-apartheid)
Earth Day
Social Investment
Forum
Opportunity Finance
Network (CDFI trade association)
Investors Circle (venture / angel
trade association)
CERES Principles from the Coalition
for Environmentally Responsible
Economies (late 1989)
Mission investors
Exchange
Global Impact Investing
Network
Convergence Partnership
Green overlay for all sectors
Healthy communities
overlay
Technology overlay
Anchor Overlay
Value Chain Overlay
Life course overlay
PU
BL
IC S
EC
TO
R
War on Poverty
Home Mortgage
Disclosure Act
Community Reinvestment
Act
Low Income
Housing Tax Credit
Federal CDFI Fund
Hope VI incentivizing mixed-income
communities
New Markets
Tax Credit
Healthy Food
Financing Initiative Coordinated
Federal Policy via Promise, Choice and Sustainable
Community / Neighborhood initiatives
Affordable Care Act
17
Frontier: Place-Based Impact Investing Sectors – Environmental Overlay
Sustainable
Development
Conserve, restore
natural resources
• Farm, fish, forest
value-added
enterprises
• Energy, Transit-
Oriented
Development
Community Development
Meet underserved needs;
create jobs; enrich community
life
• Community facilities
• Arts & Culture
• Health, human services,
human development
• Affordable housing
• Family economic
security
Economic Development
Create Jobs
• Early stage and
Growth stage
enterprises
Frontier:
Place-Based Investing with Health / Life Course Overlay
The County Health Rankings Model
suggests investment opportunities that “create social and
physical environments that promote good health for all.”
Com
mu
nit
y F
acto
rs ~
50 -
70%
Potential Impact Investments
provide financing for the organizations and
projects that build communities where “the
healthy choice is the easy choice:”
- Community health centers
- Firms spurring health technology innovation
for the underserved
- Quality child care & schools
- Microenterprise
- Small business
- Anchor institution strategies that develop local
firms as vendors
- Transportation to jobs
- Banks and credit unions offering safe credit &
financial services
- Quality affordable housing
- Shelters and supportive housing
- Local recreation centers and after school
programs
- Green retrofitting
- Transit-Oriented Development
- Access to fresh food
- Local parks and green space
20
Frontier: Coordinating Capital to Advance Health & Wealth
Goals Increased access to evidence-based health promoting resources via Community Development designs
Economic Development benefits (jobs, increased tax revenues)
Complement grants; leverage significant additional capital to finance healthy & vibrant communities
Healthy Ag
& Food Systems
Fund
Infrastructure &
Transit-Oriented
Development Fund
Open Spaces
Affordable &
Supportive Housing
Fund
Asset Building
Financial Services
Fund Family of Funds:
Advancing Health Equity
with Impact Investing
Microfinance
Small Business
Lending
Opportunistic Fund
Childhood / Youth
Development Fund
Community Health
Provider Fund
Built
Environment
Access to &
Quality of Care
Socio-Economic
Factors
Frontier: Prevention v. Intervention at the intersection of sector, place and time
22
Appendix
23
Impact Investing Examples
Investor Robt Wood Johnson Foundation Casey, Heron via DBL Investors (fund)
Social Thesis Safe play in low-income public
schools
Increased healthy food and nutrition
education for low-income students
Investment
Thesis
School districts purchase service,
providing revenue
School districts purchase service
Asset Class Loan Guarantee with One Pacific
Coast Bank (a CDFI)
Equity investment in for-profit company
Impact
• Outputs
• Leverage
Over 170 US urban schools
Building
Over 15 million healthy meals served since
inception, 60,000 meals per day
$30 million in equity capital; PRIMRI
24
Impact Investing Examples
Investor The California Endowment California HealthCare Foundation
Social Thesis Increase access to quality, affordable
care
Reduce cost of care, improve quality of life
for chronic respiratory disease sufferers via
med usage data tracking
Investment
Thesis
CHC reimbursements provide cash
flow
Insurance companies purchase service
Asset Class Loan Equity-like convertible debt in for-profit
company
Impact
•Outputs
•Leverage
New site, phone and IT systems;
Increased volume/quality
NCB, Capital Link loans
Reduced unnecessary hospitalizations
Additional equity investors
25
Impact Investing Examples
Investor TCE, RWJF, Hilton Cleveland Foundation
Social Thesis Reduce hospital care and incar-
ceration via supportive services
Leverage anchor institutions, circulate local
wealth via worker-owned vendors
Investment
Thesis
Housing subsidies and rent provide
cash flow
Revenue from selling services to anchors
provides cash flow
Asset Class Loan Loan
Impact
•Outputs
•Leverage
Reduced costs for health/justice
Community Reinvestment Act-
motivated banks
Create jobs and ownership for local
residents; circulate local dollars
CRA banks, HUD, EPA, Commonwealth,
New Markets Tax Credit