Entrepreneurship | May 15, 2018

Invest in where you know: Impact investors rediscover the power of ‘place’

Dennis Price
ImpactAlpha Editor

Dennis Price

ImpactAlpha, May 15 – Everything old is new again, including the notion that investors have a role to play in creating thriving economies in their own backyards.

“Place-based investing” is taking off. From downtown Detroit and Chicago to communities across Central Appalachia and the Navajo Nation, private investors are tapping civic leaders, community foundations and local nonprofits to find opportunities to finance small businesses, schools, health clinics and urban infrastructure. The intended impact: quality jobs, affordable housing and inclusive growth.

Each model looks a little different. A new report from the Urban Institute, produced in collaboration with the MacArthur Foundation and Mission Investors Exchange, highlights nearly two dozen place-based impact investing initiatives in communities across the nation. New ones are emerging weekly, including last month’s announcement of PhilaImpact, a collaboration between the Philadelphia Foundation and the Reinvestment Fund.

In Minnesota, a group of local foundations have committed nearly $20 million from their endowments into a fixed-income bond fund managed by RBC Global Asset Management to invest in local affordable housing and small businesses. The Minnesota Impact Investing Collaborative is led by the Minnesota Council on Foundations and includes the McKnight Foundation, Bush Foundation, and the Otto Bremer Trust.

The Michigan Collaborative is helping local foundations put their endowments to work through the Community Capital Management’s publicly traded mutual fund. The fund targets fixed-income investments in affordable housing, small business lending, and civic infrastructure in the region. The $30 million Michigan Good Food Fund, a separate initiative, provided $10.5 million in loans to six Michigan businesses dedicated to healthy eating. The healthy food fund is backed by Capital Impact Partners, Fair Food Network, Michigan State University Center for Regional Food Systems, and the W.K. Kellogg Foundation.

In upstate New York, the Community Foundation for Greater Buffalo has anchored an $8 million private investment fund for targeted impact investments in western New York. The fund brings together philanthropic and corporate investors with private individuals and aims to deliver market-rate returns through investments from social startups to environmental-cleanup bonds. Impact investing networks are also forming in Austin, San Diego, Richmond, and the state of Virginia.

Collaborative place-based initiatives “can compensate for market failures, absorb risk for investors or mitigate risk for investees, and bring much-needed capital to underinvested communities where the costs of capital are often high,” Shena Ashley and Joycelyn Ovalle write in the Urban Institute report. Diversified local portfolios, they say, “can challenge the assumption that local investing carries greater risk and that diversification comes only from broad geographic scales.”

Many of the initiatives are on display at this week’s Mission Investors Exchange conference in Chicago. By working together, local partners say they have increased the pipeline of investible deals and reduced the costs of due diligence and technical assistance. Deep local knowledge also helps mitigate risks and unintended consequences, such as the displacement of local residents and businesses.

Collaborative capital

Place-based impact investing isn’t new, Matt Onek of Mission Investors Exchange told ImpactAlpha. “But the level of collaboration is becoming increasingly ambitious.”

In the southwest, the Colorado Impact Initiative, created by the Impact Finance Center, aims to build a statewide market for impact investing (and to replicate the model in other states). The Impact Finance Center has partnered with Colorado Association of Funders, the Denver Foundation, Gary Community Investments, and 30 other community members to facilitate more than 200 direct investments in Colorado, many by first-time impact investors.

The New Mexico Impact Investing Collaborative, housed at the Santa Fe Community Foundation, is seeking to boost impact activity by helping funders share deal pipeline, due diligence and education. The Rainmakers Investment Collaborative is deploying community development loans to Native communities in New Mexico and Arizona. Confluence Philanthropy organized the effort to build the investment capacity of regional lenders and Native economic development organizations.

“Philanthropy has a full set of tools to make these investments work that other investors do not,” said Joohee Rand, the head of impact investing at the Santa Fe Community Foundation, at this week’s MIE conference. Small foundations, says Rand, can increase their impact through place-based investing by “doing it in a way that leverages collaboration.”

The New Hampshire Charitable Foundation has pooled donations with a carve-out of its endowment to seed a local impact investment fund. The foundation is deploying at least $11.6 million in local investment opportunities.

Local products

Philadelphia’s initiative shows how a local impact investing ecosystem can grow. Last year, ImpactPHL Ventures pooled $15 million from local institutions and pension funds to seed social ventures in the region. Last month, the Philadelphia Foundation and the Reinvestment Fund, a community development financial institution headquartered in Philadelphia, seeded the PhilaImpact Fund with $10 million to finance projects with measurable impact in Philly. The fund aims to demonstrate untapped potential among donor advised funds for local investments.

Benefit Chicago, a collaboration of the Chicago Community Trust, the John D. and Catherine T. MacArthur Foundation, and Calvert Impact Capital, has mobilized $95.5 million for Chicago-based non-profits and enterprises. The funds were raised through the Trust’s donor advised funds, MacArthur’s own assets, and Calvert’s community investment notes, which allow local individuals to invest as little as $20.

In Washington D.C., the Enterprise Community Partners and the Washington Regional Association of Grantmakers also allow investors to act locally. The collaboration has raised $12 million through Enterprise Community Impact Notes for the creation and preservation of affordable housing.

Propeller, a social-venture accelerator in New Orleans, has partnered with Living Cities and Foundation for Louisiana, to pop up a $1 million loan fund to fill a gap in much-needed working capital for local businesses, particularly for founders of color.  

No quick fixes

Some communities have more capital than investible enterprises. In central Appalachia, the Appalachia Funders Network of 80 funders is building a blended-capital fund that meets the needs of a variety of philanthropic and private investors to provide patient and flexible capital to help rebuild the economy in coal country. The effort is helping the region “transition from a ‘resource curse’ mentality to one of ‘we are investible,’’’ said Stephanie Randolph of the Appalachia Funders Network.

Not every collaboration succeeds. Canopy 2.0 Pacific Northwest detailed its early financial struggles in a case study, saying it likely grew too big too fast, which put pressure on its business model. The two dozen foundations include the Russell Family Foundation, Meyer Memorial Trust, and the Laird Norton Family Foundation, which share market intelligence, deal pipeline and due diligence but invest individually and not through a pooled investment vehicle.

“These places and problems are complex,” says Gladys Washington of Mary Reynolds Babcock Foundation, which make place-based grants and investments in Central Appalachia, Georgia, North Carolina, Arkansas, Louisiana and South Carolina. “This work requires time.”