Place-based Impact Investing in CDFIs can supercharge grantmaking, strategically address high-cost community needs, and enable small and moderate-sized foundations to achieve out-sized impact while mitigating risk to their investment portfolios

Since 2013, using an allocation of its invested capital, the Jessie Ball duPont Fund (“the Fund”) has managed a successful low-interest loan and bond program to support and expand the work of Community Development Financial Institutions (CDFIs or low-interest, community-focused private sector lenders) and other high-impact social enterprises in Delaware, Northeast Florida, and Virginia. CDFIs are on-the-ground community experts in affordable housing and small business development, two priorities of the Fund’s $17.5 million loan program. Our investments are structured as long-term, patient debt with durations of 7 to10 years and interest rates between 1% and 2%, ensuring CDFI loans are priced so they are accessible to borrowers in communities who have historically been under-served by traditional commercial banks. 

Although the Fund’s impact investing program encompasses more than loans, this brief will focus on a subset of our loan activities: Program-Related Investments (PRI). In the last 12 months, our first two long-term PRI loans matured, allowing us to reflect on and share the results of the Fund’s experiences over the last eight years in equity and placemaking lending. The two $1.5 million loans were made in 2013 and 2014 to Virginia Community Capital (VCC) and NCALL (Delaware) as debt in their respective loan pools. The beauty of these long-term, patient capital examples is that our initial investment of $3 million in total was recycled over the course of seven years nearly four times (4X) and then repaid with a modest return. In all, the PRIs enabled $11.2 million in loans for affordable housing projects, community facilities development, and small business support.

Why Pursue Impact Investing?

After the 2008 Great Recession eroded the Fund’s endowment by one third–about $90 million over 90 days–trustees took measures to meet the immediate needs of our grantee partners and their communities while simultaneously making a focused, longer-term, and greater financial commitment to the places we serve. First, the Fund temporarily increased its total grantmaking. Second, we launched a loan product that served as a catalyst for an impact investing program. Of course, giving away more grant dollars is an obvious approach to addressing community needs. But why impact investing? The answer lies in how private foundations are regulated and governed. 

About 5% of private foundation assets are directed toward philanthropic work, leaving the remaining 95% invested in stocks, private equity funds, or similar investments in order to achieve the greatest financial return possible. This traditional operating model–which meets the I.R.S. minimum distribution bar–is the status quo for the vast majority of private foundations (estimated 85%)(1) that aspire to grow and award their 5% in perpetuity.(2) However, a growing number of foundations are practicing Impact Investing as a way to intentionally drive the remaining 95% of their assets toward companies, products, and services that are doing good in the world and/or avoiding investments that are extractive or that negatively affect society, the environment, or people/employees.

A moderate-sized private foundation (~ $290 million assets under management when the first PRI was awarded in 2013), the Fund struggled to address high-cost solutions to common community challenges, such as affordable housing development and preservation, economic development, and climate change resiliency. Our limited grant dollars (or the 5%) alone would never be enough to move the needle on these issues. But what if we directed some of the 95% of the Fund’s invested capital to complement our grantmaking in places Mrs. duPont loved? In doing so, the Fund committed to “go bigger” in our three core states.

Investing in Our Theory of Change: Reflecting on Two Closed Loans

We Invest in Places

We believe that people thrive and gain a sense of belonging when they are able to contribute to or feel included in their communities. For places to be great and great for residents, communities must offer all residents–regardless of race/ethnicity, income, or educational attainment–the ability to own or rent quality, affordable places to live as well as convenient access to community facilities and direct service providers, such as health clinics, grocery stores, schools, and nonprofit organizations, among others.

However, our communities are in a housing crisis. For instance, about 45% of renters in Virginia and Delaware are cost-burdened, meaning that they spend more than 30% of their incomes on rent and utilities.(3) This housing crisis is the result of a mismatch between rents and income in addition to a lack of affordable and available units, particularly for extremely low-income residents.

Our CDFI partners lend to complex real estate projects. The low-interest loans, expertise, and leveraged capital that CDFIs bring to the table often help close deals and can support developers who are willing to tackle affordable housing projects with razor-thin margins. In some cases, CDFIs can also provide or attract tax credits to projects–such as highly competitive New Market Tax Credits–that subsidize developments and are absolutely necessary for ensuring affordability.

Outcomes/outputs from the Fund’s two matured PRI investments to support placemaking in Delaware and Virginia between 2013 and 2021 include:

Affordable Housing

  • 23 housing development loans made totaling $7.4 million
  • 70 units of single-family housing
  • 162 units of rental housing
  • 13 units of transitional housing
  • About 650 individuals housed
  • 189 units or 77% are affordable (< 81% average median income or AMI)
  • 56 units or 23% are workforce (81%-100% AMI)
  • 44 units or 8% are serving people with special needs (e.g., homelessness, substance use, foster youth, physical / intellectual disabilities)
  • JBdF capital used for 15% of total project costs of $48.4 million

Community Facilities

  • 2 loans made totaling $800,000
  • Established 10,300 sq. ft of community / retail space
  • JBdF capital used for 55% of total project cost of $1.5 million

We Invest in an Equitable and Inclusive Economy

One of our equity-focused approaches is to provide access to wealth-building opportunities for historically excluded populations. Entrepreneurship is one avenue for people to move up the financial ladder while becoming a part of the financial mainstream and making a positive contribution to the economy. 

However, research suggests race and gender biases in financial markets influence who receives loans and investment dollars. Some attribute unconscious bias to the lack of racial and gender diversity among investment boards and loan committees. Biases coupled with traditional lending expectations have resulted in:

  • Women and (non-Asian) minorities are simply less likely to apply for loans from fear of being denied or due to lower credit scores or historically low levels of wealth;(4)
  • More minority business owners rely on personal and family savings as a source for start-up capital as compared to White business owners; (5)
  • Black-owned businesses are more likely to use more expensive credit card financing for debt;(6) and
  • Minority- and woman-owned businesses are more likely to be undercapitalized than White male-owned businesses.(7)

Investments in CDFIs increase the amount of available capital to lend to entrepreneurs in low-wealth communities and, in addition, can also reduce risk for and/or guarantee borrowers’ loans. CDFIs are perfect partners because they provide capital with favorable terms to business owners when commercial banks often will not. CDFIs serve in yet another critically important capacity: technical assistance provider and coach to those considering a start-up with regard to developing business plans and seeking financing.

Outcomes/outputs from the Fund’s two matured PRI investments to support access to equitable and inclusive economies in Delaware and Virginia:

  • 8 small business loans totaling $3.0 million
  • Uses include refinancing existing loans, land acquisition, and working capital
  • 103 total living-wage jobs supported ($15+ an hour)
  • Businesses include manufacturing, family farm, small school, among others
  • Fund capital used for 41% of total business loans of $7.4 million

What we are learning about our investments in CDFIs:

  • Low-risk investments.
    After assessing our CDFI investments overall, we consider them to be low-risk and high-impact, thus informing a new risk profile for this portfolio. Initially, the Fund accounted for CDFI loans similarly to a cash position that sat off of the balance sheet. Since we have had no CDFI defaults–this includes all other CDFI investments since 2013–we are in the process of converting CDFI PRI loans to unsecured bond notes and accounting for them on our balance sheet to function as fixed income assets.

  • Deliver a double bottom line.
    Although we intentionally price CDFI interest below market lending rate (between 1% and 2%), these investments provide outsized impact in the communities we serve. These loans have performed as anticipated and weathered market fluctuations and downturns, providing fixed, consistent returns. Prior to the program, this capital would have been tied up in index funds spread across hundreds of companies or in private equity or hedge funds, with no insight into whether or not our invested capital was unknowingly working against our grantmaking. Through intentional, directed investment in our communities, we earned a return while complementing and sometimes even supercharging our grantmaking, expanding the Fund’s ability to support high-cost ventures like affordable housing development to a much greater extent than possible through grants alone. 

  • More beneficial to CDFIs if structured flexibly.
    CDFIs are experts in finance and place and are natural collaborators with potential borrowers, such as entrepreneurs and housing developers. Instead of bringing this capacity in-house, we prefer partnering with the professionals who have deep connectivity with community partners and understand their needs and who are most suited to make decisions about how capital is best deployed locally. The Fund provided guidance in loan agreements to ensure the loans CDFIs issue with our capital are aligned with our priorities and grant objectives. However, within a few broad verticals, we allow CDFIs to use the money flexibly as needed and do not require authorization or approval for any prospective loans.

    “Keep it simple,” says Caroline Nowery, Senior Vice President and Director of Investor Relations for Virginia Community Capital, “and do not place too many caveats on which types of projects the PRI should be directed. If the [foundation’s] goal is general in nature, the deployment of capital into the community can be rapid. If a foundation is interested, for instance, in the social determinants of health or the environment, the focus areas could be general like affordable housing or clean energy financing.”

  • Sources of crucial patient capital.
    Some projects are extremely complex and require a capital stack (i.e., layers of capital where each serves a specific purpose, may carry a different interest rate, and may have varying durations). Low-interest loans made available to CDFIs over a long period of time enable CDFIs to provide the lower-interest capital that borrowers need to make their projects work financially. This “patient capital” allows for long-term financing to projects with positive community outcomes, attracts and leverages other capital, and bolsters CDFI balance sheets and enables them to plan ahead for capital needs.

    “Prior to receiving the duPont Fund PRI in 2014,” explains Dave Callahan, Director NCALL Loan Fund, “NCALL’s debt capital had remained static for two fiscal years. We were having difficulty obtaining this critical piece of our capital structure despite a high-impact loan portfolio and strong financials. Upon closing the investment with the duPont Fund, the PRI became the second largest debt investment on our balance sheet and represented more than 17% of borrowed capital. This was a significant boost to the amount of capital available to finance critical community development projects.”

  • Can lead to other impact-focused partnerships and opportunities.
    Because of the existing PRI relationship with Self-Help Credit Union in Jacksonville, Florida, the Fund reached out to the CDFI to act as a thought partner when staff first started considering strategies to combat online predatory lending – or fintech – and increase equitable access to capital in Northeast Florida. Institutional lenders have been  unable to adequately assess under-served borrowers’ creditworthiness, so borrowers are flocking to online fintech lenders, which have become the lead source of personal loans in the U.S. Many fintech companies offer quick approval of small loans but carry extremely high fees that can strip wealth from low-income borrowers. As a result of vetting mission-oriented fintech opportunities and program design conversations, the Fund and Self-Help partnership is actively developing the JAX Microfinance Fund, providing an avenue for local impact investors to bring affordable fintech lending to small business and consumer/individual borrowers in five counties in Northeast Florida. In addition to driving capital to those who have been historically under-served by traditional lenders, the program will focus on preparing borrowers and connecting them to the financial mainstream in order to access affordable lending, financial resources, and coaching and technical assistance from CDFIs and credit unions. 

The takeaway

The Fund’s CDFI investments are a significant portion of our impact investing program and are made intentionally to complement and expand the impact of our place-based grants. CDFIs drive the long-term, patient capital made available through the Fund’s Program-Related Investments into under-served and under-resourced communities, ensuring equitable access to capital to those who have been historically excluded from the financial mainstream and conventional finance. Based on our experience with CDFIs, we rate our program-related investment program “high” in impact in terms of placemaking and equity and “low” in terms of financial risk.


View our full list of impact investments and a visual dashboard on our impact investing Program.

Sources/Resources

(1) Only 15% of private foundations surveyed in 2020 are required/permitted to allocate a portion of their endowments to investments that further mission. Council on Foundations - Commonfund “2020 Study of Investment of Endowments for Private and Community Foundations®

(2) Regarding foundation distributions, this is a simplified explanation. Private foundations may choose to distribute more than the I.R.S. minimum requirement or may plan to sunset–expending all of its assets by a defined point in time. 

(3) Virginia (44.51%) and Delaware (45.57%). Policymap.com “Estimated % of all renters who are cost burdened, between 2015-2019.”

(4) and (5) The Brookings Institution Hamilton Project, Minority and Women Entrepreneurs: Building Capital, Networks, and Skills, page 10.

(6) Ewing Marion Kauffman Foundation, Startup Financing Trends by Race: How Access to Capital Impacts Profitability  

(7) Small Business Administration Office of Advocacy, Access to Capital among Young Firms, Minority-owned Firms, Women-owned Firms, and High-tech Firms

Written by
Chris Crothers