Calvert Giving Fund
Financial Planning Magazine
March 2007
Community Investing
By David A. Twibell
After Hurricane Katrina devastated New Orleans and the rest of Gulf Coast, Access Capital Strategies decided to help. The Boston-based investment advisory firm, which specializes in community investing, partnered with Liberty Bank and Trust, the largest African-American bank in the region, to provide displaced residents with bridge loans and other financial support to pay for rent, home repairs and general cleanup. Other community investing groups, including The Calvert Foundation, Jewish Funds for Justice and Hope Community Credit Union, joined in to direct more than $1 million in investor capital toward helping residents of the battered Gulf Coast get back on their feet.
While Hurricane Katrina provided a highly visible glimpse into the world of community investing, it's by no means the only example. Community investment groups have provided innovative micro-financing--very small loans, typically less than $1,000--to aspiring entrepreneurs in impoverished regions of Bangladesh and South Africa; assisted with agricultural development, disease prevention and childhood education in sub-Saharan Africa; and funded job training and employment opportunities in rural areas of Kentucky and Tennessee.
At its core, community investing simply involves using investment funds to provide capital or loans to communities that lack access to conventional funding sources or are underserved by traditional financial institutions. And while many people have never heard of community investing, it has become a thriving investment niche. According to the Social Investment Forum, between 1995 and 2005 the assets of U.S. community investment institutions grew from roughly $4 billion to almost $19.6 billion. The industry's growth has been even more dramatic lately, with total domestic assets jumping nearly 40% in just the past two years.
The burgeoning success of community investment groups, both in raising capital and in providing support to developing communities, is leading to increased awareness of the area. In fact, Muhammad Yunus--a pioneer in the field of micro-finance and global community investing--was awarded the Nobel Peace Prize in 2006 for his work, in association with fellow Peace Prize-winner Grameen Bank, in developing a business model for micro-credit in his native Bangladesh.
Investors interested in participating in community investment programs gen-erally have three options: community development banks and credit unions; community development loan funds; and community development venture capital funds. And while they all strive to achieve similar altruistic goals, each vehicle has its own unique approach.
Community development banks and credit unions work much like their more traditional cousins. They offer most standard banking services like savings, checking and money market accounts. Clients who want to support these banks' activities can open accounts or use their other investment-related vehicles, such as certificates of deposit and individual retirement accounts. As with traditional banks, they pay market or slightly below-market rates of return. Instead of focusing on conventional lending activities, though, they target their lending activities to low-income communities and small businesses that might not otherwise have access to capital.
Like the community investing area in general, community development banks and credit unions have grown by leaps and bounds over the past decade. In fact, since 1999 loan assets at these community-based institutions surged over 300%, from just $3.5 billion to over $12.8 billion.
In contrast, community development loan funds pool investment capital provided by individuals and institutions and make it directly available in the form of loans or other investments to promote development projects in disadvantaged communities or regions. The 180 community development loan funds monitored by the Social Investment Forum accounted for roughly $3.4 billion in assets--the bulk of which is used to make loans to small businesses, affordable housing developments and community service organizations. Unlike deposits in community development banks and credit unions, investments made in community development funds are generally not federally insured. However, the funds are often secured by collateral, loan loss reserves and the institution's own asset base.
As with their bank counterparts, community development loan funds pay interest to investors, although often at below-market rates. For example, the Leviticus Fund in Elmsford, N.Y. pays a fixed 2% annually for the life of the loan pool, while ShoreBank Enterprise Pacific pays 2.25% annually.
Finally, community development venture capital funds occupy a small but rapidly growing segment of the community investing landscape. As their name implies, these funds make equity investments in promising small businesses located in low-income communities. By focusing their investments in areas generally eschewed by traditional venture capital funds, these groups provide the financial lifeblood for entrepreneurs in disadvantaged areas who might not otherwise have the necessary financial backing and managerial support to get their businesses off the ground.
There are currently more than 82 community development venture capital funds managing roughly $870 million in the U.S. That is nearly a sixfold increase from the $150 million invested in these funds just seven years ago. While most of these venture capital funds are fairly young, and therefore show rates of return that vary significantly, a 2002 study by the CDFI Data Project found that among established funds, annual gross internal rates of return ran anywhere from 8% to 17%.
Despite its rapid growth, community investing still remains uncharted territory for most individual and institutional investors. But with the increasing availability of socially responsible investment vehicles and strategies, it's only a matter of time before many investors look to merge their altruistic and financial goals into the same package.
David A. Twibell, JD, is president of wealth management for Colorado Capital Bank, where he directs the bank's portfolio management and wealth advisory practice. He can be reached at (303) 814-5545 or dtwibell@coloradocapitalbank.com.
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