Foundations and other institutional investors are targeting capital to help hardest-hit communities recover from the coronavirus pandemic, reviving a structure that helped during the Great Recession: community development financial institutions.
"COVID has really shone a light on some of the inequities," such as disproportionately higher infection rates and job losses in minority communities, said Cynthia Muller, director of mission investment at the $7.8 billion W.K. Kellogg Foundation, Battle Creek, Mich. "It has been heartening to hear from people we haven't heard from in this space," said Ms. Muller, who added she recently has seen "a huge swath of investors" checking out and investing in CDFI-backed funds that offer market-rate and below-market-rate loans. The funds typically fall within an investor's impact investment portfolio and may have lower return assumptions.
Unlike traditional banks, CDFIs deploy federal funds that they then leverage four to six times with private debt from banks, foundations, corporations and individuals to lend to disadvantaged business owners, affordable housing developers and community projects that would not otherwise qualify for traditional loans.
The capital structure depends on whether the CDFI fund involves a loan fund, banks, credit unions or venture capital funds, or some combination. There are now more than 1,100 CDFIs in the U.S. with more than $222 billion in assets certified by the Department of Treasury's Community Development Financial Institutions Fund program.
As the economic crisis caused by the pandemic has a disproportionate impact on small businesses and minority communities, "CDFI's are springing into action, reprising the role of 'economic first responders' that they have played during past crises," said Paige Chapel, president and CEO of Aeris Insight Inc., a rating and information service for impact investments based in Philadelphia.
Debra Schwartz, managing director of impact investments for the John D. and Catherine T. MacArthur Foundation, Chicago, which represents $500 million of the foundation's $6 billion in assets, said she thinks CDFIs "will be on the front lines of the recovery and rebuilding, just as they were in the last crisis. It is all about filling the gap."