Joe Silver ’11Journal #1
My internship at Living Cities is off to a quick start, and judging by the first few weeks, it will be an interesting summer. Living Cities is called a funders collaborative: it is a nonprofit organization which brings together 22 of the world’s largest foundations and financial institutions in an effort to make significant social change. Living Cities focuses on improving the lives of low-income people in urban areas across America by addressing issues surrounding jobs, housing, the environment, healthcare, and education. It does this through both policy work and capital investment, which is what I’m working on.
The capital team raises and deploys funding to community development financial institutions and community organizations through debt, program-related investments, guarantees, and equity. So far, I’ve been involved with due diligence for transactions and evaluating our outstanding loan portfolio. I've learned about structuring social investments with funding from various sources and the coordination required between multiple parties to ensure a successful transaction. It takes quite a bit of work to bring together commercial lenders, philanthropic investors, and traditional grantmakers for one transaction, but, at the same time this collaboration can make a big impact for the borrower. Historically, each of the lenders tend to be so focused in their own worlds, that they do not collaborate as much as they could through an intermediary such as Living Cities.
The most exciting part of my internship is working on our Integration Initiative. This is a new program in which cities bring together many organizations to affect major change in their city; in areas ranging from transit-oriented development, to increased access to fresh foods, to the development of affordable housing. I have been on two site visits to cities so far, and I have been inspired by their ambitious plans to make large-scale, sustainable changes for their communities. It has been fun to meet with city governments, active community development organizations, and socially responsible investors, and hear how they intend to work together to change the social systems in their communities. In the coming weeks I’ll help to structure the loans for these projects and start to really understand how to blend capital for social change.
Journal #2
The last few weeks have gone by very quickly, and I’m learning quite a bit each day. The most interesting aspect is the link between programmatic activities and capital investments, which is the key to making sustainable social change. Living Cities is an interesting organization; it brings many different philanthropic funders and financial institutions together in order to make a more significant social impact than these groups could make alone.
One project, which I have spent a considerable amount of my time on, provides a great example of working together. It’s called the Integration Initiative, and attempts to accelerate urban development solutions by integrating the work of all the necessary stakeholders in a city. Living Cities released a request for proposal last year for the project, and we are just completing the final-round selection of five cities this week. Each city’s proposal incorporates the work of the city government, community development organizations, anchor institutions, and community development finance institutions, to show how it will make systemic changes to the way it operated previously. The initiatives cover diverse areas including: broadband access, transit-oriented development, school-based health clinics, access to healthy foods, and affordable housing.
The selected cities will receive significant capital to effect their desired change. The unique aspect of this is that the capital is blended, meaning it combines philanthropic grants, submarket-rate, program-related investments, and commercial-rate capital. The blend reduces the overall cost of funds, and allows for capital to be allocated to projects with a wide range of risk. It is important to note: the loans are underwritten like commercial funds to ensure that the projects are viable investments and will generate cash flow for full repayment.
My contribution to this work has been writing green light memos for the loans. I assess the capability of each city to execute on its plans, specifically related to its ability to disburse the funds and repay. I also evaluate the proposed capital structure to ensure that the risk and return are allocated properly among lenders. Because these transactions are new, and innovative for the industry, it’s a very interesting process.
Journal #3
I have completed my 10 weeks at Living Cities, and I can honestly say that it was a great learning experience. I was exposed to a unique area of the social investment space that blends grant capital, program-related investments, and commercial-rate investments to effect sustainable change. And, I learned the different roles needed of institutions to make it all happen. As with most internships, many of my initial questions were answered along the way, but, I left with more unaddressed ideas in my head, now that I understand the industry better.
One of the recurring themes during my summer was risk, and the tolerance different institutions have towards taking risk in various transactions. Generally, foundations take the highest risk when issuing grants, and a bit less risk with Program Related Investments (PRIs), because they expect to be re-paid. Banks take even less risk with commercial-rate investments. Presumably, when this is all pooled together, the participation of the foundations will make the banks more comfortable in entering a deal, because the banks would then be in a senior position to them. However, even when money is pooled together, banks are incredibly risk-averse and hesitant to step away from the transactions with which they are experienced and comfortable. This is even true with the community development banking divisions that are supposed to positively impact the areas the bank serves. I think this is very flawed and a huge hindrance towards proving that impact investing is a viable piece of the market.
The community development divisions of big retail and commercial banks tend to only invest in the areas required by the Community Reinvestment Act of the 1970s, which is out-dated and fails to address innovations in the marketplace today. Therefore, banks lend to affordable housing projects, Community Development Financial Institutions (CDFIs), and small-scale projects that are safe and low-risk. I think the development investments from banks should invest in innovative projects, with real potential to change the way the world works. Banks should be encouraged — both by the government and shareholders — to take this extremely small portion of their funds and see how they can really develop communities in a sustainable way.
Because banks are too risk averse, and stick to the same, safe projects they have been funding for years, we are left with venture capital as the only major source of funding for new, high-potential social enterprises (institutional investors look towards already established models). Venture philanthropy is increasing, but still only a tiny part of the pie. It also funds nonprofits, which are important, but, obviously not sustainable on their own. In an ideal world, I would propose for major banks to revolutionize the mandates of their community development investments, and look towards exciting social enterprises with real potential to make a positive social impact, and be a viable investment. Sure, they would lose money on some, but the others that end up being the next solar-panel creator, mobile-banking intermediary, or fresh-food distributor would be well worth the initial risk.
