Impact Investing & Development Finance Collaboration
What is Development Finance?
Development finance is the efforts of local communities to support, encourage and catalyze expansion through public and private investment in physical development, redevelopment and/or business and industry. It is the act of contributing to a project or deal that causes that project or deal to materialize in a manner that benefits the long-term health of the community.
Development finance requires programs and solutions to challenges that the local business, industry, real estate and environment creates. As examples, we need unique financing approaches to address environmentally contaminated land and specific solutions to unlocking capital access in underserved markets and industries. Each of the problems that we seek to solve in development require unique and targeted solutions.
There are dozens of terms within the development finance industry including debt, equity, loans, bonds, credits, liabilities, remediation, guarantees, collateral, credit enhancement, venture/seed capital, angels, short-term, long-term, incentives, and gap financing. Ultimately, development finance aims to establish proactive approaches that leverage public resources to solve the needs of business, industry, developers and investors. To learn more, review CDFA's extensive curriculum dedicated to understanding development finance
What is a Development Finance Agency?
Development finance agencies (DFAs) can be either public or quasi-public/private authorities that provide or otherwise support economic development through various direct and indirect financing programs. DFAs may issue tax-exempt and taxable bonds, provide credit enhancement programs, and offer direct lending, equity investments, or a broad range of access to capital financing mechanisms. DFAs can be formed at the state, county, township, borough or municipal level and often times have the authority to provide development finance programs across multi-jurisdictional boundaries. To learn more, read CDFA's DFA industry
What is Impact Investing?
In the context of development finance and impact investing, we are strictly exploring investment based activities of philanthropy. This is not a discussion of grants. Within the foundation industry, impact investing is complicated but digestible once broken down.
The Global Impact Investor Network (GINN)
defines impact investing as investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education.
CDFA has a strategic partnership with the Mission Investors Exchange
, the leading network of foundations engaged in impact investing. Several resources about impact investing along with a database of documented program related investments and mission related investments can be found on the MIE website.
Within the context of development finance, impact investors have not been overly active. While foundations regularly award grants to development finance agencies, they have not actively partnered on market rate investments. When we explore this area, the landscape of opportunity emerges considerably. However, foundations remain uncertain about the complexities of making investments into entities that they have not traditionally engaged.
As a reminder, impact investment comes from the non-grant making side of a foundation's endowment. Foundations manage billions in assets through traditional investment opportunities such as stocks, bonds, equity and other income bearing securities. These investments are managed by an investment committee and financial advisors.
Ironically, many foundations already make investments in securities and products that are regularly used by the development finance industry. Take, for example, municipal or private activity bonds. Many foundations own considerable shares of bond funds that are comprised of these securities. Bond funds provide a reliable, safe and long-term investment option. Development finance agencies issue thousands of bonds annually to support housing, infrastructure, energy, schools, health care, water and myriad other critical community needs.
What is the Potential for Impact Investing and Development Finance Collaboration?
CDFA has been exploring the changing landscape of impact investing. As foundations begin to consider mission related investing, CDFA has identified an opportunity for DFAs and philanthropy to collaborate in new and innovative ways. However, the process to realize true investments continues to be challenging. Simply put, both the foundations and development finance industry operate differently. Language, structural and perception barriers are the primary challenge followed by investment, mission alignment and local politics. Nonetheless, the potential for this collaboration is abundantly clear.
Case Study: Port of Greater Cincinnati Development Authority
In 2017, The Kresge Foundation invested $5 million in the Port of Greater Cincinnati Development Authority to establish a commercial development loan program, which is geared toward neighborhood revitalization and transformation through mixed-use, mixed-income projects.
To be clear, this was an investment by Kresge; not a grant. This investment will facilitate Cincinnati’s ability to make loans to development projects in targeted redevelopment areas. These investments will drive urban revitalization and serve the entire community. Kresge will be paid back over the course of ten years at a market rate return. This is one of the first-ever examples of philanthropy and development finance collaborating in a true investment driven strategy. Learn more here.
The future of impact investing and development finance collaboration is very bright. Hundreds of foundations are now exploring ways to invest in DFAs and projects or programs that target local success.
CDFA Impact Investing White Paper Series
CDFA, The Kresge Foundation and the Institute for Responsible Investment at Harvard University have partnered to explore the potential between impact investing and development finance. In 2017, CDFA released the first of four white papers on this topic. The CDFA Impact Investing White Paper Series explores ways in which the impact investing community can collaborate with the traditional development finance agencies to address mission, environment, economic and financing challenges in a community.
Urban Revitalization & Impact Investing White Paper
The first white paper in this series explores the cross-section of urban revitalization and impacting investing. The purpose of this Urban Revitalization & Impact Investing White Paper is to document the potential of a collaboration between impact investors and DFAs to fill the capital gaps facing cities and neighborhoods working to support urban revitalization and to accelerate DFAs as a major source of capital to grow, create jobs and spur economic and community development. Through myriad financing tools such as bonds, tax increment, tax credits and revolving loan funds, foundations can use impact investing as a way to drive innovative, transformative development in communities.
Small Business Development & Impact Investing White Paper
The purpose of the second white paper in this series is to examine the potential of a collaboration between Impact Investors and high performing DFAs to fill the capital gaps facing small businesses and to accelerate DFAs as a major source of capital to enable small businesses to grow, create jobs and spur economic and community development. The white paper explores how bonds, tax increment and myriad access to capital programs currently offered by DFAs can be supported by impact investors to catalyze small business, micro-enterprise and entrepreneurial development.
The final three white papers will be released in periodic installments. These White Papers are supported by a grant from The Kresge Foundation
to CDFA in collaboration with the Institute for Responsible Investment
at Harvard University.
CDFA is actively looking for partners, stakeholders and collaborators to continue this cutting-edge research. Over the next several years we plan to conduct pilot programs between DFAs and local foundations interested in seeding this potential. In addition, new research, case studies and data will continue to be populated as this market expands. Contact CDFA
to get engaged.