#1Scaling U.S. Community Investing (USCI): The Investor-Product Interface November 19, 2015 Organized by the Federal Reserve Board The Connecting CommunitiesⓇ audio conference series is a Federal Reserve System initiative intended to provide timely information on emerging and important community and economic development topics with a national audience. The audio conference series complements existing Federal Reserve Community Development outreach initiatives that are conducted through our regional Reserve Bank offices and at the Federal Reserve Board of Governors in Washington, D.C. Connecting Communities® SPONSORED BY THE FEDERAL RESERVE SYSTEM#2Welcome Thank you for attending today's session. How to join (remember, this session is being recorded) • Call-in number: 888-625-5230 • Conference code: 94092356 Webinar link: https://www.webcaster4.com/Webcast/Page/584/11489 You have two options to ask questions today: *These questions may be part of the recorded archive for this session. • Email us at: [email protected]. • Type your question into the chat box of the webinar. An archived recording of this session will be available on the Connecting Communities® web site shortly after the session ends. Please visit www.stlouisfed.org/connectingcommunities/ In connection with this session, you can find a variety of additional resources on this topic, available at www.fedcommunities.org. We encourage you to browse through this site and to contact your regional office if you would like additional information on any of these items. Connecting Communities® SPONSORED BY THE FEDERAL RESERVE SYSTEM 2#3Legal Notices and Disclaimer The information, analyses, and conclusions set forth are those of the presenters and do not necessarily indicate concurrence by the Board of Governors of the Federal Reserve System, the Federal Reserve Banks, or members of their staffs. Connecting Communities® 3 SPONSORED BY THE FEDERAL RESERVE SYSTEM#4Community Development The Community Development function within the Federal Reserve System, consisting of individual departments at each of the 12 Federal Reserve Banks and at the Board of Governors, promotes economic growth and financial stability for low- and moderate-income communities and individuals through a range of activities, including: - Convening stakeholders, including practitioners, financial institutions, nonprofits, governmental agencies, and the philanthropic and private sectors Conducting and sharing research to examine economic challenges facing low- and moderate-income communities and attendant policy implications Identifying emerging issues Connecting Communities® 9 1 Boston 2 3 New York Cleveland Philadelphia Minneapolis 12 7 Chicago | San Francisco 10 4 Kansas City Richmond St. Louis 8 5 6 Atlanta Alaska Hawaii SPONSORED BY THE FEDERAL RESERVE SYSTEM 11 Dallas 4#5Today's Presenters . Amit Bouri, Global Impact Investing Network Michael Swack, Carsey School of Public Policy at the University of New Hampshire. Justin Conway, Calvert Foundation • Will Belongia, Vermont Community Loan Fund Connecting Communities® 5 SPONSORED BY THE FEDERAL RESERVE SYSTEM#6USCI Report Overview Amit Bouri CEO, The Global Impact Investing Network New York, NY [email protected] [Abhilash Mudaliar, Research Manager] Connecting Communities® SPONSORED BY THE FEDERAL RESERVE SYSTEM 6#7USCI Report Overview Michael Swack Carsey School, University of New Hampshire Durham, NH [email protected] Connecting Communities® SPONSORED BY THE FEDERAL RESERVE SYSTEM 7#8What Is a Community Development Financial Institution (CDFI)? Certified by the U.S. Department of the Treasury Mission-driven lenders and investors that primarily serve low-income and low-wealth people and places Capital and development services Create opportunities and provide support: • - Jobs and business growth - - - Affordable housing Community services/community facilities. Responsible consumer financial services for the underbanked Connecting Communities® SPONSORED BY THE FEDERAL RESERVE SYSTEM 80#9CDFI Economic Model Sources of Capital Regulatory- Motivated Investors Mission- Motivated Investors Policy- Motivated Investors Users of Capital $ $ ՄՌ CDFIs S Borrowers and Customers St $ $ Connecting Communities® 9 SPONSORED BY THE FEDERAL RESERVE SYSTEM#10CDFI Institution Types Community Development CDFI Community Development Banks Community Development Credit Unions Community Development Loan Funds Venture Capital Funds Structure For-profit depository institutions Nonprofit cooperative depository Primarily nonprofit; some for-profit Typically for-profit FDIC, Federal Regulation Reserve, OCC, OTS, and state banking agencies National Credit Union Administration Unregulated Unregulated Capitalization Structure (sources) Sectors Served Insured deposits and equity Loans and retail financial services for individual and commercial customers Insured deposits, secondary capital, and equity Loans and retail financial services for individuals/member S Unsecured and secured debt, subordinated debt, and grants Loans for housing, microenterprise, small business, community facilities, nonprofits, and commercial real estate Equity and equity-like debt Equity and debt with equity features to businesses with high growth potential and social impact FDIC: Federal Deposit Insurance Corporation; OCC: Office of the Comptroller of the Currency; OTS: the Office of Thrift Supervision Connecting Communities SPONSORED BY THE FEDERAL RESERVE SYSTEM 10#11Number and Total Asset Size by CDFI Type Smallest Largest Mean Median Number Percent of CDFIs $14.6 $2.5 $303.9 Bank million billion million $220.2 million 109 19% Credit $43 $5.99 $176.9 $25 247 26% Union thousand billion million million <$300 $1.2 $47.8 $15.2 Loan Fund 506 54% thousand billion million million Venture $5 $150 $30 $24 Capital Fund 14 1% million million million million Source: CDFI Fund, February 2015 Connecting Communities SPONSORED BY THE FEDERAL RESERVE SYSTEM 11#12CDFI Performance CDFIs have been "stepping into the breach" to address lending-related needs during and after the recession. Lending has increased over time, and portfolio performance has been good. CDFIs are concentrating lending activity in census tracts with high poverty or unemployment rates, much more so than conventional lenders. The CDFI industry has grown substantially, leveraging investment and increasing lending even during the recession and changed financial environment. Connecting Communities® 12 SPONSORED BY THE FEDERAL RESERVE SYSTEM#13Challenges to Growth THEME 1: The need to prove impact is a challenge to raising investment in USCI, but one that sophisticated product managers may be on their way to overcoming. The greater challenge may be meeting the demand for a wide diversity of impacts that different investors desire. THEME 2: While mismatch between investor demands and product realities is a fundamental barrier to scaling USCI, investors show appetite for a substantial range of USCI products. Issue: Lack of "look and feel" products. THEME 3: One of the greatest weaknesses of USCI products appears to be their lack of liquidity, causing many investors-and in turn product managers-to focus on short-term products. THEME 4: Many of the most sophisticated USCI funds tend to be constrained by their balance sheets and need equity to continue to scale investment. In turn, liquidity limitations have greatly increased the challenge to raising equity. Connecting Communities® SPONSORED BY THE FEDERAL RESERVE SYSTEM 13#14Challenges to Growth (Continued) • THEME 5: The USCI field has struggled to benchmark investment performance on risk and return, although some leading practitioners have been able to obtain investment ratings (most recently The Reinvestment Fund). THEME 6: A variety of external forces, including waning bank involvement in the space (in part due to regulatory pressures around bank safety and soundness) and competition from other spaces (including international development and crowd funding), have created a shifting landscape and new challenges for scaling USCI. THEME 7: Individual investors are a potential game changer in the space but reaching them involves solving unique challenges. Connecting Communities® 14 SPONSORED BY THE FEDERAL RESERVE SYSTEM#15Two Major Strategies to Grow Investment A coordinated marketing and investor engagement effort (comparison to "green" products) Further initiatives to develop investment platforms Connecting Communities® 15 SPONSORED BY THE FEDERAL RESERVE SYSTEM#16Example of the Need and Opportunity Today, increasing numbers of investors want their investments to have impact, and I think most Pax World investors fall into this category. But we have been stymied in how much community investing we can do. We will continue to do one-off notes where they are available but if community investing is going to really be accessible to individual investors, a larger response to the liquidity/securitization dilemma is in order. The problem is bigger than just creating trading platforms, some of which are beginning to appear. While that's a positive development, if all they have to trade is one-off private placements and notes then I suspect there will continue to be insufficient uptake by advisors and their clients. - Joe Keefe, President/Chief Executive Officer, Pax World Management LLC Connecting Communities® SPONSORED BY THE FEDERAL RESERVE SYSTEM 16#17Calvert Foundation's Approach to Scaling Investments into Communities Justin Conway Vice President Investment Partnerships Washington, D.C. [email protected] 222222 Calvert Foundation* Connecting Communities SPONSORED BY THE FEDERAL RESERVE SYSTEM 17#18• Calvert Foundation Provides a Convenient Vehicle to Connect Investors to Local Organizations and Projects Community Investment Note Overview Since 1995, over 15,000 people and institutions have invested more than $1 billion in community needs in the United States and abroad. Note is high-impact, risk-mitigated, fixed-income product seeking to provide measurable social returns and consistent financial returns ranging from 0.5% on 1-year notes to 3% on 10 years Industry-leading diligence and monitoring on portfolio, multiple layers of investor protection 20-year track record, 100% investor repayment rate Note designed to be suitable for all types of investors Available at 200+ brokerages, like any bond with a CUSIP (Committee on Uniform Security Identification Procedures) in increments of $1,000 Available online at Vested.org, starting at $20 Established relationships with hundreds of financial advisors and their brokerage firms Connecting Communities Individuals CENTRAL CITY concern Enterprise Model Calvert Foundation™ I CAPITAL IMPACT PARTNERS ACE ACCESS TO CAPITAL FOR ENTREPRENEURS MV MICROVEST alterfin ③ INVESTING IN ONE WORLD SPONSORED BY THE FEDERAL RESERVE SYSTEM G Institutions (small sample of 100+ partners) CRF USA. Capital for Communities- Opportunities for People girls inc.Ⓡ 18#19Investors Can Support Places and Causes They Care About AFFORDABLE HOUSING Increasing the supply of safe, affordable housing for people who need it most. EDUCATION Building schools and increasing access to the best resources for students. SMALL BUSINESS Connecting small business owners with the financing they need to succeed. MICROFINANCE Putting financial tools and services within reach for people in developing countries. Creating equitable growth and shared prosperity in America's iconic cities. LAUNCHED 2015 AGE [STRONG] TRIBUNE 900 Partnering with AARP to help ensure more of us can age strong. Connecting Communities SPONSORED BY THE FEDERAL RESERVE SYSTEM DANGE DUCATE LACKWOM ed with Knowl 20 19#20Impact Reporting: Metrics and Stories WOMEN INVESTING IN WOMEN INITIATIVE WN-WN $200 83% $20.169.046 MY 75% 71% " " 18.199+++++ Ocean 3,400 Affordable Housing Units Financed STORIES PARTNERS VIEW FULL MAP > 3,800 120,000 Jobs Created/ Maintained North Atlantic Ocean ICELAND 1 NORWAY Microfinance Customers Served SWEDEN + EURORE TURKE AKMENISTAN ASIA SPAIN MOROCCO CHIN IRAN ALGERIA LIBYA EGYPT MAURITANIA NIGER SAUDI ARABIA SUDAN YEMEN INDIA MYANMA THA South Pacific Ocean VENEZUELA OMBIA SCOT AMERICA SAGUAY CHILE OFRIC ANGOLA TANZANIA NAMIBIA MADAGASCAR SOUTH AFRICA Indian Ocean Connecting Communities® SPONSORED BY THE FEDERAL RESERVE SYSTEM 20 20#21To Learn More Visit the Calvert Foundation website: www.calvertfoundation.org Visit the Vested website: www.Vested.org Contact me at [email protected] Calvert Social Investment Foundation, a 501(c)(3) nonprofit, offers the Community Investment Note, which is subject to certain risks, is not a mutual fund, is not FDIC or SIPC (Securities Investor Protection Corporation) insured, and should not be confused with any Calvert Investments sponsored product. This is neither an offer to sell nor a solicitation of an offer to buy these securities; the offering is made only by the prospectus, which should be read before investing. Due to blue sky regulations, the current offering of the Community Investment Note may not be offered in all states. All photos used with permission, including: Affordable Housing courtesy Boston Community Capital, Education courtesy AHC Inc., Small Business courtesy Community Loan Fund, Microfinance courtesy MEDA, Ours to Own courtesy ULC, and Age Strong courtesy Adrian Elliott. Connecting Communities SPONSORED BY THE FEDERAL RESERVE SYSTEM 21#22Community, Invested - A CDFI Case Study Experience of the Vermont Community Loan Fund Will Belongia Executive Director Vermont Community Loan Fund Montpelier, Vermont [email protected] 2- YEARS VERMONT COMMUNITY LOAN FUND www.investinvermont.org Connecting Communities SPONSORED BY THE FEDERAL RESERVE SYSTEM 22 22#23Mission To create opportunities that lead to healthy communities and financial stability for all Vermonters · U.S. Department of Treasury-certified CDFI Aeris/CARS - Rated for social impact and financial performance Finance - Affordable housing, nonprofit facilities, small and medium- sized businesses, early care and education programs Statewide footprint $35 million in assets; $25 million in community investments 17 staff Connecting Communities® 23 SPONSORED BY THE FEDERAL RESERVE SYSTEM#24Community Investments 504 investments ($69,622) - - 389 from individuals ($29,375) • 70 through financial advisors/asset managers ($43,885) 115 not from individuals ($138,377) Note: Average investment size in parenthesis Connecting Communities 24 SPONSORED BY THE FEDERAL RESERVE SYSTEM#25CDFI Loan Funds 2012 Depository Institutions Internal Funds Sources of Investment VCLF 2015 Depository Institutions Internal Funds 5.0% 7.1% 8.4% 5.3% Government 32.6% Government 22.1% 35.0% Philanthropy Philanthropy 10.2% Corporations Corporations 9.7% 16.7% 17.5% Other 26.5% 0.6% Other 3.2% Individuals Source: Swack - GIIN, Scaling U.S. Community Investment, page 26 Connecting Communities® SPONSORED BY THE FEDERAL RESERVE SYSTEM ■Individuals 25#26Community Investment Notes Social investment cash account - $2,500 minimum - - - Open-ended term; withdrawals allowed up to 1/month Rate of 0.5 percent Social investment term account - $1,000 minimum - Terms from 1-10 years - - Rates from 0.85 percent – 3 percent depending on the term Self-directed individual retirement accounts (IRAs) Connecting Communities® 26 SPONSORED BY THE FEDERAL RESERVE SYSTEM#27Staffing and Infrastructure • Total staff: 17 Development staff: 3, plus executive director Director of development, marketing and communications manager, and investment and grant coordinator Use Nortridge Loan System to manage investment transactions Use MIMOTA (contact/relationship database) to issue investment documents (promissory note and loan agreement) Connecting Communities® 27 SPONSORED BY THE FEDERAL RESERVE SYSTEM#28Survey Results Social impact 1.28 Investing locally 2.05 Interest rate/financial return 3.78 Tax benefits 3.88 Term/product options 4.03 • Investor responses: 80 Investor Survey Survey question: Rank these factors in order of importance (1 = most important, 5= least important) in choosing to invest with the loan fund Connecting Communities® SPONSORED BY THE FEDERAL RESERVE SYSTEM 28#29• Paper! Unique documents and language NO CUSIP Limited or no fee for advisors/brokers Much higher cost to investor or their advisor/broker • Capacity • Liquidity risk for both VCLF and the investor Challenges Connecting Communities® 29 SPONSORED BY THE FEDERAL RESERVE SYSTEM#30Personal relationship with investor: - Leverage for contributions/bequests - Loyalty and referral - - - Flexible and responsive to VCLF's changing needs Motivated by impact not interest rate-"sticky" money Lower cost than institutional money Benefits Connecting Communities® 30 SPONSORED BY THE FEDERAL RESERVE SYSTEM#31. What's Next? Electronic investment process-delivery, payment, documents, etc. Create an easier investment registration process Create a community investment mutual fund/clearinghouse for USCI products Streamline the self-directed IRA investment process Connecting Communities® 31 SPONSORED BY THE FEDERAL RESERVE SYSTEM#32Questions? You have two options to ask questions today: 1. Email us at: [email protected]. 2. Type your question into the chat box of the webinar. Connecting Communities® 32 SPONSORED BY THE FEDERAL RESERVE SYSTEM#33Wrap-Up/Closing Thank you to today's presenters and to all participants for joining this session. Next steps: All session materials are available on our website, and, in the next few days, we will be posting an audio file of today's session. If you have topical suggestions for future sessions, or any questions about this program, please feel free to contact us at [email protected]. Information about future sessions will be posted on our website along with archived materials from past sessions: www.stlouisfed.org/connectingcommunities/ Connecting Communities® SPONSORED BY THE FEDERAL RESERVE SYSTEM 33#34Related Resources FedCommunities.org Federal Reserve community development resources promoting people, place, practice and small business In connection with this session, you can find a variety of additional resources on this topic, available at www.fedcommunities.org. It provides an array of practical resources to help you in your role as a community development professional, whether you work involves supporting people, places, the practice of community development, or small business development. Connecting Communities® SPONSORED BY THE FEDERAL RESERVE SYSTEM 34