Those are great, and for years we’ve been more or less a leader in aligning our community development lending with measurable mission outputs. Now I don’t think we’re falling behind, but we’re looking to revise how we do it. Let me give you an example: an example of an impact that we would seek to align with is reduced fossil fuel consumption in Oregon and Washington. Now, can a $200 million loan fund attribute that to our work? Not really; but we can work backward from there by talking about outcomes. In this scenario, some of the outcomes we would look at are: Are we finding emerging companies and entrepreneurs that are working in clean technology and capitalizing them? Are we creating ecosystems of businesses that can feed off each other? Again, can we attribute that directly to our work? Not necessarily; but we can make the argument that a stronger ecosystem of clean-tech businesses is good, and we are financing some of those. And then of course we can look at the outputs of the original transactions: this hypothetical lighting company is saving a lot of energy, and we’ll count that and report it out. So we think about this a lot, and attribution is hard. There’s one level of collecting metrics, and another level of making a reasonable argument for attribution.
Years ago we participated in a “triple bottom line collaboration” with ten other CDFIs, which we led along with CEI. We developed and all agreed on a set of metrics, and we developed a proxy portfolio of deals from ten groups. We were able to show, in terms of individual metrics, what those deals were accomplishing. It was a cool process: someone would bring a deal forward and present it like they would to a credit committee, and would explain the metrics it would hit (e.g. jobs, energy, reusing materials, redeveloping real estate). Then we would have a conversation around if it passed a “smell test.” It wasn’t a scientific conversation, just a discussion around whether or not it would move the needle on certain issues. It was a fun practice for that group, and I learned a lot from it.
TF: So when I look at your institutional funders, a lot of them fall into the CRA lender category. Is that a fair categorization?
AZ: Yes, I would say about half of our debt is bank debt.
TF: And the other half?
AZ: Roughly 25% is foundation debt. We also have USDA Intermediary Relending Program (“IRP”) money. So the other half is some combination of foundation and government.
TF: And when they talk to you about your impact, do you get the sense that they care?
AZ: The banks? No, not really. Our challenge with bank debt is that we operate with some amount of trepidation around rising rates. I’ve heard from one of our national bank partners that their Community Lending department has been rolled into Commercial Lending, so now their masters are people who don’t understand what institutions like ours are trying to do. And that creates a tighter credit box for the community development lenders within that bank, and that’s a problem.
TF: Because you’re concerned that the flow of capital will be reduced?
AZ: I don’t think it will reduce actually. I think capital is seeking a place to go, but at a different price and risk point than is appropriate for the work we’re doing.
TF: So how are you thinking about other sources of funding? I’m thinking particularly of so-called impact investors.
AZ: We’re wrapping up our first private placement offering issuance. It was a $20 million offering, and it’s about 75% subscribed. When we started it, we were shooting for it to create roughly 20% of our balance sheet, and a larger percentage of our debt through the PPO. And we’ve done that, though it’s taken longer than we thought it would.
There’s more opportunity there. That money is generally priced better as a whole than institutional debt that we’re able to access right now. And it’s pretty sticky. So even if we have family office with a $250,000 investment in us for a year, they tend to be rolling it over, which is good. So that’s one thing, and we’ve got momentum there.
And then, we have to figure out how to do fund management. Because we believe our demand for our capital will grow faster than our balance sheet will grow. So we have to manage other people’s money, and that will come from the impact investment space.
The tricky part with this is that I don’t intend for us to chase the impact that other investors want. We can’t get pulled down rabbit holes when someone shows up with a million dollars and says “I really want you to invest in X.” We’ll certainly do those deals, but as soon as we put boxes around little piles of money, our lives get really complicated, and that level of complication isn’t worth it. What we have to do is effectively sell our 5-year vision and our place-based and sector-based strategies to the investors that are buying those things. We want to attract the people who are aligned with us, not people who want us to align with them, because it will pull us in too many directions.
TF: What we’re seeing in impact investing in general is a large-place based component – people are interested in investing in places they know. Are you seeing that trend within your 8 places? Are there specific funders interested in supporting you in those markets?
AZ: In the urban markets, absolutely; there are investors who have place based interest, namely community foundations. We actually have a meeting with one community foundation today; they have an endowment/Donor Advised Fund that they’re rolling out; they have a $1 million investment in us and are looking at making an additional $2 million investment from their new fund. Their investment in us will be flagship investment; they’ll spend a lot of time talking about it, in large part because of the way we’ve operated. They’re mostly interested in the rural component of what we do. So yes, there is interest and we’re seeing it. I couldn’t tell you what I think it’ll look like in a couple of years in terms of the components of our debt, but our expectation is that the portion of our debt that is sourced from CRA institutions as a percentage will decline.
TF: So from how you describe it, I imagine you would answer the question ‘have CDFIs been doing impact investing all along’ with a resounding yes”
AZ: Absolutely. The annoying thing in the market right now, is that to me it seems that there are a lot of potential investors that are showing up to this impact investing party, which is great, and a lot of them that are still drinking the “kool aid” that they can have both near-market rate returns and impact. And my belief is that there are some anecdotal stories about that, but if you look at the need across the board, you can’t have all the return you want and all the impact you want. I don’t believe that’s something that is true.
TF: And when you think about the capital you have to offer, is it solely debt? Do you think about equity as well? For entrepreneurs, particularly those of color or in poorer communities, debt is often not something they’re comfortable with. How are you thinking about the continuum of capital?
AZ: There are a number of small angel and seed funds that are pretty diverse in terms of their geography, and somewhat diverse in terms of their desired customer type, i.e. focused on entrepreneurs of color, or female entrepreneurs, etc. We have made some small investments in some of those funds or those companies, but we do not present ourselves as equity investor. This is primarily because many of those investments are going to technology companies, where the potential for return continues to be the highest, or at least is perceived as the highest. But in our experience those companies don’t move the needle with regard to sticky, long-term living wage employment. They’re wealth generating opportunities for a relatively small group, which often turns around and sells. And there’s nothing wrong with that, but it doesn’t fit our skill set particularly well in terms of our human resources and what we’re good at; we’re better at helping companies structure operating capital so they can follow a growth curve, not structuring an equity investment to make them more appealing for a purchase. Could we go out and acquire that talent? Of course. We also don’t necessarily have the right matching capital for that either. We could pivot and do that, but it would compromise our ability to borrow debt because it would compromise our equity stack, and I’m not quite ready to do that.
So, we’re watching. It’s the hot new thing among economic development professionals to have a seed fund in your community, but my expectation is that when the economy turns again, I think a number of these funds will just die unfortunately.
I serve on a State Board here in Oregon, and my vision for small business opportunities continues to be that we need a more streamlined portal for businesses that are seeking capital. Businesses waste a lot of time chasing money and not knowing where to look. If the State could do anything, they should provide a better understanding of the capital infrastructure, so that businesses could get where they need to go faster, even if the answer they get when they get there is that they’re not ready yet.
TF: Is the state receptive to that?
AZ: Oh sure, but getting a State’s bureaucracy to be responsive to a market need is another story. It’s not on any one individual; it’s like trying to turn the Titanic.
TF: If you weren’t CDFI, what would you call yourself?
AZ: I would call us a community development institution with a lending function. We lead with impact, engagements, and strategy, and we use capital to try to move that forward.