A special type of organization, known as a community development financial institution, offers credit and financial services to organizations and neighborhoods that have trouble getting aid from traditional banks.
Traditionally, only a small universe of foundations and wealthy investors supported those institutions.
But that is changing.
For the first time, foundations and individuals are finding that in addition to a social return, these institutions are also providing a notable financial return. As a result, they are attracting new interest from unexpected places.
Historically, foundations have supported community development financial institutions through program-related investments. Such investments are typically loans or loan guarantees that foundations make to organizations that carry out programs connected to their missions — thereby preserving capital for their future grant-making efforts. Traditionally, foundations that made program-related investments had largely been motivated by social benefits, not economic returns.
But timing is everything. At Nonprofit Finance Fund, we are finding a growing interest and appetite from portfolio managers who see program-related investments as smart financial tools.
How is this manifesting itself?
First, foundations are starting to take a different approach. While program-related investments in the past might secure a modest return, that was just a side benefit to the primary motivation of preserving capital for future program giving. This year, however, we received an investment from a significant New York foundation, and the investment was made from its main body of assets, rather than from the money it sets aside to pay out in grants. This might sound like a technicality, but it is actually a significant indicator that community development financial institutions are attracting a new type of investor.
When – as in this case – a foundation’s chief investment officer decides a program-related investment provides a better financial return than other fixed-income securities, you know times have changed. In today’s market, a one-year loan to a community institution at 2.25 percent looks pretty darn good when compared with other investments. Of course, the risk profile of a community development financial institution is greater than other fixed-income investments, but their performance suggests that these are sound investments.
What about other investors, who are purely charged with seeking performance for their clients?
They’re starting to come to the table, too.
Recently, I received a call from a portfolio manager at a major investment firm (really, major), who had just started to hear about community development financial institutions. The firm had clients who were looking for alternative investments and it wanted to know more about organizations that both served communities and provided a respectable yield. Not once did the manager ask me about the social impact of these investments. They were simply looking for yield and diversification.
We need to recognize that this opportunity, taken advantage of by few so far, has a window that is likely to be relatively short. Currently, community development financial institutions have a chance to not only bring new and additional resources to foundations, but also to gain awareness among investors. That could lead to long-term benefits to the nonprofit world.