Minting New Money for Communities
It was the fall of 1998 and Deborah Momsen-Hudson had a problem. As vice president of investor relations at Self-Help Credit Union, she was responsible for ensuring a reliable supply of capital for Self-Help’s community development lending programs across the state of North Carolina. Despite her record-breaking success in bringing in new accounts, the distressed communities they served needed far more capital, and Deborah didn’t know where to find it.
Self-Help is one of over 1,000 Community Development Financial Institutions (CDFIs) in operation in the U.S. CDFIs are banks, credit unions, and loan funds that lend into distressed communities, providing loans for economic development in areas such as small business, childcare services, and affordable housing. CDFIs receive capital from a variety of sources, including individual investors and customers, institutional investors, and the federal CDFI Fund operated by the U.S. Treasury Department.
Deborah knew she wasn’t alone. As one of the leaders in her industry, Deborah talked regularly to other CDFI leaders around the country, and they were reporting serious gaps in their ability to fill lending requests.
No simple fix
Deborah brought her challenge to the U.S. Social Investment Forum, a trade association of investment firms and professionals interested in socially responsible investing practices, (where I served as managing director at the time). CDFIs accounted for about 25 percent of our membership at the time, and our board was very interested in how we could serve these members’ needs. We decided to take on the challenge of finding the capital.
We soon discovered, however, that there was no simple fix for the problem. Alisa Gravitz, the vice chair of the SIF board at the time, recalls, “We didn’t know yet how much capital was needed, but we knew it was a lot and we frankly had no idea where to find it…We talked to the folks at [the U.S.] Treasury, but were told that new appropriations to the CDFI Fund were unlikely, and certainly wouldn’t be at the scale we wanted. And the big foundations weren’t ready to commit that much of their portfolios to CDFIs at the time.”
We realized we needed help, so we engaged a team of leaders from across the banking and investing industries who would take on the challenge together and create new ways to approach it. The team was incredibly diverse, with over 30 leaders from banks, credit unions, loan funds, mutual fund companies, foundations, and included financial advisers, individual investors, and money managers. Even at the time (well before we had a clear concept of collective impact), our experience told us that more perspectives and backgrounds would improve the likelihood of finding a workable solution.
That group needed a goal and needed to understand potential fixes to fill the gap, so they quickly organized into sub-teams – a research group to determine the amount needed and a solutions group to find new sources of money. The research group quickly tallied up a need for over $1 billion in net new capital. After some time, the solutions group brought back a provocative possibility: Get mutual funds to invest in the CDFIs.
At the time, U.S. mutual funds held over $7.2 trillion in their portfolios, and many types of funds held a portion of those portfolios in cash. If we could find some way to convince even a few large funds to move a portion of those cash positions into CDFIs, we would solve the problem. Not just that, we might be able to solve the CDFI funding challenge for good.
We had to test the hypothesis, of course, so we formed a team to interview mutual fund managers and learn what factors might prevent or incentivize them to put their cash into CDFIs. That effort turned up two interesting factors:
First, money managers normally traded securities through computer terminals, where the transactions behind the scenes were largely automated. To invest in CDFIs, they would have to manually open cash accounts and manually move the cash. According to the fund managers, that additional work was a showstopper.
Second, money managers had no idea how the new type of investment vehicle would affect either the performance or risk of their funds, and they had to know this before they would consider investing.
Ideas that work
What happened in the next 18 months is a testament to the speed, ingenuity, passion, and progress that a collective impact approach can produce. Trading experts in the group quickly got over 50 of the CDFI’s products listed on the country’s largest trading platform (which made them as easily tradable as any other security); a small team of portfolio managers ran several simulations that clearly demonstrated that these products had essentially the same performance and risk characteristics as other cash products in use by the funds; and a marketing group designed, tested, and launched 1% for Community, a media and marketing program that promoted funds that made a commitment to “building America’s communities” by pledging at least one percent of their portfolios to that work.
Most importantly, the group dramatically exceeded the $1 billion goal and within three years had moved over $3.2 billion into CDFIs. In contrast, the U.S. government’s CDFI Fund has distributed only $1.7 billion in nearly 20 years of operation.
Why did the effort work? We brought together a group of caring leaders with diverse experience and perspectives, they set a goal that was both audacious and specific, they moved fast in both their analysis and solution design, and they worked to deeply understand the experience of those whose behavior most needed to change.
(Originally published in the inaugural issue of Engage! magazine from the Tamarack Institute.)