ACCELERATING IMPACT WITH GUARANTEES Another tool in the impact - PowerPoint PPT Presentation

ACCELERATING IMPACT WITH GUARANTEES Another tool in the impact investing toolkit 2121 Crystal Drive, Ste. 700, Arlington, VA 22202

Kresge’s $350M Impact Investing Commitment NEW PHILANTHROPIC INVESTING CONTINUUM 2121 Crystal Drive, Ste. 700, Arlington, VA 22202

WHY DOESN’T CAPITAL FLOW? • Policy barrier • High transaction costs • Market lacks understanding of segment/product • Cost of capital • Too much risk 2121 Crystal Drive, Ste. 700, Arlington, VA 22202

Basic Social Investing Terminology Social Investing Tools – Everyday Translation Taking out a car loan Making a down payment Debt Equity Co-signing a loan Guarantee 4 2121 Crystal Drive, Ste. 700, Arlington, VA 22202

IMPACT INVESTING CONTINUUM 2121 Crystal Drive, Ste. 700, Arlington, VA 22202

THE POWER OF THE GUARANTEE Click here to see a 2 min video from Kresge on guarantees and their role in community. (the full web address is: https://www.youtube.com/watch?v=x6kBZM7R_Cc&t=26s) 2121 Crystal Drive, Ste. 700, Arlington, VA 22202

GUARANTEES (AKA CREDIT ENHANCEMENT) • Credit enhancement is generally used to incentivize the issuance of debt or to obtain better terms for debt instruments. Through credit enhancement, the lender is provided with reassurance that the borrower will honor the obligation. • Highly effective in crowding in other capital – typically 5x leverage • Adventagous for foundations (and DAFs) because asset ets s sta tay f fully inves ested ed u until l losses es occur i in the f future. When payments are made they are treated as gr grants ts. 2121 Crystal Drive, Ste. 700, Arlington, VA 22202

MAKING ‘CENTS’ OF GUARANTEES – A CIO’S PERSPECTIVE “We find ourselves in an investment environment most believe is overvalued, thus making future returns challenging. How can foundations not only continue their level of support but possibly even grow it? One word: guarantees. The balance sheet is one of the most underutilized assets foundations have to support their missions.” Robert Manilla, Kresge Foundation, CIO 2121 Crystal Drive, Ste. 700, Arlington, VA 22202

When a transaction can be de-risked • so that other capital will flow When you want to extend charitiable • activity without requiring current liquidity Perceived risk is higher than actual WHAT TOOL • risk DO YOU When you believe the risk will • NEED? diminish over time, therefore the guarantee can burn off  Arguably, a guarantee should be WHEN TO considered anytime there is other capital willing to make the investment USE A (at appropriate terms) with some GUARANTEE amount of credit protection. As a guarantor your funds to remain fully invested. In the event of future loss, guarantee payments are grants. 2121 Crystal Drive, Ste. 700, Arlington, VA 22202

EXAMPLES MHIC: Healthy Neighborhoods Equity SUN (Boston Community Entity California Community Foundation Detroit Home Mortgage Strong Families Fund Fund Capital) Guaranty on LIHTC properties; release 3 Credit enhancement for CDFI Bond Single family mortgage pool in months of Operating Purpose Mixed Income/Mixed Use Development Stand by guarantee re: DAF Guaranty Program Detroit Deficit Reserve to establish service coordination function Guaranty available to syndicator who can apply Limited credit enhancement for Pooled guaranty that cannot be called until the Guaranty runs to Aura Mortgage it to individual properties. Guaranty to ensure that if CCF is participating banks in the event of a end of the fund term and only after all FBO of US Treasury to pay Guaranty is not pooled but unable to get DAF investors to meet default. Payment on losses are Structure properties have exited the fund. Guaranty sits shortfalls to Qualified Issuer if at the property level. 1 the capital obligation of the SHLF limited to a per loan basis (not behind a publically funded first loss reserve proceeds are insufficient to pay month of developer ODG fund Kresge will fund that obligation pooled) and only in cases of hardship and GP equity Treasury must be utilized before and upon sale of the asset. Kresge guaranty can be called. If there are any calls on guaranty Length of term before guaranty can be called; that amount converts to a note Guaranty is called after public funds Pros partner (and public funds) at risk before Kresge which becomes an obligation of expended. BCC. Released relatively small Uncertainty about when the stand by Cons dollars; we have to look at guaranty may be called every property 2121 Crystal Drive, Ste. 700, Arlington, VA 22202

And other guarantee management practices: Working with Finance • and auditors Asset management • Projecting future loss • 2121 Crystal Drive, Ste. 700, Arlington, VA 22202

COMMUNITY INVESTMENT GUARANTEE FACILITY 2121 Crystal Drive, Ste. 700, Arlington, VA 22202

NEW PHILANTHROPIC INVESTING CONTINUUM 2121 Crystal Drive, Ste. 700, Arlington, VA 22202

Increase amount and efficiency of community development investment by • NEW PHILANTHROPIC INVESTING CONTINUUM centralizing a source of credit enhancement Reduce complexity for Guarantors by building intermediary capacity to deploy • guarantees and manage them over time Accelerate community investment without requiring current endowment • liquidity by activating Foundation balance sheets Share future losses pro rata • Seven Foundations have committed to launch the Facility: • Kresg esge, Roc ockefelle ler, D Dig ignity Hea ealth, Ph Phil illi lips F Family ly Fou oundatio ion, G Gary C Com ommunit ity Investment, We Weingart Fo Founda ndation, n, C Californi nia E Endowment First close Q3 2019 • 2121 Crystal Drive, Ste. 700, Arlington, VA 22202

CIGF WILL MAKE GUARANTEES IN THREE SECTORS HOUSING, CLIMATE AND SMALL BUSINESS/JOBS. THE FACILITY IS EXPECTED TO PROVIDE ENTERPRISE LEVEL GUARANTEES TO MEET THE FOLLOWING NEEDS: LIQUIDITY, CREDIT RISK PROTECTION, COLLATERAL/EQUITY SUBSTITUTION. 2121 Crystal Drive, Ste. 700, Arlington, VA 22202

NEW PHILANTHROPIC INVESTING CONTINUUM 2121 Crystal Drive, Ste. 700, Arlington, VA 22202

A Simple Example NEW PHILANTHROPIC INVESTING CONTINUUM The Smith Foundation makes a a $5MM unf nfunde unded g d guaranty c commitment t to C CIGF • which equals 10% of the $50MM CIGF pool A lender has a $3,000, 000,000 g 000 gua uarantee ee allocation from CIGF and experiences a • $750, 0,000 l 000 loss ss in Y n Year 5 5 To Total L Loss ($750,000) First L Loss: s: L Lend ender er (75,000) Sec econd L Los oss: C CIGF ($675,000) Smith Fo h Founda ndation n Loss (67,500) : 10% of CIGF Pool 2121 Crystal Drive, Ste. 700, Arlington, VA 22202

2121 Crystal Drive, Ste. 700, Arlington, VA 22202