MIE member New Hampshire Charitable Foundation (NHCF) has made a $500,000 investment through its Impact Investment Fund into a market-rate impact investment strategy managed by Community Investment Management (CIM). CIM supports innovative online lending platforms that responsibly finance small businesses across the United States, screening for predatory practices—such as hidden fees or prepayment penalties—that are more common among technology-driven lending platforms. CIM also collects and reports to investors impact-related data on the types of investees served via these secondary lenders: 50 percent of businesses served by the online lenders funded by CIM are currently owned by women, people of color, and veterans. Click here for the complete announcement.
In the Q&A below, Michael Wilson, Chief Financial Officer and Vice President of Finance of NHCF, and Jacob Haar, Managing Partner of CIM, share their organizations’ perspectives on this deal and their respective impact investing programs.
A Q&A With Michael Wilson, CFO of NHCF
Tell us how this investment in CIM came about? Why this, and why now?
Michael Wilson: NHCF has been involved in impact investing for more than four decades, and we’re particularly committed to supporting local community development financial institutions (CDFIs). For example, one of our early impact investments was to the New Hampshire Community Loan Fund, a CDFI providing financing to support New Hampshire-based affordable housing, child care facilities, nonprofit facilities, and business finance, including projects involving resident-owned mobile home communities in New Hampshire that has since been replicated nationally. NHCF has provided grants and loans to the Loan Fund over the years.
As a long-time supporter of local CDFIs, we began examining how CDFIs fit into this new era of online lending platforms. Although some online lending platforms are known for predatory practices, others are able to support small businesses in ways that are consistent with NHCF’s goal of investing locally.
We heard about CIM from Calvert Impact Partners and our investment consultant, Cambridge Associates, which is also an MIE member. We began discussions in May 2017 with CIM’s Co-Founder and Partner, Michael Hokenson, exploring the nature of the investments in the CIM strategy. After several discussions and an analysis of the impact and financial return of their investments, NHCF’s Impact Investment Committee decided to invest $500,000 in CIM in November 2017.
As a locally focused community foundation, dedicated to New Hampshire communities, how does NHCF think about investment in funds like CIM that invest nationally?
NHCF prioritizes local investments, consistent with our mission to support communities in New Hampshire. However, we do invest nationally to a lesser extent as we weigh impact, financial return, geography and liquidity. For example, NHCF’s Impact Investment Fund (IIF) has invested in RBC Access Capital Community Investment Fund, a mutual fund that screens RBC’s US fixed income securities for community development goals including affordable housing, small business loans, and more. Although the fund invests nationally, it also targets our investment into New Hampshire and offers daily liquidity.
To assess whether CIM was a mission fit, we first began a series of due diligence conversations to understand how CIM screened for impact and invested specifically in New Hampshire. CIM created several portfolio reports highlighting investment activity in New Hampshire and the surrounding New England states, including the actual clients that were served by the financing entities. CIM also agreed to designate at least one-half of NHCF’s $500,000 investment into loans to New Hampshire-based businesses.
Tell us more about the relationship between the Impact Investment Fund and NHCF’s endowment. What is driving NHCF’s MRI strategy?
The Impact Investment Fund (IIF) is currently NHCF’s own vehicle for MRIs. We’ve committed $10 million—about 2 percent—of our own endowment to the IIF. Although we will evaluate over time whether that amount changes, the Investment Committee currently targets an 8 percent return for the endowment. We understood that achieving that return with the IIF would be a challenge given our geographic focus on New Hampshire and our willingness to make investments with the potential for high impact but lower financial return. Based on these considerations, we target a 5 return for the IIF. The IIF generated a healthy 6.9 percent return in 2017.
Rather than making impact investments directly from the endowment, NHCF created the IIF in order to allow donors to make larger commitments to the fund. We’re seeing a new generation of investors interested in impact investing, and the IIF was an opportunity to give them new ways to invest and contribute to the community. Nearly $2 million of current investments into the fund are via donor allocations. And nearly all of the $12 million in total funds is currently deployed.
What did you learn through this process that other community foundations might benefit from knowing?
We tried to build flexibility around the types of investments we would consider in the IIF, as we were not sure what kinds of deals we would see. But we have been pleasantly surprised by the variety and volume of deals we have seen, though the volume is partly due to our outreach efforts.
Also, we knew this work would be complex, so we have to be thoughtful about where we allocate our time and deciding what we cannot do. Finally, continued engagement and learning with the relevant committee or board is important.
An investor needs to consider their appetite for investment risk and headline risk when making impact investments. The CIM investment is interesting as the premise of online lending is intriguing, but the broader industry has suffered from some self-inflicted wounds. There is certainly potential for headline risk here. We were interested in learning about how online lending and CDFI’s will evolve in the impact investing space and thought exposure to both types of investments made sense.
We also want to be supportive of responsible lending in the online lending space, so an investment in CIM helps advance that goal. The CIM team is thoughtful about their responsibilities to borrowers and helping develop a fairer financial system.
A Q&A With Jacob Haar, Managing Partner of CIM
MIE: What is CIM’s impact investment thesis? Why this focus?
Jacob Haar: We provide strategic debt funding to scale and demonstrate responsible innovation in lending to traditionally underserved communities in order to advance financial inclusion, improve financial health and drive widespread adoption of such innovation by the financial mainstream. We diligence and partner with responsible and transparent financial technology lenders that serve small businesses across the United States to construct a short duration, diversified fixed income strategy that provides both compelling risk-adjusted financial return and positive economic and social impact.
CIM believes that small businesses are critical as the principal engine of jobs, growth, and innovation in the US. But traditional debt options aren’t a sufficient solution for small business borrowers today. In 1995, small businesses comprised 51 percent of total bank loans, and despite creating 60 percent of all new jobs since then, they fell to comprise just 29 percent of total bank loans by 2012.
In part, this is due to a fundamental mismatch between the traditional debt financing market—which is designed for capital intensive businessesn—and the needs of small businesses. For example, 86 percent of small businesses are service-based (versus 73 percent of large businesses) and their assets (cash flow, invoices, contracts, etc) may not qualify as collateral required to secure a traditional loan. These numbers are even more stark when it comes to certain groups: 95 percent of women-owned businesses and 89 percent of businesses owned by people of color are service-based. Small businesses—and particularly those owned by chronically underserved populations—are often locked out of the traditional lending market.
In response to this service gap, the market has been flooded in the last decade with hundreds of online lending platforms with innovative approaches to efficiently acquire, underwrite, and service borrowers by using financial technology to rapidly deploy smaller amounts of capital to borrowers—often without requiring collateral. Online lending platforms can be a powerful vehicle for small-business loans, but many of them also have predatory lending practices that ultimately extract value rather than creating it. By funding responsible lending platforms, our goal is to benefit the underlying borrowers and ultimately contribute to improved financial health outcomes on a net basis for small businesses.
How do you build your portfolio and assess impact?
We partner with innovative lenders that provide transparent and responsible loans to small businesses. First, potential platforms must conform with the Small Business Borrowers Bill of Rights
, a values framework developed by the Responsible Business Lending Coalition to clarify what responsible lending looks like. CIM is a founding member of this coalition, and actively works with other organizations to assure that innovation in lending serves underserved populations in a responsible way.
Once we’ve vetted a lending partner, we buy a defined set of underlying loans—as opposed to investing in the fintech lenders themselves. Through this arrangement, we have invested $400 million across a portfolio of 5,000 small-business borrowers and have full transparency into the loans we’ve purchased. This model also reduces the overall financial risk; if the technology platform itself does not succeed, then we continue to manage the portfolio of underlying investments.
What are the characteristics of borrowers?
The financing arrangement and technology we use allows us to capture granular data on every business we’ve funded. We collect detailed data on geography, mission, and human capital and could, for example, identify which borrowers focus on the clean energy economy or health care. We also assess businesses through a gender lens and creativity lens.
Currently, nearly 50 percent of borrowers served through our platforms partners are women, people of color, and veterans (combined). Although our core objective is to provide responsible and transparent funding to underserved small businesses, these derivative impacts are a direct result of the kinds of loans we support. For example, while women-owned businesses only make up 14 percent of the borrowers of traditional lenders, they comprise 29 percent of CIM’s borrowers.
How do you work with foundations like NHCF, who have a local focus? And how do you target 50% of NHCF’s investments to New Hampshire communities?
CIM is able to designate the proceeds of a specific investor’s capital to a particular subset of the portfolio—whether by mission, geography, or the other borrower characteristics we collect. Through the innovative lending platforms we work with, we currently support 5,000 small businesses in all 50 states. The size of our portfolio and data available on each loan allows us to earmark --and deploy—proceeds according to the specific mission of our investors.