June 9, 2020, 2:56 p.m. EDT

Future Returns: Using Foundation Guarantees to Unlock Capital

Watchlist Relevance

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

or Cancel Already have a watchlist? Log In

A group of foundations led by the Kresge Foundation in Detroit, Mich., recently launched the Community Investment Guarantee Pool—a creative strategy for unleashing capital in disadvantaged communities.

The emergence of the US$38 million pool—a vehicle backed by the balance sheets of big and small philanthropic institutions, including the Chan Zuckerberg Initiative, the Rockefeller Foundation, and the California Endowment—could not have come at a better time, given the additional economic pressures caused by the coronavirus pandemic. 

But the need for this innovative guarantee structure—one that has been used in other countries, but never in the U.S.—had long been apparent to many in the foundation world.

“The foundation balance sheet is an underutilized economic resource,” says Adam Bendell , CEO of the U.S.-based Toniic impact investing network.

The pool allows foundations and other philanthropic institutions to leverage their endowments by using these assets as a guarantee backstop for nonprofit financial institutions that lend to individuals and small businesses in low-income communities. The guarantees give these institutions more freedom to attract capital for lending. 

“Foundations are lending their balance sheets, their reputations, their credit history, to nonprofit organizations that are serving some of the most vulnerable people in our society,” says Catherine Burnett , chief impact officer at the Phillips Foundation in Greensboro, N.C., which is one of the foundations backing the pool. 

The nonprofits the pool seeks to back “are focused on building and retaining affordable housing, and providing access to capital at affordable rates to entrepreneurs of color, women entrepreneurs, and small businesses from vulnerable communities,” Burnett says. 

These are individuals and businesses that are considered too risky to get loans from big banks. Instead, intermediary organizations, such as community development finance institutions (CDFIs), and community development corporations (CDCs)—organizations that lend to underserved communities, can provide this capital. But these nonprofits often don’t have enough liquidity to meet financing needs that have only grown bigger in the wake of the pandemic.  

“What we in the guarantee pool are saying to those intermediary lenders is, ‘we’ve got your back—go ahead and lend to these small businesses, and if they default, we will share in the loss with you,’” Burnett says. 

“How lucky are we that this exists right now,” she adds, “when historically non-privileged communities are disproportionately bearing the brunt of the global pandemic and global economic crisis.”

Creating the Pool 

Kresge had been using the power of its balance sheet to guarantee loans to individual organizations for many years, and in 2017, partnered with the Global Impact Investing Network (GIIN) to figure out why more foundations weren’t doing the same. 

The pool—an outcome of the study, and two-and-a-half years of on-the-ground research—could not have come at a more opportune time as low-income communities, hard-hit by the coronavirus pandemic, seek to get on their feet, Burnett says. 

“Now we’re in the process of making these guarantees to stabilize and rebuild the economy during the Covid crisis,” she says.

The foundations behind the pool didn’t know the Covid-19 crisis was on the horizon, of course, but they did know inequities in financing existed and were moving to address them. Originally, they had planned to provide funding for climate solutions as well as affordable housing and small businesses. But the pandemic has shifted the pool’s focus for now. 

Supporting PPP Loans for Disadvantaged Communities

1 2
This Story has 0 Comments
Be the first to comment

Story Conversation

Commenting FAQs »
Link to MarketWatch's Slice.