10.26.10 Capital Availability in Inner Cities: Summary of Key Findings 2010 ICIC Capital Panel Session San Francisco Federal Reserve Bank
I. Estimating the Capital Gap for Inner City Businesses The majority of inner city firms are undercapitalized as compared to their industry peers. Inner City Firm Distribution by Average Capitalization Avg total capital is 1/4 th of the national avg. Wellcapitalized 29% Undercapitalized inner city firms are located in zip codes that are 35% more distressed. Undercapitalized 71% Source: Kauffman Firm Survey (KFS), 2004 2007; ICIC analysis Copyright 2010 ICIC 2
II. Inner City Capital Demand - Size Distribution Nothing in the employment or revenue size distribution of inner city firms supports the hypothesis that inner city firms require less capital than other US firms. Percent of Total Number of Establishments (2007) 100% 80% 60% 40% 20% 0% Inner City Firm Distribution by Size: Number of Employees 3% 3% 2% 46% 43% 43% 51% 55% 54% Inner City Region U.S. <5 Employees 5 to <100 Employees 100+ Employees Inner City Firm Distribution by Size: Revenues Inner City U.S. $1 to $100K 49% 54% $100k to $1M 42% 37% $1M to $5M 6% 7% >=$5M 3% 2% Total Number of Reporting Companies 228 2,513 Source: Kauffman Firm Survey, 2004 2007 Copyright 2010 ICIC 3
III. Inner City Capital Demand Industry Capital Intensity Using multiple methods of analysis, inner city firms are at least as capital-intensive as non-inner city firms. Based on 2-digit NAICS code analysis, inner city economies are about 5% more capital intensive than the rest of the US. Using net capital per employee, inner city firms are equally as capital intensive as US firms outside of the inner city. Copyright 2010 ICIC 4
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What role can mission-related investing models at foundations play in channeling capital to inner city businesses?
Context Growing interest in economic development and social enterprise Use capital to create opportunity and improve quality of life for residents of low income urban communities Constraints: Foundation tools: PRIs must be charitable; income is not primary purpose MRIs (usually from endowment) usually required to generate market/near-market rates of return Program staff tend not to be business/financial people Tension between supporting job growth (e.g. high tech clusters) vs. supporting jobs for disadvantaged people May 2010 p7
Solution Invest in mission-driven intermediaries able to identify, fund and support job-creating businesses Community development financial institutions (CDFIs) Place-based or issue-based venture funds (e.g. clean tech) Community banks New types of entities, such as Next Street Financial May 2010 p8
Challenges Lending Intermediaries Capitalization: Most CDFIs are undercapitalized, with limited ability to take on more debt and few sources for equity that has no exit Expertise: Most CDFIs have been housing-focused; Accion is exceptional in its highly successful track record of lending to small businesses Funding technical assistance: Intermediaries must find a business model that enables them to work closely with their small business borrowers; usually such work requires grant support May 2010 p9
Promising Models: The Integration Initiative $80 million effort to encourage public, private, philanthropic and non-profit leaders to work together to implement game-changing innovations that improve the lives of low-income people in their cities Application process required partnership between philanthropy, a financial intermediary, and the city Several cities focused on ways to bring capital to businesses May 2010 p10
Cleveland Partnership among Cleveland Foundation, local anchor institutions (Cleveland Clinic, University Hospital, Case Western Reserve University) and NDC to support the growth of businesses supplying the anchors Blending of PRI and commercial debt, along with grant support and a guarantee from the community foundation Multiple types of capital available to businesses: Start-up equity from new Evergreen Fund New Markets Tax Credits through NDC SBA loans May 2010 p11
Twin Cities Leader in developing models for how transit development can benefit rather than displace low-income communities Small business focus: mitigating impact of construction on primarily immigrant-owned small businesses along the Central Corridor; enabling businesses to position for growth Providing substantial grant and PRI capital to Neighborhood Development Center, a CDFI with an excellent record of assisting small businesses Two types of loans Real estate: Enable existing businesses to purchase their buildings Equipment/Working capital: May 2010 p12
Promising Models: Fresh Food Financing Builds on experience of The Reinvestment Fund in providing capital to over 70 grocery stores and supermarkets in Pennsylvania Catalyst loan to enable TRF to expand its program to Newark and Baltimore Cooperative model with TRF advising other CDFIs (e.g. LIIF in NY) Combines place-based CDFI expertise with industry knowledge through a partnership model Promise of federal support May 2010 p13
Inner City Economic Forum Summit 2010 The Federal Reserve Bank of San Francisco October 26, 2010
Meeting the Capital Needs of Inner City Businesses Innovative and Comprehensive Strategies Formed in 2001, the Urban Investment Group (UIG) has committed over $1.2 billion of Goldman Sachs capital to help transform underserved inner city communities UIG employs several strategies to bring capital to inner city businesses: 10,000 Small Businesses $500 million national initiative that combines Education, Business Support Services and Access to Capital Key differentiating factor: Integration of Business Support Services with both the Education and Access to Capital components Financial Intermediaries Real Estate Investing Provide capital to inner city businesses through Community Development Financial Institutions (CDFIs) Design innovative public-private partnerships that address critical and immediate needs of inner city businesses Use New Markets Tax Credits (NMTCs) allocated by Community Development Entities (CDEs) to provide equity and debt financing to inner city small businesses Support mixed-use, catalytic projects as part of a comprehensive community development agenda Enable the development of standalone and mixed-use developments that facilitate the creation and expansion of affordable retail and community facility space in underserved communities 15
10,000 Small Businesses Education, Businesses Support Services and Access to Capital Innovative model that integrates the provision of capital and comprehensive technical assistance to promote long-term sustainability, growth and capacity of inner city small businesses 16
10,000 Small Businesses Access to Capital UIG is responsible for deploying $300mm of lending and philanthropic capital to CDFIs that provide affordable, flexible capital to underserved inner city small businesses Lending Capital Underserved businesses often fail to meet the more strict underwriting criteria imposed by traditional financial institutions, or require handson technical assistance to get through the loan application process CDFIs address the distinct needs of small businesses that fall between the cracks of the traditional financial system and focus on underserved and minority and women-owned businesses enterprises (MWBEs) Loans to end borrowers: Range from $50,000 to $750,000 Typical uses of loan proceeds include working capital, inventory, equipment, acquisition and facility-related improvements Philanthropic Capital Help cover a portion of the high costs involved in providing intensive technical assistance, in addition to covering potential loan losses and helping build CDFIs long-term net asset base Capacity Building Grants Identify and address areas for operational improvement and provide capital to implement capacity building strategies Loan Loss Reserve Grants Pair lending capital with loan loss reserve grants to help reduce exposure to potential losses CDFIs retain unused portion of the grant to increase their net asset base Build long-term sustainability and help attract other private sector funders 17
Financial Intermediaries New York Healthy Food & Healthy Communities Fund Overview UIG committed $40 million and is the sole private sector investor in the NY Healthy Food & Healthy Communities Fund (the Fund) Project Details Loans to end borrowers: Range from $250,000 to $5 million Interest Rate: T + 300 bps with floor of 6% The Fund will finance new and existing grocery and other stores selling fresh food in underserved communities in NY State Proceeds may be used to finance acquisition, predevelopment costs, construction / rehab, equipment or infrastructure, and to provide term / gap financing Part of the Healthy Food & Healthy Communities Initiative launched in the Fall 2009 by NY State, who contributed $10 million to the Fund The Fund is managed by the Low-Income Investment Fund (LIIF), a nationally recognized CDFI, in partnership with The Reinvestment Fund (TRF) and The Food Trust 18
Real Estate Investing Supporting Neighborhood Revitalization Strategies The Bradford Overview $51mm investment in a mixed-use, mixed-income development in the Bedford-Stuyvesant neighborhood of Brooklyn, NY Before $6.6mm in direct equity financing to fund acquisition and pre-development costs $6.5mm in NMTC equity and a $17.1mm bridge loan to fund a portion of the Project s construction costs $20.9mm credit enhancement of a senior construction and permanent loan funded by the sale of tax-exempt bonds After Contains 9,700 sq ft of retail space and 105 rental housing units affordable to low and middle income families The Project is part of a comprehensive effort to redevelop the Fulton Street transit and retail corridors by bringing mixed-income, housing and affordable commercial space to the area Multiple financing programs and partners necessary to drive outcomes 19
Arga Bourgeouis Sunfired Foods Houston, Texas In 2004 with a $13,000 loan from ACCION Texas, Arga Bourgeouis opened up Sunfired Foods in the third ward of Houston, thus fulfilling a life-long commitment to improving the health and lifestyles of those around her. With other loans from ACCION Texas, Arga has been able to expand her product lines to customers, provide workshops, hire new employees and improve her working capital. Now, Sunfired Foods is not only a full health-food store, selling herbs, vitamins, vegetarian and organic cuisine and nutritional products traditionally unavailable to low-income individuals but has also become the neighborhood s information source for pursuing a healthy lifestyle.
Claudia Mirza Akorbi Translation Services Dallas, Texas
Kevin Baldtree Austin Moonwalks Round Rock, Texas In 2005, Kevin Baldtree, while still holding a full-time job, operated Austin Moonwalks as a part-time business providing moonwalk rentals at about 500 events a year. Wanting to expand his business and purchase additional inventory, Kevin came to ACCION Texas for a $10,000 loan and then later an additional $12,000 loan to meet the demand in the market. Today, Kevin, working full-time with 4 additional part-time staff, provides party rental equipment at over 1,000 events to include birthday parties, school fairs and other community venues. Austin Moonwalks expects to hit $250,000 in sales this year while assisting his Greater Austin area clients with happy and fun-filled events.
San Antonio, March 1994 El Paso, August 1996 McAllen, March 1998 Houston, September 1998 Brownsville, May 1998 Dallas/Fort Worth, January 1999 Austin, May 1999 Corpus Christi, August 2004 Laredo, September 2005 Arlington, December 2008 Louisiana, April 2009 23
10,930 loans $100 million disbursed $27 million outstanding portfolio 2,064 active borrowers $149 million in economic activity $48.8 million in increased wages $8.7 million in tax revenue 2,000 new jobs 4,000 sustained jobs 63 employees 24
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86% minority ( 67% Hispanic, 14% Black, 3% Other) 55% male/46% female Minority and female owned businesses historically have most difficulty obtaining business capital. No coincidence that most of our loans are to these businesses. Our lending history validates that we are helping businesses that need it the most Our constraint is not eligible clients. Pure and simple it is capital 26
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From modest beginnings to biggest and best Multiple Loan Products SBA 504 Certified Lender Provide underwriting services nationwide Proven business practices in a non-profit world Be lowest cost provider of microloans nationally Pursue strategic partners 28
Contact Janie Barrera President & CEO ACCION Texas 2014 S. Hackberry San Antonio, Tx 78210 210.507.4283 Direct Line jbarrera@acciontexas.org www.acciontexas.org
BAML Capital Access Funds Inner City Economic Forum October 2010
Concepts Microloan Reserve Grants Provide capital to intermediaries to allow them to access multiples of government financing Fund required loan loss reserves at CDFIs and other nonprofit lenders to stimulate more lending Grant funding leverages federal dollars No market participant would fund this piece of capital structure Impact $10MM infusion projected to result in over $100MM of additional lending Average SBA microloan is $13,000; expect to help 8,000 small businesses In first 6 weeks of program, $3.7MM in grants leveraged $27.5MM in federal microloan capital Goal is to fully use program in 12 months Replicate and Scale More grants by more parties 31
Inner City Capital Connections Concepts Convene market participants to build relationships that will eventually lead to access to capital Targeting businesses between $2MM and $30MM in revenue Training sessions Make a market meet or work better Impact $372MM in capital raised to date Businesses grow revenue and employment at greater than 20% CAGR Businesses see strategic change opportunity Replicate and Scale More events, more technology 32
BAML Capital Access Funds Concepts Invest in funds that invest in underserved markets, including inner cities Find opportunities that are overlooked Actively invest in SBIC program Market based approach Impact Managed or advised on over $1 billion in underserved markets Funds that don t self identify as inner city focused do make inner city investments Replicate and Scale Other fund of funds providers Educate fund managers on inner city opportunity 33
Social Impact Growth Equity Prepared for ICIC Investing in sustainable businesses with substantial community benefit Rob Davenport, Managing Partner October 26, 2010
Overview Genesis of the Fund Our Investment Process The Brightpath Approach Our Mission
Genesis of the Fund For-Profit Social Enterprises
Our Investment Process Social Impact Process Industry Impact Screening Business Model Impact Assessment Management Mission Alignment Develop Impact Strategy Implement Strategy Evaluate & Report Impact Investment Process Market/Mgmt Evaluation Business Evaluation/ Due Diligence Strategic Development 100 Day Plan Operations Optimizing Exit
The Brightpath Approach Geography Deal Type Industry Impact Investment Stage Focus SF Bay Area California West Coast Preferred Equity Mezzanine Debt w/ Warrants Minority or Control investors Lead or Syndicate deals Clean-tech Health & Wellness Education Finance Sustainable Food Jobs created Pollution reduced Access to education Access to healthcare Increased Sustainability Late-stage venture Early-stage growth BCP typically invests $1 to 5 million in each opportunity utilizing flexible, transparent structures designed to align the interests of all stakeholders, and adds value to its portfolio companies with entrepreneurial, strategic, operating and financial advice; a longer time horizon and access to a robust network of social entrepreneurs, enterprises and institutions
Our Mission Our mission is to generate competitive returns by investing in sustainable companies that produce a demonstrable positive social and/or environmental impact Competitive Advantage >Talented entrepreneurs >Innovative solutions >Superior execution >Attractive risk-adjusted return Social Impact >Jobs created >Establish fair living wages >Increased access to health or education Environmental Impact >Pollution reduced >Carbon footprint reduced >Energy efficiency
Questions? Brightpath Capital Partners, LP www.brightpathcapitalpartners.com