Project Spotlight: CDFI Investment Funds

FUND Consulting recently completed a research project for a CDFI small business loan fund client interested in starting an investment fund.  While members of the CDFI industry use a variety of terms to refer to this type of model, for the purposes of the project, we defined an investment fund as a capital generating model which allows a range of investor types and classes to purchase structured debt and/or equity investments from a CDFI with the expectation of a modest financial return.

Our analysis showed that CDFIs with a broad range of asset sizes (CDFIs in our sample ranged in assets of less than $1 million to upwards of $100 million) have established investment funds which allow participation from a wide pool of investor types including financial institutions, religious institutions, foundations, private businesses, and individuals.  Smaller funds in the sample were comprised of as little as 20 investors while larger funds had as many as 800 investors, ranging in size from $400,000 to $160,000,000.  Further, investment funds require as little as 6 employee hours per week and as many as two full-time employees; on average one employee hour per week is required for every $46,709 in the fund.

Investment funds are a promising tool for CDFIs that are looking to expand and diversify their capital sources, especially with the growing interest in socially responsible investing (SRI).  According to US SIF, the area of community investing – capital invested into communities that are traditionally underserved by traditional financial services institutions – is the fastest growing segment of SRI and has grown over 60% in the past three years from $25 billion to $41.7 billion in assets.

Even with this potential to tap into the desire of both individual and institutions to increase investments into local communities, there are many factors an organization needs to consider before initiating an investment fund, including the capacity to manage an investment fund and securities laws which vary from state to state and can affect the type of investors a fund is able to accept.