Future returns: how to invest in strengthening communities

High net worth investors who want their assets to support wealth creation in underserved communities have several options.

For clients of Veris Wealth Partners, a U.S. impacting wealth management firm with $ 1.5 billion in assets under management, these options range from investing in community development financial institutions (CDFIs), to ‘investment in mutual funds, private equity and private debt.

Many of these choices have been around for years, but investor interest in them has accelerated during the pandemic due to the revelation of widespread wealth inequality across the United States and the protests fueled by Black Lives Matter. , who drew attention to racial inequalities, says Michael Lent CIO of Veris.

There are also many other vehicles available today for investing in affordable housing or black-owned businesses, for example, that offer both market rate and below market rate returns.

The trends are positive for those who care about closing the wealth gap, a problem that has been going on for years and getting worse, Lent says.

Building community wealth has been a fundamental investment theme for Veris since the company was founded in 2007. Penta recently discussed with Lent specific strategies that investors interested in these solutions can consider.

“It’s about knowing how to create opportunities,” he says. “How do you invest directly in creating wealth in communities that have not always had access to capital?”

Invest in CDFIs

One way to support wealth creation is to invest in CDFIs. There are over 900 of these institutions in the United States that serve as banks, credit unions, loan funds, and community development funds. They provide funds for affordable housing, for entrepreneurs without access to capital and to a range of social service centers.

Before recommending a CDFI as an investment option, Veris assesses its effectiveness within its community, asking, for example, “How well are they reaching underserved populations? How do they do it and in what form? Says Lent.

Currently, Veris has approved 13 CDFIs for clients in a wide range of geographies and areas of focus – from social entrepreneur lending to mortgage lending for affordable housing.

For example, Self-Help Credit Union, headquartered in Durham, North Carolina, is a CDFI that serves rural areas of Florida, North Carolina, Central Valley California, Illinois, and of Wisconsin. Some of their branches primarily serve farm laborers, a “very underserved banking community,” Lent says.

Another is Oweesta, a Native American CDFI from Colorado that lends to other Native American CDFIs. “As an intermediary, they provide technical support, grants and loans,” says Lent.

Community Vision in California is a CDFI that focuses on economic and racial equity, providing funding to those without access to capital and to businesses owned and run by people of color. It also focuses on affordable housing for low- and middle-income people and supports nonprofits that share its goals.

A range of investment options

Veris customers can deposit cash into a CDFI, which facilitates these institutions’ ability to provide banking services to customers, or customers can provide promissory notes or participate in loan funds, Lent says.

Typically, the loans in these agreements are fixed instruments that provide a low interest rate, such as 1.5% for a five-year loan – a level that is not that different from the current yield of about 1.6% on a 10-year Treasury bill. .

“Given the low interest rate environment in which we operate, the rates are competitive,” says Lent. They “have turned out to be very solid investments for our clients”.

Other investment options include public mutual funds, private equity, private debt, and venture capital funds.

For example, Community Capital Management Impact Bond Fund, a US $ 3 billion mutual fund, facilitates affordable housing by purchasing mortgages issued by banks under the United States Community Reinvestment Act – a law that requires banks to lend in low-income communities that have historically been denied access to credit. , Said Lent. CCM also invests in small business loans.

Within Private Equity, Veris seeks funds and managers who invest in companies that guarantee good wages, salaries, advancement opportunities and benefits, and that use both a gender and business lens. racial fairness when looking for opportunities.

“If we are looking to increase community wealth, the types of jobs people get are important and critical to the future of community wealth creation,” he says.

Veris is also seeking funds to support entrepreneurs of color. One example is Impact America, a vehicle run by an African-American woman that funds female entrepreneurs seeking venture capital.

The company is also seeking funds that support new approaches to help historically marginalized communities build wealth. Examples include funds that provide capital to facilitate employee stock ownership plans, or ESOPs. These structures can provide a regulated mechanism for transferring ownership to employees by facilitating the granting of loans over a period of time prior to the vesting period of employees.

“I have been very interested for many years in how you make the transition from the companies to the people who work in these [companies] over many years – what are the best ways to do this? Says Lent.

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