A foundation doesn’t need a large staff to make program-related investments (PRIs) that advance its mission. Investing through intermediaries like community development financial institutions (CDFIs) can increase philanthropic impact by generating measurable benefits and modest financial returns while recycling philanthropic capital.
With their expertise for re-lending and providing access to capital to low-wealth people and underserved communities, CDFIs are a critical part of the infrastructure for addressing poverty. There are simple, inexpensive ways to conduct due diligence; MRBF subscribes to Aeris’ CDFI ratings tool to help analyze opportunities and assess risk.
The Mission Investors Exchange, a national membership group of mission investing organizations, just released Essentials of Impact Investing: A New Guide for Small-Staffed Foundations to offer advice, tools and real-world examples to help foundations shape effective investing strategies. For insight on building CDFI capacity, MIE interviewed MRBF Deputy Director Sandra Mikush and Finance Officer Jennifer Barksdale:
Q: Why do you think it’s important to build CDFI capacity?
A: The Mary Reynolds Babcock Foundation’s mission is to help move people and places out of poverty across the Southeast. As a small foundation working in a large geographic area, we often work with anchor organizations that are well connected to low-wealth people and communities and provide critical infrastructure for addressing poverty. CDFIs are one such organization, offering access to capital and support for asset building through home ownership and small-business development. CDFIs often play other roles as well, including developing innovative pilot programs, advocating for public policies that support low-wealth families, and building public-private partnerships.
Q: How does the Mary Reynolds Babcock Foundation do this?
A: We support CDFIs through both grants and PRIs, guided by a capacity-building approach. Our investments often start with grant relationships based on our shared vision, and we often use PRIs to help CDFIs move to scale. We mostly make general support grants, based on the belief that long-term, flexible funding is most helpful in increasing the impact and sustainability of organizations, especially smaller CDFIs. We also provide flexible capital through our PRIs, offering general recourse loans that can support the CDFI’s entire lending portfolio. By combining grants and PRIs as CDFIs grow, we can help them increase their self-sufficiency and attract capital from more traditional sources, including banks.
Q: Aeris (formerly CARS) provides data, analysis and advisory services that support investment in CDFIs. How have the Aeris tools helped you with your goals?
A: We use Aeris for due diligence when we consider new CDFI investments and to monitor current PRIs. It is much easier to start a relationship with a new CDFI if they are rated by Aeris. For us, Aeris provides a one-stop shop for comprehensive financial reports and impact information, as well as in-depth analysis that is accessible and easy to understand. Their formats are consistent year over year, and they also have peer comparisons. It is hard to look at a CDFI in a silo, so the meaning behind the numbers is more understandable when you can compare across several institutions. We are now using Aeris to monitor our CDFI partners’ quarterly financials, which are all in the same format as the Aeris annual reports. The uniformity of reporting allows us to easily make comparisons across organizations and time and has greatly reduced the work required to look at each CDFI’s numbers individually. We have a relatively small staff, so if CDFIs are not rated by Aeris, it takes much more work to get a meaningful analysis of an organization. Without Aeris, we would probably need to outsource due diligence to more consultants, which would be much more expensive.
Q: What can you tell other foundations that are considering an investment in CDFIs?
A: CDFIs are a great way to start your PRI program. They are in the business of lending, so a foundation can help get capital to people and places that need it without taking the risk of direct lending. We learned some hard lessons many years ago when we made direct PRIs, but at the time, we didn’t have the staff and board expertise to do that well. We have found that making PRIs through CDFIs is a very effective way to get capital where it needs to go with much less risk. If a CDFI is not yet ready for a loan or PRI, begin with a grant and develop the relationship over time, staying open to when a PRI could help the bank leverage additional capital and increase its scale and impact. PRIs are not beyond the small-staffed foundation, especially with tools like Aeris!
Learn more about CDFIs:
We recently posted an article featuring interviews with leaders of some of the CDFIs we support as part of our Southern Voices oral history archive.
The South Carolina Association for Community Economic Development is a statewide affiliation of nonprofits, community development corporations, CDFIs, local governments and other organizations in economically distressed communities. This video highlights the ways SCACED works through its members to strengthen communities.
In 2011, MRBF commissioned a study of CDFI growth and sustainability.