Community Development Loan Funds: An Effective Partner for Local Impact Investing

Bonny Moellenbrock, LOCUS’ advisor, shares insights on how Community Development Loan Funds (CDLFs) can be used for impact investing.

This spring, the Global Impact Investing Network (GIIN) and investment firm Symbiotics released The Financial Performance of Impact Investing Through Private Debt, the latest in a series of reports benchmarking impact investing opportunities in different asset classes. For U.S. place-based investors, Community Development Loan Funds (CDLFs) provide a particularly promising impact investing opportunity.  The report analyzed data for the past five years from 102 participating CDLFs across the country. Below I’ve shared some of the highlights from this report relevant to foundations and others interested in place-based investing.

Community Development Financial Institutions (CDFIs) are mission-driven banks, credit unions, venture capital funds, and loan funds that provide capital and financial services to underserved communities to increase economic development and opportunity. They are certified by the U.S. Treasury Department CDFI Fund. Community Development Loan Funds (CDLFs) are the most common type of CDFI, providing financing and technical assistance for microenterprises, businesses, commercial real estate, housing development, and community facilities, all in economically distressed locations across the country. Most are nonprofit organizations, focused on a particular state or region, and most rely on grants and contributions in addition to returns from lending to fund their operations.  LOCUS Impact Investing’s parent company, Virginia Community Capital, is a $323m CDLF.

The report shows the diversity in CDLFs. Forty percent of the funds analyzed focus on housing, 33% on local business financing, and the rest provide financing for microenterprises and community facilities. Assets under management range from $1 million to $1 billion, with the average and median CDLFs at $55.2 million and $24.9 million, respectively. Growth of the median has been a solid 12.4% since 2012.

The majority of capital invested in these funds – a significant 75% – is from institutional investors including pension funds, financial institutions, non-governmental organizations, and foundations. The remaining is provided by public funders (18%) and retail and other investors (7%). These funders invest in notes or lines of credit with the CDLFs. Here at LOCUS, we see an increase in foundations who care about a specific geographic region investing in CDLFs for both a financial return and social impact in their communities.

Impact Investors typically weigh fund performance, risk, and the impact achieved in their investment decisions. Average interest rates paid by CDLFs on notes have been very stable at 2.9% over the period; average interest paid on the less-common lines of credit was also relatively stable at 3%. Housing-focused funds paid the highest interest rates on notes, averaging at 3.0% or above. Microenterprise funds paid the lowest interest rates on notes, with rates of 2.1% – 2.6% over the period.

Portfolio yields, a reflection of the interest rates CDLF’s charge for loans, ranged from 5.2% to 5.4% on a weighted average basis over the period. Microenterprise fund yields were highest at an average of 12.5%, and housing-focused funds lowest at 4.2%, with businesses and community facilities funds falling between. These discrepancies between portfolio yields and respective interest rates reflect the higher costs associated with microenterprise funds, which usually provide additional technical assistance to the enterprises, versus the relatively lower expense ratios of housing-focused funds.

CDLF’s demonstrated high portfolio quality, with write-offs in 2016 at 0.6% of the portfolio outstanding. As one would expect, when broken down by size, write-offs by small CDLFs were higher at 2.2% of portfolio outstanding versus 0.2% for the largest CDLFs. Loan loss provisions at the end of 2016 were at 4.9% of portfolio outstanding overall.

While most CDLF’s have a particular sector focus as noted above, they also participate in other subsectors. Thus nearly 75% of the CDLFs in the study provide loans in Financial Services (including individual loans and microfinance) and Housing. Education, Healthcare, and Food & Agriculture are other common sectors. Through these financial products, CDLFs target a number of impacts. Employment generation (87% of CDLFs in the study), affordable housing (71%), and food security (43%) are top impacts, with health improvement, education, and financial inclusion also of notable interest. While metric data in the study was very limited, the most common metrics tracked were housing-related (units created or preserved, or people housed), the number of jobs created or preserved, and students served.

Despite their long tenure, CDLFs have been somewhat under the radar in the impact investing space. This report highlights the strong opportunities that CDLFs provide for institutions and individuals interested in place-based impact investing in their U.S. region.