Place-based impact investing

Spotlight

Place-based Impact Investment is Filling Funding Gaps in Rural Arkansas

Deb Markley | July 23, 2018

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Place-based impact investing is a growing focus of many foundations seeking greater impact in their communities. As more and more foundations explore place-based impact investing, it is natural for the discussions to focus on the nuts and bolts of investing: Will we commit dollars from our endowment? Will we build internal capacity, or outsource due diligence, servicing, etc.? What level of risk are we willing to accept?

When we started LOCUS Impact Investing in 2017, it was to unlock more capital in communities and regions by supporting place-focused foundations as they explored these types of questions. But we know that foundation staff and board members never lose sight of the motivation that drives them to explore local impact investing in the first place: the desire to create positive change in their communities.

What does local impact investing look like from the ground up? Here’s one example from Arkansas, where the Arkansas Community Foundation is embracing place-based investing.

Communities Unlimited is a not-for-profit community economic development organization with over 40 years of experience working in Arkansas’ rural communities. It’s mission is “to move rural and under-resourced communities in areas of persistent poverty to sustainable prosperity.” CU brings a diverse set of tools to that mission, including technical assistance, training, GIS mapping and capital (through a community development financial institution with $14 million in assets) focused on three areas: entrepreneurship, environmental (water and wastewater systems) and community sustainability.

In 2016, CU received a social impact investment in the form of a 10-year, $1 million loan, at 1.5% interest, from the Arkansas Community Foundation (ARCF), a statewide foundation with over 40 years of experience partnering with “Arkansans to build better communities.” With few restrictions on the loan—other than lending in Arkansas—the foundation has provided CU with a source of lower interest and very flexible capital to bring to Arkansas communities and entrepreneurs.

Although CU has not yet deployed all the impact capital, the impact is already being felt. The capital has funded:

• A $450,000 12-month loan to repair and rehab a rural community wastewater system, moving it out of receivership and into compliance, providing 490 households with environmentally sound wastewater services.

• A $152,000 five-year loan to connect 11 rural households with problem wells to city water system, providing 11 homeowners with safe drinking water.

• A $32,000 12-month loan to purchase two biodiesel storage tanks for Delta Bioenergy, Arkansas’ first multi-stakeholder cooperative, enabling them to continue processing fuel without interruption. The Delta Bioenergy project has transformed a condemned fuel transfer station into a small business park creating 44 new jobs in a rural Delta community.

• A $45,000 six-year loan to a growing HVAC company serving Delta communities to purchase two new trucks and inventory, provide working capital and supporting the hiring of 3 additional people.

place-based Impact Investing
Small Business Park in DeWitt, Arkansas (Photo credit: Tami Hornbeck)

The impacts of these loans are diverse but there is a common denominator: none of the loans or projects would have been possible without the local investing by ARCF, says Ines Polonius, CEO of Communities Unlimited. The foundation-supplied capital serves as “problem solving” capital—each loan addressing a significant capital gap that was not being filled, or could not be filled, by other types of financial institutions.

In the case of the wastewater system, banks were unwilling to lend to a system in receivership. The capital solution for the households with failing wells required organizing the affected households and working with the city to do on-bill financing so that CU could get paid back over time, something a more traditional financial institution would not have undertaken.

The loan to Delta Bioenergy was risky because it was to a multi-stakeholder cooperative, a business model unfamiliar to the region’s financial institutions. The loan to the HVAC business came on the heels of intensive technical assistance to ensure that the company’s growth strategy was sustainable and they could continue to serve the community and their employees

What can place-focused foundations and their local partners learn from this on-the-ground local impact investing story?

LOCUS Impact Investing
Source: Communities Unlimited 2017 Impact Report

One, the ARCF found in Communities Unlimited a mission-aligned, place-rooted partner with a broad set of tools to tackle the challenge of building more prosperous communities. The foundation’s local impact investment augmented CU’s capacity as a community development financial institution (CDFI) by providing lower cost, flexible, problem solving capital.

But capital was not the only tool that helped to create the impact associated with each of these loans. Technical assistance, community engagement and organizing, value-chain coordination, and entrepreneurial support provided by Communities Unlimited all contributed to impact. These non-financial tools are important ingredients, but they also require money and support to deliver. Foundations might want to broaden the way they think about local impact investments to include loan capital in combination with operating or program support to a CDFI or other organization.

Two, foundations have a degree of leverage when they engage in local impact investing that can be used to create more impact. CU is a community development organization that uses its CDFI as one of many tools it can bring to help communities become more prosperous and sustainable. Especially in lower-resourced communities, rural or urban, this comprehensive approach to community building is important to mitigate risk on the front end, rather than the back end, of capital deployment. Foundation investors should be asking about the tools beyond capital that a community or regional partner will use to create impact.

Three, community organizations looking to foundations like ARCF as potential impact investors need to lead with impact. CU brought a legacy of impact and a thoughtful, field-tested approach to community building to their initial conversations with ARCF. If place-focused foundations are exploring local impact investing out of a desire to have more impact, local partners need to demonstrate both mission and impact alignment with their foundation partners.

Finally, these Arkansas partners are not unique. There are place-based impact investing stories to be told by Southwest Initiative Foundation, LOCUS parent Virginia Community Capital, Northern Initiatives and Humboldt Area Foundation, to name just a few. Each of these organizations—driven by mission and impact—is helping to change the community and economic development landscape in their place. It’s an exciting time to be an impact-driven, place-focused foundation. There is much innovation, experimentation and problem solving happening across the country—and the opportunity to learn with and from each other is great.

Photo at top by Linda Tanner (flickr user: goingslo)

Deb Markley is Senior Vice President, LOCUS Impact Investing. LOCUS is a social enterprise with a mission to empower place-focused foundations to invest their capital locally to build prosperous, vibrant communities. (LOCUS is a Locavesting sponsor). 

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