I’m a long-time advocate of impact investing. It brings new money to the nonprofit world, supports social enterprises, and can provide services and products that would otherwise be unfunded or unresolved.
Those who want to solve social problems may choose a for-profit model over nonprofit status, giving them a return on investment as well as social impact. New incorporation options allow successful businesses to put social good on a par with profit.
Now, I’m happy to report that new options for private investment in social good are cropping up, including in our own back yards. Many are blended ventures that combine public, philanthropic, and private investment to support high-impact community and economic development in low-income communities.
Bruce Arbit, principal of Melarbit Partners, Inc., attributes the rise in private investment in public good to a “perfect storm” of people wanting to see real progress towards social problems; more resources and a different mindset within a new generation of wealth-holders; and the current economic climate.
In other words, it’s time to try something new. Philanthropy, while essential, is finite. Once the money is gone, it’s gone. Investments, on the other hand, aren’t used up; they are re-used. When a loan is paid back, another loan can be made.
HANDS, Inc. has been revitalizing Orange, NJ for the past 25 years, through support for arts-based entrepreneurs and innovators, and through the redevelopment of run down buildings. It is using a four-tiered funding package to accomplish the task. The first level is “senior debt,” provided by a financial company. Next comes “subordinated debt,” provided by a state agency.
The third level is private investment, four investment units of $250,000 each. The private investors will each get 2.5% paid annually, Arbit says, plus tax advantages and return of their principal, yielding an after-tax return of just over 5%. Not a bad return even without the feel-good aspect of revitalizing a community.
The fourth tier consists of grants that will serve as a reserve fund until the other loans are paid back. When that happens, the grant will be available for other investments or services. For the nonprofit, the effective 25-year blended rate of capital is 3.5% to 4%, also not so bad.
Yes, it’s complicated but enticing. As government budgets are slashed, funding for nonprofits dries up. Enticing investors who want to be involved in social impact but also want a return on investment is a very good option.
Arbit is excited about the options. “This is on-the-ground and relevant to the larger national dialogue about economic prosperity and small business development,” he says. And he’s right. We need jobs. We need small businesses. We need strong communities. Impact investing brings all of those.
Now, if only there were something for those of us who have less than $250,000 to invest! Impact investing options are usually limited to “qualified investors,” those with a high net worth. The Calvert Foundation has a Community Investment note but, overall,direct impact-investment options for the general public are scarce.
Imagine the money that could flow to social impact organizations if we could all add a social impact investment fund to our 401 (k) or IRA? Yes, I want to help but I do need to retire with something in the bank.
What projects would you support as an impact investor?
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