One way to achieve a financial return while having a positive impact on society is to invest in economic development programs designed to achieve public policy objectives such as providing housing or jobs or combating poverty. climate change.
Enhanced Capital Group, a US $ 4 billion New York-based asset manager, has taken this approach for more than 20 years, channeling private debt and equity into public-interest enterprises, such as projects. solar on New Jersey rooftops and a mixed-use park. facility in New Orleans Ninth Ward providing educational and exhibition space and affordable housing for seniors. Government incentives, including tax credits and programs like Federal Opportunity Zones, are often part of the equation because they are created by governments to stimulate investment.
“We don’t just offer cash returns, we also offer some form of quantifiable metric-based impact,” said Michael Korengold, President and CEO of Enhanced Capital.
Before investing, the company ensures that each investment meets specific impact criteria, such as the creation of a specific number of jobs or demonstrable community revitalization. After investing, Enhanced Capital requires quarterly or annual reports on how their investment goals are achieving their goals.
The company’s investors, which include high net worth individuals and family offices as well as institutional investors such as banks and insurers, invest through separately managed accounts or in narrowly defined mandates that match their specific objectives, Korengold said. .
Banks, for example, may want to invest in a designated neighborhood that will allow them to meet their federal obligations under the Community Reinvestment Act, while individuals may want to restrict their investments to a specific state or city.
In addition to loans, investors can participate in “tax fairness” investments in renewable energy projects, historic building rehabilitation projects and low-income community businesses eligible for tax credits. “In these cases, investors receive tax credits and other tax benefits in addition to cash returns on their investments,” Korengold said.
Penta recently spoke with Korengold about Enhanced Capital’s approach to investing, which it does primarily in three areas: small business, climate change and what she calls impact real estate.
Small business financing
The company has primarily served as a small business lender since its inception, with a focus on low-income and underserved communities, including rural areas. The company also invests in businesses owned by women, people of color and veterans, and those focused on addressing climate change.
The loans it grants are often less than $ 5 million, which is a difficult amount for a company with growth plans to achieve, Korengold explains.
Community development financial institutions that work in low-income and underserved communities typically make much smaller loans, while smaller investment firms and business development firms focus on larger loans, typically greater than. $ 10 million.
“We find a lot of companies that are worth funding but just haven’t had that access to capital,” Korengold said.
About four years ago, the company granted Vertical Harvest, a female-run hydroponics farming company in Jackson, Wyo, a loan under the Wyoming Small Business Investment Credit Program. . Vertical Harvest used the funds to expand the operations of its vertical greenhouses, which provide a sustainable way to grow vegetables and fruits year round.
Recently, more and more investors, especially individuals and families, have become interested in funneling funds to businesses that are not only located in underserved areas, but are run by women and people. colored, Korengold said.
“People understand that there is a big capital gap, that solving this problem is going to be necessary to address some of the social ills that are plaguing the country,” Korengold said.
Climate change finance
Funding projects that deal with climate change are also at the center of investor concerns. This is because of the obvious need to address them as forest fires, droughts and severe storms increase, and because those investments can be for tangible things like solar panels or wind turbines.
“People see how they can make an investment that has a direct impact,” he says.
Many renewable energy projects in the United States have been built using federal tax credits. Enhanced Capital will invest in this kind of projects by financing the credits. “Instead of a cash return, [investors] get money and tax credits as part of their return, ”says Korengold.
The company has also invested in the underlying equity of renewable energy projects located in Opportunity Zones, which are skilled low-income communities across the United States. In 2020, as part of a multi-year partnership with Solar Landscape of New Jersey, Enhanced Capital invested US $ 5 million of equity capital in opportunity areas in North Bergen and Camden, NJ, for example.
The Solar Landscape project also involved nearly US $ 9 million in tax equity funding for community rooftop solar projects, which were also installed in Edison and Woodbridge, New Jersey.
Real estate impact
Some of Enhanced Capital’s investments straddle climate finance and impact real estate, such as those that finance energy efficiency projects in new and existing buildings. A strict impact real estate project can be a community revitalization effort, such as the restoration and reallocation of a historic building.
“We fund these projects as a lender, and we also fund the incentives,” says Korengold. “If this is a historic building, there are usually historic tax credits available at the state and federal level. ”
One example is the US $ 118 million redevelopment of the abandoned Copley Hospital campus in Aurora, Illinois. Enhanced Capital has partnered with Fox Valley Developers, a group of Aurora CEOs, to fund it. According to Enhanced Capital, the company provided a total of US $ 60 million in financing “through a bridge loan secured by historic rehabilitation tax credits and contributions from the Property Assessed Clean Energy (PACE) program of the town of Aurora, Ill., and equity capital to monetize tax credits for historic Illinois River Edge rehabilitation. ”
Korengold notes that tax credits aimed at achieving public policy goals are backed by Democrats and Republicans in US President Joe Biden’s climate and social policy legislation, known as Build Back Better, may be blocked, but Korengold is cautiously optimistic about the fate of some of its tax incentive proposals.
“Democrats support the public policies that these programs help fund and Republicans favor the free market approach to utilize and encourage private capital,” he said. “Whatever happens in Build Back Better, these incentives will likely continue to exist and this will create more opportunities for impact investors. “