Community Development Financial Institutions have not been well served by the capital markets. This, despite the fact that they have performed exceptionally well in managing risk over the past twenty years. The gap, however, is not due to the perceived credit risk of extending credit to low income communities and constituencies. It is due to two major factors: (1) the size of the transactions—i.e., scale; and (2) the differences between the methods and the metrics that CDFIs use to fulfill their mission and the methods and metrics that the conventional marketplace uses. These differences persist and are not likely to change.
- To provide unimpeded access to the stream of unrestricted long term equity funding for participating CDFIs.
- To familiarize the conventional preferred stock investor with the CDFI industry, and thereby lower the cost of market rate on preferred stock funding for CDFIs over time.
- To establish an avenue for common equity investment at low market rates into the CDFI sector.
Designers: This blueprint is being assembled by the Center for Impact Finance at the Carsey School of Public Policy at the University of New Hampshire.
Recipients of the Equity: Participating CDFIs will be able to obtain equity from the CDFI Equity Fund, to help finance their origination of new loans and recapitalization of old ones. This equity, the “CDFI Preferred,” will be a specialized form of preferred stock designed to suit the needs of CDFIs. There will be a minimum of 7 and a maximum of 15 CDFI participants in the project. At present, there are 12 participants including OFN, Chicago CLF, ROC USA, LIIF, Capital Impact Partners, Florida Community Loan Fund, Community Housing Capital, LISC, Capital for Change, New Hampshire Community Loan Fund, Pacific Community Ventures and Craft3.
Charles Tansey and Michael Swack outline a path to conventional equity for CDFIs in this working paper.