A Path to Conventional Equity for CDFIs
Community Development Financial Institutions (CDFIs) have been lending and investing in low-income communities nationally for over 30 years and have established an impressive track record. The 1,300 CDFIs have total assets under management of $228 billion. CDFI performance over the period has been characterized by sound lending, low loss rates, and relatively low leverage—all of which contribute to their low risk financial profile. Over multiple economic and financial cycles, CDFIs have shown a tendency toward counter-cyclicality in terms of demand: in down-cycles, the need for their services accelerates as gaps in credit availability expand and capital availability decreases in low-income communities. CDFIs would be able to grow, expand their lending capacity, and serve their customers much more effectively if they could access equity from the conventional public equity markets. This is not currently possible due to a series of mostly technical market factors. If these technical factors could be addressed, conventional equity investors would be presented with an excellent opportunity to invest in well managed and strong performing loan portfolios that generate cash returns and experience steady and stable growth. There would be the additional benefit of providing essential investment to low-income communities, businesses, and individuals, and aligning with federal efforts on behalf of these constituencies.
This proposal takes a segment of the CDFI industry—non-profit loan funds with approximately $15 billion in assets on the balance sheet—and tackles each of the technical obstacles. Successfully implemented, the effort would result in direct access to the public equity markets on an unsubsidized basis and open the equity door to smaller and newer CDFIs and eventually a large segment of CDFI banks and credit unions.