Guarantees Making a Difference

Where We Started

In 2019, a team of national and local impact investors came together to create an innovative way to advance community impact in affordable housing, climate, and small business with particular attention paid to advancing equity. These investors saw tremendous potential in creating a guarantee pool that could backstop promising projects and allow capital to flow to borrowers who faced challenges in accessing the resources needed to launch and sustain their projects. The result of this vision, the Community Investment Guarantee Pool (CIGP), is a platform for guarantors to deploy financial guarantees jointly and efficiently in the affordable housing, climate, and small business sectors. Two years later, CIGP is already proving itself a unique tool for impact, one that unlocks vital “but-for” dollars for projects headed by diverse stakeholders.

In addition to helping financial intermediaries manage risk and increase equitable access to capital for businesses on the ground, CIGP is committed to working with beneficiaries to develop insights and share learnings about the impact of this guarantee pool. For investor guarantors, the pool enables them to realize more transactional efficiencies and risk sharing benefits than they would issuing guarantees on their own. As a financial innovation and learning pilot, CIGP continually tests its own effectiveness as a model in the hopes that the lessons learned can inspire more philanthropic investors to leverage financial guarantees for mission-advancement.

A full theory of change has been developed that articulates the CIGP model, its expected outcomes, and its impacts. A key feature is to deploy financial guarantees that will catalyze additional investments totaling at least five times the guarantee amounts in the affordable housing, small business, and climate change sectors with a core focus on racial, gender, and economic equity. However, the CIGP model faced several early unknowns that would require intentional learning. Would there be a market need for guarantees in these sectors? How would this be impacted by the pandemic? How should the pool operationalize its racial, gender, and economic equity focus? Would beneficiaries be willing to pay for the guarantees and secure the CIGP model’s sustainability? Would guarantees truly shift behavior and help the community development marketplace advance equity?

Where We Are Today      

As CIGP enters its third year, it is too early to definitively answer many of these questions, but an active evaluation and learning program is in place. Some of the unknowns are being illuminated such as the demand for the guarantees, its potential for leverage, and its effect on advancing racial equity in community lending practices. To date, CIGP has deployed $16.6M of its $38.1M guarantee pool across five affordable housing and two small business guarantees. These guarantees are expected to support up to $146M of underlying financings – well more than CIGP’s target of unlocking 5x additional capital. Moreover, the guarantees are already enabling projects to move forward that will ultimately provide 1,200 affordable homes and the retention/creation of over 550 small business jobs. There are also early signs of promise with respect to CIGP’s racial equity objectives. For example, all affordable housing lending enabled by CIGP’s guarantees have gone to BIPOC-led or owned developers.

A Caste-Study in Guarantee Use

For MoFi, one of two small business beneficiaries in CIGP’s current portfolio, the $500,000 guarantee extended from the Pool provided this Montana-based CDFI with additional downside protection for a new working capital loan called Thrive that the organization developed for small businesses damaged by the pandemic who lacked access to bank financing. With two years of interest-only payments at an affordable rate along with a six-to-seven-year term, these loans provided entrepreneurs with a longer runway for recovery. In addition, MoFi focused outreach to communities that had the least access to conventional financing: businesses in low-income communities, and businesses owned by low-income people, women, and entrepreneurs of color. To better access these markets, MoFi partnered with Native CDFIs and used outreach strategies adapted from other lenders with success lending to Latinx business owners.

Early results are encouraging. Since launching Thrive in the spring 2021, MoFi has made 87 loans totaling nearly $5M through October – ahead of its own projections and about halfway to its overall volume target of $10M for the program. Approximately 33% of borrowers are female entrepreneurs and 20% of borrowers are BIPOC entrepreneurs. In describing the role of the guarantee,MoFi CEO Dave Glaser noted, “the value proposition the guarantee provides is clear; it enables CDFIs to be more of who they need to be. When we launch new products, having a guarantor come in and work with us to mitigate some of the risk is empowering on many levels. Most importantly, it allows us to reach further, and help underserved communities across the country through innovation.”

Opportunities for More Impact

In addition to its current portfolio of guarantees, CIGP has developed a pipeline of over $100M in future deals across all geographies and sectors including climate change, where it has adopted a more deliberate opportunity sourcing strategy. To meet this overall demand, CIGP plans to substantially increase the Pool’s capacity by adding new guarantors in 2022 and 2023.

These early successes demonstrate how CIGP can be a valuable resource for community development finance; however, there is still work to do. While all guarantees have been to Community Development Financial Institutions (CDFIs) so far, the CIGP team is now working with other types of beneficiaries to explore potential guarantee use cases, particularly in the climate change space. Additionally, the use of unfunded non-governmental guarantees has less precedence in the climate sector and will require continued market education. With the prospect of meaningful federal investment to accelerate the transition to a low carbon economy, CIGP’s guarantees could enable community development organizations to play a more leading role in this transition and to help leverage public dollars for greater climate justice.

A Focus on Learning

To help address these and other questions, a team of experienced evaluators and learning leaders led by impact evaluation expert and field builder, Jane Reisman, will provide a five-year emergent learning assessment to evaluate CIGP’s impact, make real-time adjustments to improve positive impact, and ultimately share formal learnings with the field. Additionally, work is underway to engage a consultant to help CIGP fully build its racial equity vision into its processes and procedures. And finally, CIGPs has established Financial Advisory Teams consisting of over two dozen experts in climate change and affordable housing (a small business advisory team may be launched pending funding). These teams bring diverse experiences and perspectives to CIGP, helping the pool be inclusive and expansive in its approach. As with the evaluation work, these teams will produce learnings that will inform the field about the role of guarantees in community development and their respective sectors.

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