Table of Contents

Community investing is a growing trend and a very attractive one during this difficult investment climate. Every investor should have a diversified portfolio to minimize risk and achieve a variety of investment objectives. Community investing can be a healthy part of a diversified portfolio. Instead of negative returns in the stock market, depending on the investing vehicle you choose, you can earn a guaranteed market rate return.

The Social Investment Forum's 2001 Trends Report on Socially Responsible Investing reports that community investments grew by over 40% between 1999 and 2001. As of mid-2001, assets in community investment vehicles stood at $7.6 billion.

What is Community Investing?
When you put your money in a bank, it doesn't just sit there waiting for you to take it out. Banks make money by loaning and investing your money; seldom do they ask you what projects you want your funds to support. Your conventional checking account funds could be financing construction of a natural gas pipeline in the rainforest. They could be loaned to a company embroiled in sweatshop labor in China. Your CD might support construction of a big box store in your hometown; forcing small locally owned businesses to close.

Community investing provides financing for economically disadvantaged people in the U.S. and abroad that are traditionally underserved by financial institutions. It can help people normally deemed "unbankable" - a group of black farmers in South Africa, low-income housing developers in Kentucky, or the owners of a small food co-op in Oregon. They are too poor, too inexperienced or too high-risk to receive a loan from a traditional financial institution, but with loans from community development institutions, they can reach their goals.

That's why the Social Investment Forum Foundation and Co-op America have launched the 1% in community campaign. If every socially responsible investor moves 1% of his or her assets into community investing, it will add $10 billion to rebuilding low-income areas around the world by 2005. The Calvert Foundation calculates this can finance 10 million U.S. micro-enterprises (45 million worldwide) or almost 2 million small businesses. Quite an impact!

Many institutions and investment professionals participate in the 1% campaign. Investing in them is another way to contribute to community investments. Large institutions like the General Board of Pensions of the United Methodist Church and Fannie Mae Foundation, for example, participate. Many SRI advisors participate, among them Progressive Asset Management, Progressive Investment Management and Trillium Asset Management. And many SRI mutual funds participate including Domini Social Investments, Portfolio 21, and Walden Asset Management.

California Public Employees' Retirement System (CalPERS), the nation's largest pension fund with $132 billion in assets, reports its Single Family Housing Program is single highest returning investment category for the past 10 years. The program has returned over 20% a year since inception ($500 million) while building 32,000 homes in 200 California communities. Over the last three years, the strong performance of these community investments has cushioned against the poor performance of equity investments.

How Community Investing Got Started
Race riots during the 1960s shook the foundation of America's urban core but it also planted the seeds for community investing - a new economic movement dedicated to rebuilding and supporting impoverished communities. It started largely from the efforts of religious groups.

"We were concerned about racist policies and how they kept people poor. We realized there was a need for social justice beyond charity," explains Sister Corrine Florek, of the Adrian Dominican Sisters, one of the pioneers of community investing. Instead of giving grants they started calling community groups asking them if they could use a loan. This group of fewer than 10 nuns began loaning their retirement money, charging minimal interest, with no assurance they would ever get it back.

"It was a total risk. Collateral was not a word in our vocabulary," Florek recalls. "We just had a promissory note that said the amount loaned and the date it would be due. We learned by doing."

The Sisters first issued loans of $5000 - $10,000 to borrowers who generally couldn't qualify for or afford a loan from a traditional financial institution. 100% of the early lendees paid them back, with interest. Today, 200 loans later, their loans average $35,000 and their loan fund stands at $3 million!

In 1977 The Community Reinvestment Act passed, which requires federally insured banks to shift part of their funds toward community investment. In the mid-80s, the Interfaith Center on Corporate Responsibility (ICCR) connected a wide range of congregations through the Clearinghouse on Alternative Investment, a network that encourages community investment in low income and minority communities around the world.

Today, there are about 40 community banks, 200 community credit unions, 200 community loan funds and about 70 community venture capital funds. The most recent National Community Capital survey finds that this money has financed 125,000 housing units, 16,000 businesses, and 2300 Community service organizations, while creating 150,000 jobs.

Frequently Asked Questions

How can I get involved today?
You can achieve the 1% goal just by opening a bank account with a community development bank or credit union. Community development banks offer competitive interest rates and are federally insured up to $100,000 - just like any other bank. Thanks to electronic banking you can deposit with any bank, anywhere. Your paychecks can be deposited automatically and you can move funds around electronically. Keep the minimum amount necessary for a free checking or savings account at a conventional bank that has lots of ATM machines. Or write a check from your community bank to the conventional bank once a month to cover your cash needs.

Choose a bank based on what you what your money to support. If you want your money to be invested locally, choose a bank in your geographic area. Or choose a bank that specializes in your area of concern whether it's supporting conservation initiatives, green businesses or affordable housing.

What other options are available?
Community Investment Funds. These are generally longer-term investments (one to five years), offer market or below-market returns (0-4%), and are not insured. These vehicles have the highest impact of all the options because investor money is tied up for a longer period of time and the money can reach the highest risk borrowers who need it the most.

* Community Development Loan Funds (CDLFs) provide affordable financing for housing and economic development projects, cooperatives, and community- based nonprofits. Although they are not insured, they use grants and loss reserves to help protect investors. Most CDLFs have a minimum investment, averaging around $1000. Investors generally receive interest payments quarterly or annually; once the allotted time is up, the CDLF repays your money. Most set a minimum loan period of at least one year. If you can't afford the minimum, most funds accept deductable charitable donations in any amount.

* Microenterprise Loan Funds provide small loans and training to entrepreneurs in the US and overseas.

* Community Development Venture Capital Funds (CDVCs) provide loans to businesses that create jobs in low-income communities. Like traditional venture capital funds, CDVC funds invest in companies with strong management, impressive growth potential, and the prospect of high financial returns. Unlike traditional funds, they also consider the number and quality of jobs that will be created and the business's impact on the community. CDVC funds also provide extensive management assistance. They may sit on a company's board of directors, help win contracts, assist in designing budgets, and help line up more financing. Minimum investments range from $50,000-$500,000 and typically run for 10 years. Loans to nonprofit CDVCs may have lower minimums. The CDVC industry is young and funds typically haven't completed full investment cycles, so there are no definitive statistics on returns. More mature funds indicate they expect returns in the 8-12% range.

* Pooled Investment Portfolios are a great option if you want to diversify your community investments. You invest through one facility, which spreads the money out within a pool of institutions that serve many low-income areas in a variety of ways. By purchasing a Community Investment Note through the Calvert Foundation, for example, you can even specify a geographic region or international program for your money.

* Mutual Funds. Some SRI funds devote up to 10% of their assets to community investing, and two even put 100% of their assets into underserved communities.

Why not just give the money to charity?
Community investments can have a much higher impact.

Example: New Forest Vegetable Project
In South Africa, A U.S. community loan fund gave 16 black women in South Africa the start they needed. As you can imagine, bank after bank turned the women away when they found they had little farming experience, hardly any resources, and barren land to work with!

What they did have was persistence and a local community development institution called the Bushbuckridge Local Business Service Center (BLBSC) agreed to help them. BLBSC secured a commercial bank loan on their behalf by turning to a U.S.-based international guarantee fund established specifically for that purpose, Shared Interest.

Shared Interest helped BLBSC get a $709,000 loan for the women, and they launched the New Forest Vegetable Project. The project quickly became successful, growing 175 tons of top-grade tomatoes in their first harvest.

Today, three years later, each woman owns her own greenhouse and employs four other women - 80 women in total. Their tomatoes and peppers are sold throughout the country via a farming network.

Investors who are willing to loan their money for 5 years, with 2% interest, fund Shared Interest. The fund started in 1994 and currently manages $6.2 million from 140 individual and institutional investors. Though the fund is not insured, Shared Interest has repaid every loan.

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Further Resources:

Community Investment Guide: lists community investment banks/ credit unions, loan & venture funds, mutual funds.

http://www.communityinvest.org: see the streaming video!

Social Investment Forum: database of social investment advisors and mutual funds.

Association for Enterprise Opportunity: www.microenterpriseworks.org

National Community Capital Association: www.communitycapital.org

Community Development Venture Capital Alliance: www.cdvca.org

Now that you have decided you would like to put 1% of your money into community investments - which institution(s) should you invest with?

The 1% in Community Campaign sponsored by Co-op America and Social Investment Forum recently praised the leading "green banking/investing organizations," many of whom we interviewed for this article: Chittenden Bank (Brattleboro, VT.); Permaculture Credit Union (Santa Fe, NM.); Self-Help Credit Union (Durham, NC.); ShoreBank Pacific (Ilwaco, WA.); Wainwright Bank & Trust Company (Boston, MA); Coastal Enterprises, Inc. (Wiscasset, ME.); Vermont Community Loan Fund (Montpelier, VT); Rudolf Steiner Foundation (San Francisco, CA.); Sustainable Jobs Fund (Durham, NC.); Underdog Ventures, LLC (New York, NY.). They are leaders in the environmental side of community investing.

The vast majority of community investments go to affordable housing. The easiest way to invest in this segment is to invest locally. If you want to invest specifically in environmental projects it's easier to choose because there are fewer choices. The following are profiles of some of the environmental choices.

Banks & Credit Unions

Wainwright Bank & Trust Company (WAIN: Nasdaq), Boston, MA.
www.wainwrightbank.com

Founded in 1987, Wainwright Bank is a model for socially responsible banking. It has assets of $500 million and serves neighborhoods in and around Boston. 40% of its commercial loans are in community development: affordable housing, homeless shelters, HIV/AIDS service, community health centers, and environmental protection. Over the past 10 years, Wainwright loaned $250 million to community development initiatives.

On the environmental side, the bank finances the purchase and preservation of land including New Hampshire's Connecticut Lakes property, the largest unbroken tract of privately held forestland in the state. It provides lines of credit and other types of short-term financing to nonprofits like Silent Spring Institute (Newton, MA.), a research institute focused on the link between environmental exposure and breast cancer. WAIN provided a working capital line of credit to Earthwatch Institute and financed the Union of Concerned Scientists headquarters, among others. It screens all its investments based on social and environmental criteria. Its GreenLoan home equity loan gives a discounted rate to people that install solar energy systems.

Wainwright's environmental policy emphasizes internal recycling, use of recycled paper and paper reduction, energy conservation, and subsidizes employees that use mass transit. WAIN is a signatory to the CERES Principles and publishes an annual corporate environmental report. Although the company has examined using renewable energy it hasn't taken that step yet.

Lower income customers get free Basic Checking and Savings accounts with no minimum balance. 1st time Homebuyer and Affordable Mortgage Programs include lower rates, lower down payments and reduced closing costs.

Turnover is low, at 8% for general personnel and only .007% for senior personnel!

ShoreBank Pacific: (3 locations in Washington, Oregon)
www.eco-bank.com

The first environmental bank in the U.S., ShoreBank attracts depositors from around the country even though it lends only to businesses in the northwest. "The culture here is more receptive to environmental business and the natural resource base of the economy makes it perfect for us, explains Laurie Landeros, Marketing Director. "We're hoping banks across the nation will pick up on our programs and start replicating them." ShoreBank opened in 1997 in Ilwaco, WA. In 1999 they opened an office in Portland, OR. and last year they opened another office in Olympia, WA.

ShoreBank's goal is to create a sustainable economy and lends only to small businesses that are pursuing sustainable practices. The People's Food Co-op in Portland, OR. is a typical borrower.

While they would have had a hard time convincing a conventional bank to loan a co-op funds for a new building, ShoreBank gave them $388,000 precisely because of that and the fact that they would incorporate green building practices. Other borrowers have created an environmentally focused school, expanded an organic dairy, and used certified wood to manufacture furniture. The bank also assigns staff to help potential borrowers reduce waste and pollution, and conserve natural resources.

Permaculture Credit Union, Santa Fe, NM.
http://www.pcuonline.org

The web site says, "The history of financial institutions is one of focus on the bottom line which results in overexploitation of the earth's resources. Now, an innovative new financial institution - Permaculture Credit Union - allows its members to share their excess with other members of like mind who would use it for sustainable projects and, at the same time, take care of the Earth." Now that's a bank!

Started in 2000, Permaculture has $2 million in assets. Anyone that "adheres to the principles of permaculture" can be a member. Members have access to the usual array of bank services and are eligible for low-interest loans for environmentally conscious projects. The credit union invests the rest in other local credit unions and socially responsible financial institutions.

Any member can apply for a small loan of $5000 -30,000 at discounted rates. "We've helped people finance putting cisterns and solar panels in their homes, and buy hybrid vehicles," says Michelle Lowry, General Manager. Only members in New Mexico and California can access larger loans such as mortgages right now. They plan to expand these services nationwide.

Their Sustainability Discount Program provides a .75% interest rate discount for projects that are for: home energy efficiency upgrades; renewable energy generation; permaculture landscaping; water catchment and delivery; farm machinery; and fuel efficient automobiles that average 35 mpg (an additional .75% discount for vehicles that exceed 45 mpg).

Chittenden Bank, Vermont.
www.chittenden.com

A third of Vermont households are customers of this $2.8 billion Bank. Chittenden is Vermont's largest, full-service bank with 60 offices throughout the state. Chittenden has consistently earned an "Outstanding" rating for Community Reinvestment Act (CRA) performance, meaning that it meets the needs of local communities.

On the environmental side, Cynthia Gubb, Director of Community Development Services, points to their conservation loans. "We work with the Vermont Land Trust to conserve prime agricultural lands. We'll work with a family farm to finance that kind of project. We finance renewable energy projects for peoples' homes."

Chittenden has an innovative program where customers can dedicate some of their interest to subsidize the interest for a borrower in need. They then discount interest rates on loans to community groups, educational institutions, small family farms, conservation groups and downtown revitalization projects.

Our of a total 1610 loans worth $113 million:
- Environment: 357 loans, $31 million
- Affordable housing: 235 loans, $22 million
- Business & economic development: 621 loans, $19 million
- Downtown revitalization & community building: 240 loans, $24 million
- Education: 157 loans, $17 million

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Another way to put your money to work for community is to purchase shares in mutual funds or work with financial advisors that participate in the 1% campaign. Many SRI funds and advisors do!

Portfolio 21 mutual fund/ Progressive Investment Management
www.portfolio21.com
www.progressiveinvestment.com

Progressive Investment Management is a community investing pioneer, dating back 20 years. The only community investing option in the early 1980s was South Shore Bank in Chicago (now called ShoreBank).

CEO Carsten Henningsen recalls: "I flew out and visited South Shore Bank and toured the neighborhoods they were helping. I talked to people whose lives had changed for the better. It had a tremendous impact on me to see the power of what money can do if it's directed in the right places. I brought that excitement and passion back to Portland (OR.) and we started sending South Shore more and more deposits. Over the next few years, South Shore told us most of the money they received outside Illinois was from Oregon."

Progressive kept educating its clients and directing increasing deposits into community investing. They helped start three community investing banking programs in Portland. They helped raise venture capital funds to start Albina Community Bank, which directs money to economically disadvantaged areas in northeast Portland. They convinced a conventional bank in Portland to create a community investing division - they call it Progressive Banking. And they helped ShoreBank Pacific get off the ground.

Then Progressive went to the next step and integrated community investing into client portfolio allocations. Say you've got 50% in stocks and 40% in bonds, how about allocating 1, 2, 3, 5, or 10% in community investing? Progressive researched and chose several financial institutions they considered good community investments, giving clients a number of options (usually CDs in a bank or loan fund). That's been very successful according to Carsten. Progressive cuts its management fee in half for money that goes to community investing.

Now, they are working as part of a Social Investment Forum committee (the professional association for SRI money managers) to help money managers get more involved in community investing. Logistics in tracking and reporting are a barrier. If a manager puts a client's money into a bank or loan fund, each institution has to send a statement. It takes a very committed money manager to manually enter it into their computer system so it shows up on client reports, and to track down the statements that inevitably don't arrive. The solution: get major custodians like Schwab and Fidelity to hold these accounts the same way they hold clients stocks, bonds and mutual funds. Then reporting is automatic. Schwab recently agreed to hold ShoreBank.

Progressive and the group's mutual fund, Portfolio 21, participate in the 1% campaign, committing at least 1% of assets in community investing. Investments from Portfolio 21 go to ShoreBank Pacific and Permaculture Credit Union, consistent with its sustainability mission.

As I researched this article it struck me that the lions share of community investing dollars goes to affordable housing. Do funds take sustainability criteria into account, such as whether it contributes to sprawl or the materials used to build it?

Carsten replied: "I think the community investing segment focused on housing hasn't yet caught up with environmental sustainabilty wave. Community Investing has its roots in the '70s; that's when many of the organizations were established. The idea of sustainability is new to them and they need to be educated about it. Likewise, many people passionate about sustainability don't know anything about community investing. Folks like ShoreBank Pacific and Portfolio 21 are not the norm.

Trillium Asset Management
www.trilliuminvest.com

Trillium is another community investing pioneer, also for the 20 years the company has been in business. Many clients invest some of their assets in community instruments. It's rare to have staff devoted solely to community investment - there are two at Trillium. Like many money managers and mutual funds most investments go into CDs or loan funds.

When a client starts working with Trillium s/he completes a profile that covers her concerns and interests. Trillium then recommends community investment entities that fit the profile either based on geography or area of concern. Staff continually researches investment funds and keeps an "approved" list. They usually suggest clients diversify across several banks and loan funds.

They send deposits to about 10 banks and credit unions: ShoreBank, Elkhorn Bank (AK.), Wainwright Bank, Chittenden Bank, Self Help Credit Union, Vermont Credit Union, among them.

What are some of the criteria for the "approved list?" According to community investment officer, Linnie McClean, first they look at an organization's credit worthiness. How stable is management, how are they financed, and what is their capital base? Then they examine who they serve and whether there is there a need for what they're doing.

Are some loan funds riskier than others? Yes, definitely, Linnie says. Loan funds with a longer history tend to have a bigger staff and a more experienced, stable Board. Some funds are more vulnerable than others because of economic conditions or the domain they serve. For example, a foreign operation would be effected by changes in currency. Or a rural organization that concentrates on farming would be affected by drought. Most funds are involved in housing because they are more experienced in that than they are in small business development.

Trillium works with about 25 loan funds, mostly with long histories such as Axion, Boston Community Loan Fund, Cascadia Revolving Fund, Chicago Community Loan Fund, Greater New Haven Loan Fund, Institute for Community Economics, Lakota, Mercy Housing, and New Mexico Community Loan Fund. Linnie says she looks for new organizations to fill in gaps. Ecologic Enterprise Ventures (Boston) is an interesting one, she says. They work on biodiversity in Latin America.

I asked her if you she knew of funds that focus on housing but also consider the environmental issues associated with housing like sprawl and green construction. "I don't know any loan fund that clearly says 50% of our funds go to housing projects and we make sure the projects meet environmental criteria. I'm looking for unique loan funds like that," remarks Linnie. "It would be great if a fund said we're environmentally focused and this is how we measure our results."

Like Carsten, she points to the fact that housing was the focus at the beginning of the community investing movement. As a society people need affordable housing - this was identified early on as a void that could be addressed, she explains. Since that's been the area of concentration, people have learned how to finance these projects better than some other areas. "I don't think people know how to do environmental housing projects," she says.

"The environmental overlay is the next level. When people build affordable housing they're thinking about is putting up a house that's acceptable according to the housing codes and that gives people shelter. They don't necessarily think about energy efficiency, ventilation, and materials. They needed to be educated."

The New Alternatives Fund, another environmental mutual fund, also participates in the 1% campaign. It invests in ShoreBank, Alternatives Credit Union (Ithaca, NY), Community Capital Bank (Brooklyn, NY.), Self Help Credit Union (Durham, NC.) and Chittenden Bank, some of the oldest banks. Although New Alternatives invests only in environmental companies, they see the community investing side as adding a social component to their investments. Therefore they invest in banks for housing and community improvement. www.newalternativesfund.com

The Progressive Asset Management (PAM) Network, a national association of social investment advisors, also participates in the 1% campaign. The group has directed several million dollars of client deposits to ShoreBank Pacific. www.progressiveassetmanagement.com

Finally, the Access Capital Strategies Community Investment Fund is a mutual fund that invests only in community investments. It started in 1998 and has $300 million in assets, investing in 30 states and Washington DC. The fund most concentrates in affordable housing to facilitate home ownership for people who earn below 80% of the median income. The fund customizes investments for its 90 investors - the minimum investment is $500,000. Investors can stipulate where they want their money to go: to minority lenders or to a specific geographical area, for example. The return is currently 8.14%.

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Community Development Loan Funds (CDLFs)

Calvert Foundation
www.calvertfoundation.org

If you would like to invest some money in loan funds, would like to diversify across a number of funds and don't feel like doing the research, a Calvert Community Investment Note might be for you. Your investment enters a loan pool, which is dispersed among 185 borrowers: community development banks, loan funds and micro-enterprise organizations. The majority of the portfolio goes to a variety of community development loan funds. You can open an IRA using this vehicle too.

1500 individuals and institutions have put over $38 million into the program thus far. You can start with as little as $1000. Investors instruct Calvert to invest their money either in a particular geographic region or in a sector: housing, micro-lending, small business, or community development. Investors choose a fixed rate of return, between 0-3%, and the term: one, three or five years. The "social return" calculator on their website shows, for example, that a one-year, $1000 investment can build or renovate 14 homes in Africa.

Nikkena Powell of Calvert explains, "Someone who invests in our note is looking for a balance between social and financial return. The lower the interest rate you choose the more social return you have. We don't have to pay you back as much interest, so more money stays in the loan pool and is lent out. If our interest rate is lower, that means we can lend to borrowers at about 4% instead of 14% - they don't have enormous interest rates to pay back. It's really a balancing act. If an investor picks 0% they're picking a completely social return. If you pick 3% you're picking much more of a financial return - in this market is very competitive. The rates change with the times - we used to give more like 6%."

The vast majority of borrowers are involved in affordable housing development or helping small businesses. About a dozen groups specifically have an environmental focus. They include Shorebank and Wainwright Bank, Coastal Enterprises and Cascadia Loan Funds. Ecologic Enterprise Ventures (MA.) provides loans to fair trade/ organic coffee producers in Latin America. Environmental Support Center (Wash DC.) provides loans to environmental groups in their local area. Corlands (Chicago) purchases land to preserve it. They also loan to the Institute for Local Self Reliance and the Environmental Enterprises Assistance fund, a green business venture capital fund. About $1.5 million out of a total portfolio of $42 million goes to environmental funds.

ShoreBank Enterprise Pacific
http://www.sbpac.com

ShoreBank Pacific and Ecotrust started this nonprofit community development loan fund in 1995. ShoreBank Enterprise helps rural sustainable-oriented organizations in the region by providing business development, management and financial assistance. They work with start-ups in the fishing, forestry, farming, tourism, real estate and community development industries. ShoreBank Enterprise does both debt and equity financing. When they get the business to a bankable level ShoreBank Pacific make take over financing.

They focus in helping entrepreneurs dedicated to preserving the northwest temperate rainforest. Some of the businesses the loan fund has helped include: Rainforest Kayak Adventures, Natural Life Furnishings (uses certified wood), Evergreen EcoForestry, and Goosepoint Oysters.

Cascadia Revolving Fund
www.cascadiafund.org

Cascadia is a nonprofit community loan fund that helps businesses in Washington and Oregon that can't access traditional financing and support. Like its peers it provides business development assistance along with financing. Over 17 years, it has given 340 loans totaling over $20 million. The median loan amount is $26,000.

Cascadia's goal is to help entrepreneurs start and grow successful businesses to bring jobs and economic prosperity to distressed urban and rural communities in the Northwest. They help businesses owned by low-income people, women, immigrants, and minorities with significant potential for job creation, that preserve or restore the environment and/or build community. Some of the businesses they have helped are: Shoreline Natural Medicine Clinic, Columbia Pacific Food Bank and Marquez Child Care Center.

About 230 investors, 80% of whom are individuals, provide the bulk of Cascadia's capital. It funds its operations from loan interest and fees. Although this type of loan is considered high-risk, Cascadia's loss rate is a remarkably low 1%, rivaling that of major banks. No Cascadia investor has ever lost money.

Cascadia is helping to mold national policy as an active board member of National Community Capital Association and provides advice to sister loan funds around the world. They were honored with the Presidential Award for Excellence in Microenterprise Lending in 1997.

Coastal Enterprises, Wiscasset, Maine
www.ceimaine.org

CEI has been helping communities in Maine since 1994. It has a program for every aspect of community development from affordable housing to micro-lending to sustainable economy. Typical loans are in the $75-$250,000 range for job-creating, innovative manufacturers and other employers. CEI's Enterprise Fund is one of the leading microlenders, financing up to $50,000 for small minority or women-owned businesses, child care providers and other businesses unable to obtain loans through conventional means. Typical loans are in the $10-25,000 range. CEI also provides technical assistance to borrowers. CEI also has a small venture capital fund that reaches beyond Maine's borders to invest in businesses in neighboring states.

There are several loan funds targeted toward building a sustainable economy. The Fisheries Loan Fund lends to marine-related enterprises to develop and maintain a sustainable fishery and industry infrastructure. The Sustainable Agriculture Loan Fund finances small farmers, food processors and related ventures that add value to sustainable agriculture. The Green Fund finances businesses with sustainable products or those that need help greening their operations.

Community Development Venture Capital Funds (CDVCs)
http://www.cdvca.org

A recent report by the Community Development Venture Capital Alliance (CDVCA), the trade association for community development venture capital funds, shows that traditional venture capital (VC) is very narrowly focused on urban companies in just five states - California, Massachusetts, New York, Texas, and Colorado.

That leaves the rest of the country that venture capital professionals often call the "fly-over states" for community development venture capital (CDVC) funds. They can be found in the poorest counties of Kentucky, the old Iron Range of northeastern Minnesota, East Palo Alto and Roxbury, MA. Over the past 10 years the CDVC industry has grown from just a few funds to 80 funds, managing a total of $554 million in capital.

Some of the most successful funds have already raised $60 million in second CDVC funds: Coastal Ventures, Inc.; Pacific Community Ventures; The Reinvestment Fund; Boston Community Venture Fund. The two oldest funds are Kentucky Highlands Investment Corporation (London, KY) and Northeast Ventures Corp. (Duluth, MN.). Investors in the older funds are seeing returns in the high single to low double-digit range.

The CDVCA has its own fund - a "fund of funds" that invests in many of its member's funds. Like the Calvert Pooled Note for loan funds, the CDVCA fund is a good choice for investors that want to invest in a variety of venture capital funds and would like to rely on CDVCA's expertise in choosing them. CDVCA also makes direct equity investments in businesses as a co-investor with member funds.

Like conventional VC funds, CDVC funds raise pools of capital mostly from banks and foundations, but also from government and individuals. They invest in companies with strong management, strong growth potential and solid financial returns just as traditional VCs do. Many funds also work with angel investors to structure co-investments.

How do they differ? CDVCs also look for equally strong social returns. 49% of CDVC investments are in the manufacturing sector - typically ignored by traditional VCs - because it offers value-added products and creates lots of jobs. CDVC funds diversify investments across industries more than traditional VCs, which tend to focus on technology. Investments tend to be smaller, typically in the $50,000 - $1.5 million range compared to the $14.8 million average traditional VC investment.

VIDA, located in the San Francisco Bay Area, is a good example of a CDVC portfolio company. The company makes furniture using recycled and certified materials. A CDVC called Pacific Community Ventures made a $250,000 equity investment in them because they have a strong brand and high potential growth. And they hire skilled and semi-skilled workers from low-income local neighborhoods, providing good salaries and benefits, and have an environmental mission.

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Progressive Investor interviewed Kerwin Tesdell, President of CDVCA.

PI: What does CDVCA do?

Kerwin:

CDVCA was incorporated in 1995. We provide training and technical assistance to community development VC funds. We help people structure new funds, show them how to raise capital, and educate them on the kinds of expertise they need. We do market studies, business plans, offering memorandums, help them find a fund manager. We do advocacy. We got a couple of new federal programs enacted. We operate our own fund.

PI: Are their Community Investing counterparts outside the U.S.?

Kerwin:

We're trying to set that up. We're going to have a major meeting in Italy about this. There are funds that are similar to community development VC funds in the UK. They are funded largely with donor agency money. We're helping several groups start funds in Nigeria.

PI: Most funds seem to be more involved in the social than the environmental side.

Kerwin:

Many of our funds have environmental aspects, but our focus is community development - creating good jobs. Sustainable development is an important part of community development - they go hand in hand.

It used to be if you had a high school education - or even if you didn't - you could get a job at the auto plant or the iron mine and earn a decent wage, have health benefits and support your family. Those jobs are disappearing or have disappeared. Our funds ask the question: where in the new economy are jobs for people without computer science Ph.D.'s? In rural areas they tend to be moderate sized manufacturing companies; in more urban areas they tend to be service companies.

Some funds like the Sustainable Jobs Fund and the The EcoEnterprises Fund, focus on environmental businesses.

PI: What are some of the issues in community investing that people are wrestling with right now?

Kerwin:

One of the issues we're dealing with as an industry is how to exit investments. When you make a loan - it's clear how you cash out. When you make an equity investment it's not clear. Traditional VCs look for an IPO or for the company to be acquired. It's a problem for community venture capital because the companies tend to be smaller. Just as there are few VCs focused on this group there are few investment bankers helping them merge, find a buyer or go IPO. We work very hard with the companies to find alternative ways to exit the investment. We have more management buy-backs, for example.

PI: I would think a management buy-back might be preferable given the philosophy of community investing. Is constantly pushing companies toward IPO's best for our economy?

Kerwin:

Yes, I agree. We're examining using ESOPs (employee stock ownership plans) as exits. The problem is that often lowers the financial return. If you give up too much on the financial side you're not going to attract investors. We try to strike a balance.

Finding the deal flow - the companies to invest in - is another challenge. A traditional VC fund throws out business plans that don't have three guys from Intel who graduated from Stanford Business School as the leadership team. Our funds are in places like southeastern Kentucky and Appalachia - they get imperfect business plans and they work very hard with the entrepreneurs to help them build successful businesses. A traditional VC might look around southeast Kentucky and say there aren't any deals there. Kentucky Highlands, a CDVC there, works with local entrepreneurs to make their deals investable.

The funds are generally in the $5-50 million range and tend to get set up where people perceive a need - in areas of high unemployment, and in need of economic revitalization.

PI: Where do you see community VC industry going in the next 5-10 years?

Kerwin:

I think our industry has done a lot of experimentation in pioneering and developing this concept. Now we need to turn into a regular industry with best practices, standards, capital providers, and information about the financial and social returns we're producing. That's another challenge: for us to articulate and quantify the social returns we produce.

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To learn about individual CDVC funds, see these short profiles.