Earlier this month, we reported a emerging American trend where philanthropists provide "first loss" capital for private investment.
The idea works as follows. Investment ideas that pursue political outcomes – such as education or environmental sustainability – generally do not generate enough returns to attract private capital. But if philanthropic capital assumes the bulk of the risk, private money will flow.
Here is the latest example of the emerging complexity of philanthropic capital structures, in a article earlier this week of Impact Alpha. He describes a new fund, supported by the Chan Zuckerberg initiative, aimed at providing affordable housing in San Francisco.
The organization linked to Facebook will provide $ 40 million, which "will serve as equity" and will be "given without waiting for financial return". Here is the key line:
The large amount of concessional capital – actually a grant – allows the new fund to provide affordable housing developers with lower-cost loans and other attractive terms – and to attract new investors with competitive returns.
The investment fund raised $ 260 million out of a total of $ 500 million. He attracted capital from Morgan Stanley, according to a Press release last week. This publication also mentions the Ford Foundation, which we mentioned in our last message, as well as many other foundations involved in the larger project, including the San Francisco Foundation and the William and Flora Hewlett Foundation.
For the American foundations, the losses themselves have a certain value, because they account for the obligation to distribute (or "lose") 5% of their holdings each year, so as to remain exempt from any tax. tax. At a high level, you can see a conceptual substitution between the tax "losses" on the one hand and the "first losses" on the other.
The investment fund already lends $ 6.5 million to the East Bay Asian Local Development Corporation. The ultimate logic is that concessional capital (also called "catalytic capital", also referred to as "first loss capital" above) allows loans provided by the fund to be cheaper than the market would provide. These loans, to developers, will in turn enable them to provide more affordable housing in developments that "also include units at the market rate".
As you may have noticed, the whole principle is analogous to what a series of government grants are aimed at. As the Impact Alpha article points out, people who earn 60% of the average median income are eligible for federal tax credits for affordable housing. The philanthropic approach targets those who earn more but still struggle to find affordable housing.
When the government provides grants, it potentially benefits private companies or investors, as much as it benefits the targeted political group that it intends to subsidize in one way or another. That is why private interests are trying to influence or capture the government's decision-making process.
The same is true of charity. Or, as we should now start to refer to it, "capital absorbing losses". We will closely monitor the development of these new capital structures.
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