Creative Capital in Support of Emerging Fund Managers
We know the road to starting a new investment fund can be challenging, and even more so for historically underrepresented fund managers. Inspired by our partners at the Dearfield Fund for Black Wealth, who created a new fund to build wealth through homeownership for Black and African American families, we at Impact Charitable worked to create new pathways for capital to flow in support of their important work. By sharing the different investment models and structures we used, we hope other fund managers can reimagine ways that catalytic capital can support their success.
Impact Charitable exists to help close the gaps between the sources of impact-first capital (capital that focuses on impact over return), and the communities, ventures, and funds who have traditionally faced systemic barriers to accessing critical financial resources. To date, we’ve mobilized over $70 million in funding into the communities that have been left out of traditional finance. While this amount is a move in the right direction, we know there is much more work to be done. As a white person working in impact investing, beyond stats and figures, I have witnessed and intuitively understand the structural racism that exists in finance, and that women of color in particular in this field are too often overlooked and underestimated.
This commitment to innovation and financial activism is why I was thrilled when VC Include (VCI) invited me to speak on behalf of Impact Charitable, along with Aisha T. Weeks, Managing Director of the Dearfield Fund, at a webinar for VCI fellows.
I met Milton Speid, VCI’s Executive Director, at a conference that was focused on collaboration and moving capital through partnerships. When we discussed some of the work that Impact Charitable had done with Aisha, a VCI Fellowship alumna, he extended an invitation to share more about this with the VCI community.
Below, I’ll delve into the specific fund structures we employed and highlight the critical need for co-creation amongst partners. We have worked in close partnership with the Dearfield Fund since its beginnings, and have helped to flow millions of dollars of capital into their work.
Finding Creative Solutions for Dearfield Fund
The Dearfield Fund recognized a stark gap in funding and support for Black families looking into home ownership in Denver. To address this issue, the Dearfield Fund provides down payment assistance to Black and African American first-time homebuyers, utilizing an innovative shared equity, shared appreciation product. They also provide wrap-around support services such as financial education, estate planning, insurance information, credit counseling and many others that are designed to support new homeowners build stability and success.
As the Dearfield Fund was beginning to raise funds, it discussed an investment with a foundation interested in providing support. However, the foundation's investment committee wanted to ensure, beyond all doubt, that the investment would qualify as a program-related investment. Santhosh Ramdoss, President and CEO of Gary Community Ventures (GCV), where the Dearfield Fund was incubated, reached out to Impact Charitable knowing our expertise in structuring such investments.
Together, we crafted an investment that would satisfy all the requirements of a program-related investment for the foundation as well as providing the capital the Dearfield Fund needed.
The Dearfield Fund also ran into barriers with other foundation funders. Some foundations were interested in providing grant funding to support the wrap-around services for these first-time homeowners, and in another case, two foundations wanted to provide catalytic first loss capital. Impact Charitable was able to remove the barriers by creating pathways for turning grant funding into investments and direct service support.
Developing an Innovative and Tailored Approach
Impact Charitable facilitated the process of bringing together six total foundations, successfully moving more than $6 million in funding through a combination of grants and investments through three innovative financial mechanisms in order to support Black homeownership.
The first example takes a program-related investment loan and creates an equity investment with the investment upside supporting the Dearfield Fund’s community work.
Foundation Loan to Impact Charitable:
A foundation wanted to support the Dearfield Fund but was hesitant to make a direct equity investment.
The foundation provided a program-related investment (PRI) to Impact Charitable, a 501c3 nonprofit, which is easier for their investment committees to approve.
The loan was at a low-interest rate of 1%, which solidifies the qualifications for a PRI.
Impact Charitable's Role:
Impact Charitable received the loan and executed a Limited Partner (LP) equity position in the Dearfield Fund.
This conversion helped to add capital to the Dearfield Fund’s raise and provided early momentum for the fund.
When the investment return is realized, if the proceeds are in excess of the 1% owed back to the foundation, the additional funds will be put to use supporting the wrap-around services for homeowners.
The second avenue for flowing funds was to create a fiscal sponsorship relationship between Impact Charitable and the Dearfield Fund. A number of foundations were inspired to support the Dearfield Fund, but they wanted to utilize grant funds instead of an investment. The fiscal sponsorship allows Impact Charitable to accept these philanthropic funds and then make grants to support the wrap-around services and eventual replication of this fund model in other parts of the country.
Fiscal Sponsorships:
Impact Charitable also provided fiscal sponsorships for grants intended to support the Dearfield Fund.
Foundations preferred to make grants to a 501c3, so Impact Charitable accepted these funds and created expenditure responsibility grants to disburse them to the Dearfield Fund.
This allowed for seamless integration of grant funds into the operational and support activities of the Dearfield Fund.
The third pathway for investment support was to take in grant dollars to take a first-loss position in the Dearfield Fund. This catalytic capital not only provides additional funds to support down payment assistance, it is meant to reduce the risk for other funders as encouragement for them to invest.
First-Loss LP Position:
Impact Charitable managed grants from multiple funders who wanted to use their contributions as a first-loss LP position in the Dearfield Fund.
This strategy was aimed at attracting additional capital by reducing the risk for other investors.
The pooled grants were combined and converted into an LP position, leveraging legal expertise to facilitate these transactions.
In the case of the investments made into the Dearfield fund, each agreement includes a clause that guarantees that any excess returns over what is to be returned to the funder are allocated for the support services for the new homeowners.
Through these innovative financial structures, multiple organizations worked together to further the Dearfield Fund’s success. You can take a closer look at the details behind this fund structure here.
Leveraging Opportunities
By leveraging funding from foundations, Impact Charitable was able to move money off the sidelines and into the Dearfield Fund’s ability to create a lasting impact.
The success of the Dearfield Fund is already beginning to build. They have assisted 200 first-time Black home buyers with substantial down-payment support to unlock almost $75 million in homeownership capital for Black families in Colorado. To support addressing the systemic inequities in funding and wealth distribution, Impact Charitable chose to embrace innovative financial solutions that prioritize community impact over traditional financial returns. By leveraging program-related investments, shared equity models, and fiscal sponsorships, we can ensure that capital flows into underserved areas, driving sustainable economic growth and closing the wealth gap.
Santhosh of GCV highlighted the significance of this partnership: "We have thoroughly benefited from being able to work with Impact Charitable in the launch and implementation of the Dearfield Fund. It is fair to say that the fund would not be where it is today without IC's support… It is truly impressive how Impact Charitable is able to execute a range of structures and innovations to make high-impact solutions work for communities.”
From identifying funding gaps to implementing innovative solutions, the journey of Impact Charitable and partners like Gary Community Ventures and Dearfield Fund for Black Wealth exemplify the power of strategic partnerships in creating systemic change.
Author: Cindy Willard is the Senior Director of Capital Activation at Impact Charitable, moving philanthropic funding to create more equitable access to capital.
At Impact Charitable, we believe that bringing a range of tools to the table is the best way to catalyze change. Our partners, including individuals, foundations, and government entities, think less about the organizations they want to support and more about the specific problems they want to solve. They favor a systemic approach to achieving impact at scale using a range of tools to get there.
We are pleased to share Impact Charitable’s partnership investment language and processes, but please note this is tailored to our specific context and is not investment advice; we recommend consulting your own legal, compliance, and tax advisors before making any investments, and further, in no case will IC, VCI, or the author be liable for any loss or damage from the use of this language or these concepts.
