Pennsylvania the latest government to try out impact investing

Impact investing is slowly carving out a permanent place for itself in the investment industry, especially as government entities are added to the list of clients eager to see social return on their assets. Pennsylvania is now following in the footsteps of New York City, Washington, D.C. and Massachusetts by putting some of its assets into RBC Global Asset Management’s (GAM) Access Capital Community Investment Fund. The $100 million impact investing initiative was announced by Pennsylvania Treasurer Timothy Reese last November.

The Treasurer’s goal is to see a “double-bottom line” by redirecting funds into investment products that, in addition to providing monetary return, support affordable housing, small businesses, infrastructure projects, and health and educational facilities. To do this, Access Capital will create a tailored portfolio of high-quality, securitized, fixed-income investments to be made in Pennsylvania projects.

Access Capital’s approach involves assessing investment opportunities based on their ability to promote community development. Specifically, its advisors consider whether the investment:

• Provides affordable housing for low- to moderate-income (LMI) individuals;
• Provides community services targeted to LMI individuals;
• Funds activities that (a) finance businesses or farms that meet the size eligibility standards of the SBA’s Development Company or Small Business Investment Company programs or have annual revenues of $1 million or less and (b) promote economic development; or
• Funds activities that revitalize or stabilize LMI areas, a designated disaster area, or non-metropolitan middle-income area that has been designated as distressed or underserved by the institution’s primary regulator; or
• Supports, enables, or facilitates certain projects or activities that meet the “eligible uses” criteria described in the Housing and Economic Recovery Act of 2008 (HERA).

Reese, a serial entrepreneur and experienced angel investor, looked to Access Capital when searching for a fund that could target underserved markets in Pennsylvania. Ron Homer, Access Capital’s president (and current ICIC Board member), co-founded the community investment fund in 1997. It manages mortgage-backed securities (MBS), government-backed loans and municipal securities that support social and economic objectives in LMI communities. Access Capital had more than $910 million in assets under management as of September 30, 2016.

Through Access Capital, Pennsylvania’s $100 million will give local housing agencies, economic development organizations, and small business lenders more mobility. For example, the funds could be used to purchase mortgage loans from the Pennsylvania Housing Finance Agency (PHFA), which would then free up PHFA to invest in additional affordable housing. Traditionally PHFA would have to wait for the loans to be repaid before deploying capital into new projects.

This isn’t a new pool of state funding, but rather the redirection of existing assets in a way that can spur economic growth and development. “These are the types of investments that the state makes already,” said Treasurer Reese. “However, they weren’t given a mandate to focus on Pennsylvania,” he said.

Reese’s two priorities as treasurer are, “to safeguard and safely grow our state’s financial assets, [and] find ways to use those assets to help drive Pennsylvania’s economy.” He said, “Our impact investment initiative accomplishes both by earning a competitive rate of return while investing state funds in projects that positively affect Pennsylvania’s communities, businesses, schools and infrastructure.”

While investors typically focus on achieving returns solely to meet financial goals, Reese’s “double-bottom line” approach is becoming more widely adopted. NYC Retirement Systems collectively have $350 million invested in a fund overseen by Access Capital that invests in single-family MBS to make low-cost mortgages more available to low-, moderate- and middle-income homebuyers.

According to Homer, NYC, D.C. and Massachusetts have either tripled or quadrupled their assets under management with Access Capital, and some clients have began to seek out other firms to manage more impact investment dollars. “As [a governor] once told me, there’s no point in being the first if there’s not the second,” Homer said.

For impact investing to maintain its momentum, the industry must respond with new strategies that can deliver on two fronts. However, impact investing has several hurdles to jump before it breaks into the mainstream. These include fragmented supply and demand, unfamiliar risks, constrained returns, and difficulty finding the right balances of duration and amount. Pennsylvania chose Access Capital partly because they have a nearly 20-year head start on other firms navigating these obstacles. It will also take time to measure the full return on Pennsylvania’s initiative, as well as that of impact investing more broadly. In the meantime, Pennsylvania has joined other governments in choosing a way to meet their financial obligations while working towards community and economic development.