Why We Are Seeing A Growing Demand For Our Capital
May 23, 2016
Earlier this month Justin shared with you all news of our new increased rates. He explained that this was a result of a growing demand for impact capital in our markets. This is exciting news, not just for ourselves and our investors, but for the industry as a whole.
As Justin put it,
“There has always been an underlying question in impact investing: Are there enough high-impact deals looking for capital? Or put another way: Does the industry have “absorptive capacity” for investments? It’s a nuanced question (and sure there are some limits in every opportunity set) but from where we sit today, our answer to that question is yes!”
Where we sit today is the result of both external changes in the market and internal changes in the way we manage our lending. These changes are outlined below:
Broadened sector approach
For much of our history, we lent to two major intermediary types for the majority of our portfolio, Community Development Financial Institutions (CDFIs) and Microfinance Institutions (MFIs). In recent years we have broadened our sectors to include a wider range of financial intermediaries and funds, including those working on climate change mitigation, global health, energy access, sustainable agriculture, and small and growing business development in low-income communities.
Geographically nuanced demand drivers
In our emerging markets work, invested mainly in Latin America, Sub Saharan Africa, and South and South East Asia, macroeconomic trends like technology distribution, access to information, a growing middle class, and urbanization are driving increased consumer demand and willingness to pay for quality basic services, including healthcare, energy access, and education. During these growth phases, companies working to meet this demand require patient, flexible capital from lending organizations (and Calvert Foundation borrowers) like GroFin, Medical Credit Fund, and Varthana. We see established organizations scaling their work and new entrants coming to market.
In US markets, we continue to support the incredible work of our CDFI and affordable housing partners, and are also seeing new structures and sectors driving growth. For example, environmental sustainability and clean energy markets are maturing and are starting to raise debt to scale after many years of reliance on equity, philanthropic, or public sector support.
Strength and scale of our borrowers
As impact markets mature, so do the organizations financing them. We continue to see our borrowers strengthen and grow, which requires us to grow alongside of them to continue meeting their capital needs. For example, one of our borrowers has grown from $3 million in total assets in 2011 when we made our first $250,000 loan to $60 million in assets today. We recently made $6 million loan to continue supporting their strong growth. Overall, our average loan size has increased from $500,000 to approximately $3 million.
Focus on structuring responsive financing
Perhaps most importantly, we have shifted from offering a standard loan product to providing capital in the shape and form most useful to meet the demand. The diverse markets in which we work have nuanced needs and market-specific traits. To respond accordingly, we have shifted our mindset and approach so the capital adapts to fit the demand, not the other way around. For example, in communities like Detroit and Baltimore, there is a need for longer term capital that has the patience to see neighborhoods and properties regain value. In the off-grid solar market, we have blended philanthropic, public, and private capital to better match the risk profile of emerging business models. We are seeing increased value – and demand – due to our desire to structure the right solutions for our borrowers.
We are thrilled by this dynamic demand in our markets. In the coming years we will continue to work in service of our investors and our borrowers to create the necessary infrastructure, networks, and relationships to allow individual investors to efficiently invest for the pursuit of social and environmental impact.