Tim Ferguson: There is a perception that CDFIs have become too bank-like to fulfill their mission to provide capital and resources to underserved communities. Do you agree?
Elyse Cherry: Well, I think it depends on which sector of the CDFI community we’re talking about. The smaller the player, the less the rule of large numbers works. So, it forces people toward conservatism, which is what I think is behind the idea that CDFIs are becoming more bank-like. To take on appropriate levels of risk for a CDFI, the organization must have sufficient reserves and sufficient bandwidth to take on that risk. So, I don’t think the issue is that they’re becoming more bank-like; I think if we were to segment by size, what we’d discover is that there’s a real difference in terms of ability to assume and manage risk depending on the size of a CDFI.
TF: Do you think that CDFIs are driven by where their capital comes from? I’d say the bulk of their funding comes from banks, particularly the CRA or community capital divisions, and from the Treasury. Do you think that reflects how you think about risk?
EC: Again, it really depends on the size of the CDFI. At BCC, we intentionally have a broad range of revenue sources to ensure that we maintain our independence with respect to lending. If you’re a CDFI with more concentrated sources of revenue, you may be more affected by the particular interests of your investors.
TF: I spent some time reading your 2017-2021 strategic plan and your recent annual reports. The breadth of what you’re doing in your communities is really remarkable. You’re also at, I believe, 117% self-sufficiency, so earned income really covers most of your expenses.
EC: Yes, and it has for the 20 years I’ve been leading the organization.
TF: That, to me, is a big differentiator amongst the CDFI community in general.
EC: We believe that you can’t really grow unless you achieve self-sufficiency.
TF: Because you don’t have the net asset ratio to build the balance sheet to have greater impact?
EC: That is true, but also if you’re worried about where payroll is coming from because you rely on grants to balance your books, you can’t think more long term. You need capital to develop other business lines to be able to meet evolving social needs. For example, we have roughly $20 million invested in our SUN Initiative, which we launched in 2009. SUN stands for Stabilizing Urban Neighborhoods, one of the first foreclosure relief programs in the U.S. We’ve helped 900 families stay in their homes and it’s been a good investment: a very sustainable business model with steady returns over time. That is the result of a very deliberate strategy.
TF: When you look at that level of resource, how do you think about the impact that you have? I know your values are very focused on connected access, stable and vibrant neighborhoods, and benefits to all. Does that then drive the business lines that you seed?
EC: Absolutely. As the needs and issues that arise in our communities have changed over the last 30 years, so have we. And we’re in midst of another change; we’re in the process of changing our name to reflect our national scope. But the one thing that has never changed is our mission, which is to help build healthy communities where low-income people live and work. If you think about it, that’s really everywhere.
So, we test every business line we consider in three ways: 1) is it consistent with the changing needs of the communities we serve; 2) is it consistent with our mission; and 3) can we figure out a business model that is sustainable? And I would add a fourth, which is whether or not the work we’re doing is consistent with the skill sets we have or can imagine bringing in.
TF: Is the new name public yet?
EC: Well it would be if we had one! We’re still in the middle of that process. We have lots of good help with it. The challenge, of course, is that language changes, and people’s understanding of language changes. Our name and our language need to shift to reflect those changes.
TF: I was struck that you don’t have many of the words that we hear in the CDFI community in your mission – things like “quality jobs.” You seem to be looking at it in a slightly different way. Is that fair to say?
EC: I think it’s important to say that while we have several very active CDFIs under our umbrella, we also have a set of business lines that aren’t CDFIs. We don’t think of ourselves as limited to using credit as the key tool. While access to credit or availability or provision of credit is important, we don’t see everything as a credit problem; sometimes it’s an income problem, a cohort problem, or some other kind of problem. So, we don’t limit ourselves in that way.
The second part is that we are trying to launch a conversation on an inclusive future of work. That will be our focus in 2018. We think the relationship of people in low income communities to the workforce and good jobs is changing dramatically; and we want to ensure that the needs of lower income folks don’t get left out of the discussion. We need long-term strategies for this: We don’t see the point of trying to put a set of jobs in place in the short term, that in the long term won’t be there. Furthermore, I think we need a conversation focused on creating meaning and purpose in people’s lives, and how to move from issues around producing value to issues around the distribution of value. This is not a “next year” problem, but it will be a problem in 30 years, and I think we need to be teed up to have that conversation.
TF: So when you say “we” do you mean development finance institutions in general or the CDFI community in particular?
EC: No I just mean BCC. I would be delighted if other folks join us in this. But what I want to do is get a conversation launched.
TF: Some of the larger foundations are also keen to have that conversation.
EC: Of course. I don’t think we’ll be isolated in this, I just want to get our thinking in place. I’ve been reading and thinking a ton over the last several months to develop an informed perspective around the future of work and to incorporate others’ ideas.
TF: That’s interesting, and I want to continue talking about the future. Your plans for growth in terms of assets under management for the next 5 years will mirror that of the last ten years. What are your aspirations in terms of possible new areas of activity?
EC: When you have built an effective organization and a strong balance sheet, you have a real opportunity, but also an obligation, to build on that base. If I were the chief shareholder of a for-profit company, I might say “this is terrific, I’m happy to go sideways for next decade.” But that’s not what we are; we exist for a service and a purpose. In our strategic plan, we’re looking for lots of growth in our core businesses. In fact, we’re on track to be at $2 billion by 2021 with just our core businesses.
There are also some other things I’m not quite prepared to talk about yet, but I’ll just say that we’re hoping to launch a couple of other businesses in the next twelve to eighteen months.
TF: I remember a conversation we had seven or eight years ago, where you made a comment that you don’t particularly care if your subsidiaries are structured as nonprofits or for-profits. Is that still true?
EC: We try to structure our various entities in the way that makes the most sense for the mission we’re trying to fulfill, and for the entity we’re trying to build. Today we have about 30 entities within the broader BCC family. Some of them are nonprofit, some are for-profit, some are LLCs. We’re very careful to dot the ‘I’s and cross the ‘T’s with respect to tax status, but I think that organizations need to be governed by mission, not tax status. It wouldn’t make sense because we philosophically believe in one entity over another, that we should shoehorn something into that kind of an entity. Keep in mind, I have a background as an attorney; I practiced for many years. So, the idea of structuring things consistent with the mission and the purpose of the organization is kind of in my blood and how I think of things.
We’ll continue to set up our entities in whatever way makes the most sense for pursuing mission.
TF: You just reiterated your focus on the core. You’ve been really successful; though I’m sure there are things that have been challenges.
EC: Yes, we have been. We set aggressive goals, and then we run to get there.
TF: Exactly. So, at your core you are a lender, an innovator, and a structurer of transactions that help transform your communities. Has that always been the case as to who BCC has been under your leadership?
EC: I think so. That’s part of why I came in to lead the organization. We believe low income communities need far more capital than what the philanthropic or even the CDFI world can manage. We’re committed to working with every sector, including public, private, civil society, and others to ensure that we serve our communities optimally.
You’ve probably seen on our website that we have a set of values that we take very seriously, and that govern our day-to-day work. Two are particularly relevant here: The first is that effective organizations change to meet the changing needs of the constituencies they serve. The second is that low income populations and communities are entitled to exactly the same kinds of quality services and products that their wealthy neighbors take for granted. We don’t want to hive off these communities and put them into some separate economy where what they get only comes from the philanthropic world. These communities must be actively participating in the broader economy, fully connected, so that they’re not the last to benefit from new technology or other advances. In fact, they need to be among the first served.
TF: How do you ensure that you’re able to create solutions that cross all your activities? Thirty subsidiaries is a lot; I’m assuming your solutions sometimes require the different entities to work together?
EC: Each business line is self-sustaining and has its own set of financial goals, but the same people serve on each Board of Directors. Everybody in the organization fully understands that everybody’s job, in addition to their ordinary duties, is to move the organization forward. We try hard to avoid internal competition. As an example, our SUN initiative is expanding into Connecticut right now. Supporting that expansion is the fact that our Loan Fund has done $60 million of lending in Connecticut over the last few years and has a set of relationships there. But that said, the two organizations – the Loan Fund and the SUN Initiative – each have their own goals and their own products, and they proceed on their own paths.
TF: You were probably one of the first broadly defined “CDFIs” to have a venture fund. And people probably don’t know you were one of the first investors in Zipcar. I assume that was because they couldn’t raise equity capital from other sources?
EC: Yes, we were the first institutional investor. I can’t speak to their ability to raise from other sources, but we certainly don’t see ourselves as the investor of last resort. What’s clear about our venture fund is that we actually leveraged our equity dollars by better than 10x by bringing other investors into our deals. You can’t do this work by yourself without starving the companies you’ve invested in.
I think the thing to remember about Zipcar is that it was the first company in what we now think of as the “sharing economy.” It was a radical new idea, and an early iteration of that idea. From our perspective, it seemed like a great way to drive down emissions, and make other positive environmental and social impacts.
TF: One of the observations we have is that part of the challenge in some the communities we work in, is that the building of wealth in those communities is so important. And in particular, the missing piece, in terms of types of capital, is equity. Do you agree? And if so, do you think your Venture Fund is working on this?
EC: We function as a market economy, and low-income communities are a part of that market. Equity dollars are one piece of what’s needed, but it’s harder to make equity investments in small businesses because they don’t have the structure or the sophistication to engage capital in a way that provides the level of return investors would expect or that can incorporate multiple tiers of investor dollars. So, as we think about how to bring money into low income communities, equity may be a piece, but equity investments would have to come from a fund that is large enough for us to satisfy the capital needs of growing companies without losing control of our investment. We’ve learned a lot from the investments we’ve made, but venture capital is also not as favored of a sector as, perhaps, it has been in the past. It’s much harder to raise a venture fund now.
TF: Would you put seed capital or early stage capital in that same bucket?
EC: If you look at return histories, early stage tends to have lower returns than later stage, which is why so many venture funds have moved to later stage. I think it’s hard to achieve a sufficient risk adjusted return on significant amounts of early stage capital.
The question is: Do you fund early stage investments with philanthropic capital? I was listening to Clara Miller recently, in her keynote for the University of New Hampshire’s Innovator of the Year Award. I may have the particulars wrong, but she said if you took all the money that foundations put out in the course of a year, it covers about a week of the national K-12 budget, and if you took their corpus, it covers about 14 months of the K-12 budget. It’s just not a lever that’s big enough. The purpose of that lever must be to figure out how to engage the public and private sector to support the kinds of things that civil society and philanthropy want to support.
TF: Clara Miller’s always said if we’re going to have real impact it will be by moving into the core, into the $75 trillion of assets, not just the $600-800 billion that foundations represent.
EC: Exactly, and I agree with her. The question is how we serve as an intermediary between communities we focus on, and the large sources of private sector capital that need to be brought to bear. Our philosophy over the years has been about standing at the intersection of downtown expertise and community values, and helping to ensure that we can provide the expertise that allows private sector entities to bridge over. Low-income populations and communities have a lot of expertise, but not necessarily the kind that allows people to connect with mainstream financial institutions and large corporate players.
TF: I would argue the Ultra-High Net Worth Individuals would also fall into this.
EC: Yes, and we have had some success with that.
EF: That’s a good segue to so-called “impact investing.” How do you view that? Do you say “we’ve been doing that all along?”
EC: Well, we have been doing it all along. And I think that the CDFI industry as a whole has not done a good job of making it clear that we are exactly what impact investors are looking for. If I’m an impact investor and I want a piece of my portfolio to be in a fixed-income instrument, I can’t imagine why I wouldn’t go into either our loan fund or something like our SUN initiative. Effectively, we have been above market in terms of return for a long time. I think that we have work to do as an industry, as well as us an as an organization, to ensure that we get our message out to impact investors and help them understand that we’re what they’re looking for. In fact, I did a keynote last week to Vanguard Capital and Big Path Capital for impact investors, and that was a part of the message we were delivering.
TF: I believe that the money you’re talking about is still sitting on the sidelines, and one reason is that the perception is that CDFIs are fundamentally program people, as opposed to people who combine placed based knowledge and investment skills. Do you think that’s fair?
EC: I’m not sure. I think that the CDFI industry has lots of work to do to help impact investors understand who we actually are. There are all kinds of perceptions. The perception people had around the SUN Initiative is that low-income folks involved in foreclosure were a bad bet; we’ve clearly proven that isn’t the case. Perception is a funny thing, and it doesn’t necessarily have anything to do with reality.
TF: I agree with you that CDFIs in general should be really well placed, to be intermediary of choice as main stream investors begin to think differently about how they want to put their money to work.
EC: Exactly. I think from a CDFI perspective there are a couple of issues. One is making sure word gets out so folks really understand what these opportunities are. The second is that we have to do a better job bridging across to different investment platforms to make it easier to invest in CDFIs.
TF: There’s also the whole question of putting larger amounts of money to work. The need and demand is there. But because capital hasn’t been that available, it hasn’t really driven the size of the deals in the market.
EC: I don’t know about that. I don’t believe we have ever been capital constrained. I think it depends on what organizations you’re talking about. We’ve always reached out broadly and insisted on a broad range of sources, and we’ve been good partners with the folks that have provided capital to us, so I wouldn’t say we’ve been capital constrained.
TF: That’s interesting. I think you’re at a different level from many of your peers. This implies a level of capital markets expertise that I don’t see often.
EC: I can’t speak for others, but we think that level of expertise is absolutely critical. You can’t solve issues if you’re leaving 80% of the capital on the table. We really need to be in position where we can bring in private sector, individual, and government sector capital, as well as philanthropic capital.
TF: Some would say that there’s been little use of technology in general within the areas we work in. Do you think that’s true? What are you doing to capitalize on different types of platforms?
EC: There are two or three different pieces to this. The first is that I’ll put BCC’s technology up against anybody’s. We’re fully integrated, people can work from anywhere, anytime; we have been able to drive down our personnel costs because we’ve automated a good deal of what we do. We don’t want anyone doing things that are more easily done automatically. We’ve done a terrific job of that internally.
In fact, I was just having this conversation this morning with our CFO as we think about our annual Goals Retreat. One thing we’re talking about is teeing up for more successful growth. Part of that is figuring out how to access existing investment platforms that are more automated than we are today. Any organization like ours needs to think carefully about which pieces of an organization should be high tech, and which should be high touch. The answer to that changes depending on the size and nature and growth trajectory of the organization. We’re now at a point where we have had sufficient growth and need to move to next level of automation.
TF: When you think about your different sources of funding, I assume you start from the need or demand from within the communities you work in, and then seek out the funders to fund those needs?
EC: That’s the case in some situations. We also rely on our own deep knowledge and experience of how communities function and attempt to get ahead of issues rather than waiting for demand to emerge. For example, we started looking at the foreclosure crisis back in 2007 – even before the economic crash —when I wrote our first white paper “Recouping the True Costs of the Foreclosure Crisis.” At the time, we had little national understanding of the emerging foreclosure crisis, but we were deep into our communities, and we could see that housing prices were rising and there was no similar rise in income. We couldn’t figure out how people were going to pay their mortgages. So, we built a business model to make our foreclosure relief program work; and then went out to find the capital for it – it’s not like capital was coming to us.
When I first went out to the capital markets, what I was hearing was that if there was capital around at all to lend to low income folks involved with foreclosure, it was probably at 12% or 14%. We made a conscious decision to shift our focus to High Net Worth Individuals (“HNWI”), to capitalize our SUN initiative, and we’ve greatly benefited from their support. Once we were able to prove out the model, we secured a line of credit with East Boston Savings Bank that got to about $75 million. We’ve now closed a $100 million line on a CDFI bond through the Federal Financing Bank, and that bond is backed up by the assets and he capital within the SUN Initiative itself and by a $3 million guarantee from Kresge Foundation, not a guarantee of the overall parent. And that was a fight we had for several years. My perspective was we couldn’t build out the overall organization and continue to build business lines with a $100 million contingent liability on our balance sheet.
So, I think that part of the role HNWIs played was to take the risk early on when we couldn’t get more institutional money to take the risk at a level that made sense to us.
TF: In terms of capital deployment, I think you have a target of $100 million per year. You also focus on six sectors – housing, education, healthcare, healthy food, economic development, and energy. When you think about those, is there any area within those that that has a higher priority?
EC: The $100 million lending goal is just for our loan fund. We committed $109 million in financing in 2017 and closed loans totaling $86 million. So, it’s doable.
In a given year, lots of sectors we lend into depend on public sector finance. So, wouldn’t makes sense to pre-determine what percentage we lend into each sector, only to discover it’s all changed because public sector financing has changed. So, it is a combination of figuring out what business lines and what products we think are most appropriate for the communities we serve, and then being opportunistic about the transactions that are possible and the partners we have on the ground in areas of country that lack what we can bring to the table.
We’re a pretty nimble organization, and we’re not top down. We really try to build from the demand on the ground as it emerges.
TF: I think that’s a really smart way to do it. I want to go back to something you said earlier, which is that you have CDFIs within the BCC family. The perception from the outside is that you’re a CDFI, but obviously you’re a lot more than that. So what would you call yourself?
EC: We existed as an organization well before term CDFI was developed, so we didn’t emerge in that context. One of the things we’re actively reviewing how we describe ourselves and the discussion is continuing.
TF: In terms of leading and managing the organization, what are the things that you think about most – what are the most critical needs, and where do you invest your resources internally?
EC: At the moment, we are preparing for enhanced and successful growth. I say I’m trying to tee us up for next 20 years. I think that one of the great challenges for a successful organization – and we’re now into our 4th decade – is not getting complacent. We are committed as an organization to continue to grow. With respect to people and systems, we plan to hire additional 11 people in the next year, which is probably more than we’ve hired in the last 5 years combined. And what that’s all about is ensuring that we have strengths in every level of the organization to manage the growth we’re planning.
We’ve just hired a Chief Communications Officer to enhance our PR, branding, marketing, and investor relations; we’re looking now for someone that I’m calling the Chief Strategy and Implementation Officer, who we hope will help us grow our core business, provide broad organizational support to our existing businesses lines, and help us jumpstart the development of new businesses. These are the wonderful problems of growth. Any organization either has problems of complacency, problems of shrinkage, or problems of growth. I’ll always choose the challenges of growth.