In the United States alone, there is more than $900 billion sitting on the pristine balance sheets of private foundations. Yes, some foundations have expanded their impact toolkit beyond grants to include program related investments (PRIs), mission related investments (MRIs), and shareholder advocacy, but there are other ways that foundations can not only continue their level of community support but possibly even grow it. One way is through loan guarantees. This is a quiet but powerful investment tool that has been around for hundreds of years. As highlighted in this pivotal blog, “MISSION, MONEY & MARKETS: MAKING 'CENTS' OF GUARANTEES, THE VIEW FROM A CIO,” written by Rob Manilla, CIO of the Kresge Foundation, a foundation’s balance sheet is one of the most underutilized assets within the philanthropic community. What could your balance sheet make possible?
Recently I had the opportunity to bring together two long-time leaders from philanthropy and the investment sectors to discuss this important topic during Confluence Philanthropy’s “Loan Guarantees” webinar. I shared learnings from my work at MCE Social Capital and was joined by Teri Lovelace, the President of LOCUS Impact Investing, and Eileen O’Rourke, the Chief Financial Officer of the Abell Foundation.
There are several reasons why loan guarantees can be challenging to implement. Sourcing opportunities, conducting due diligence, and structuring guarantees are some examples. Partnerships and collaboration with intermediaries or other foundations have worked successfully to lower these hurdles.
MCE Social Capital has been operating an internationally focused pooled-loan guarantee model since 2006, unlocking more than $200 million in loans to microfinance institutions and small businesses across the developing world, with less than a 2% default rate. We leverage the excellent credit of over 150 high-net-worth individuals and foundations (our Guarantors) and then borrow capital from U.S. and European financial institutions and accredited investors to strategically deploy to our partners in emerging markets. As an example, I shared that if you have been an MCE Guarantor for our microfinance portfolio since 2006, your signature has enabled over $2.5 million in loans, benefiting some of the most underserved rural communities in the world, all while you have maintained control of your assets and gifted MCE $46,000 during that same time frame. That’s a 50X multiplier effect.
The Abell Foundation, with over $300 million in assets and 19 employees focused on their local community in Baltimore City, Maryland, has been utilizing guarantees for over two decades. “It really stemmed from caring deeply about the community and seeing such a wide variety of needs. While we were proud of the work we were doing on the grants side, we asked the question, ‘Isn’t there anything we can do with the other 95% of our portfolio to make a difference in this community that needs more help?’” O’Rourke shared.
For example, Abell Foundation funded nine charter schools with $16.5 million in guarantee commitments for loans the school needed access to construct classroom space. Their commitment was for five years, there were no losses, and over 5,000 students were enrolled with above-average test scores as an outcome. Because of our commitment, the charter operators were also able to start five additional charter schools, with three more in the pipeline. “I think that’s a lot of positive impact for something that cost us nothing,” said O’Rourke.
LOCUS impact investing is a national mission-aligned consulting and asset servicing firm that is also the program manager for the newly launched Community Investment Guarantee Pool (CIGP), a national financing tool for intermediaries participating in affordable housing, small business, and climate lending. The CIGP, which was kickstarted by the Kresge Foundation, has convened ten philanthropies and a healthcare system together to effect change on a national level using an unfunded loan guarantee pool of $33 million as a starting point. "The beauty of an unfunded guarantee is that you can unlock capital for impact without requiring current endowment liquidity,” shared Lovelace.
The CIGP represents a centralized source of credit enhancement and will reduce complexity for the providers and beneficiaries of loan guarantees by building capacity to deploy and manage the guarantees. They want to be a model for how pooled guarantee facilities can work, will be focused on “but for” transactions that would not be possible without the use of a guarantee, and have told their guarantors to expect modest calls on their guarantee, which, for the foundations, will be a grant.
We encouraged the audience to think seriously about the use of loan guarantees as a way to make a huge impact directly with often very little risk, including the domino effect of crowding in other investors who might be hesitant if a guarantee were not in place. “Talk to your CDFI or community lender, ask what is being turned down, ask what the most impactful transactions in your community are that you can’t do, and why can’t you do them?” shared Lovelace. A loan guarantee could be that critical missing piece.
- Catherine Covington, Managing Director, Chief Business Development Officer, MCE Social Capital
