How to strengthen portfolios for racial & social justice using a barbell approach

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By Scott Babka and Liz Sessler, CapShift Advisors – More and more investors are looking to achieve both financial rewards and promote racial justice to help historically underinvested and underrepresented Black, Indigenous, and People of Colour’s (BIPOC) communities thrive.  

As we, CapShift Advisors, support families and foundations in their efforts to create a financial return and create a more just world, we worked with TheCaseMade to develop a Framework that helps us understand the impact one might expect from investments along the racial justice continuum. To promote impact while managing liquidity and return objectives we often recommend a “barbell” approach. While more often associated with physical strength training, a barbell is a useful tool to describe a potentially impactful approach to portfolio strengthening. 

At one end of the barbell, we seek to provide capital to BIPOC communities that are historically underinvested in but limit risk and maintain liquidity. At the other end, we seek to accelerate progress toward racial justice and may sometimes seek a higher financial return by taking on more risk and expanding our investment time horizon. 

A closer look at the barbell 

When we look at the first part of the barbell – cash equivalents and short duration fixed income - we see opportunity to shift from traditional money market funds and hold a deposit account with Hope Credit Union. 

Through its Impact Driven Deposit program, Hope’s goal is to attract $100 million of deposits from savers around the country and channel them into historically marginalised communities in the South. While the interest paid (0.1 per cent) is modest, this return is no different than that offered by traditional banks or money market funds. Result -- no yield given up and measurable impact on communities that lack the deposit base to fuel loans to individuals, small business, and developments.  

As a complement to Hope, we further support racial equity through an investment in the LISC Impact Notes. LISC offers Impact Notes for as low as USD1,000, with terms ranging between 1-10 years. The notes will be fixed interest, determined at the time of market issuance, with January issuances paying between 0.95 per cent-1.8 per cent interest. With this investment, we trade off near-term liquidity to earn a higher return and fund LISC invests in community and economic development projects in under resourced communities across the country. Through LISC’s ‘Project 10x’ initiative, LISC intends to dedicate USD10 million of the note proceeds to build equity and wealth for BIPOC individuals through home and business ownership initiatives. While a Note carries more risk than a deposit, we feel confident in LISC’s ability to service its Impact Notes through its strong operational management and solid equity cushion protecting Note holders, coupled with ongoing grant support for their work. 

At the other end of the barbell, we seek to amplify our efforts promoting racial equity and racial justice. We are willing to accept more risk for either greater impact or greater potential return (or a combination thereof). We seek this result through three different investments:

1. Invest in a five-year note with Seed Commons, a fund that our framework identifies as promoting racial justice. Seed Commons directs capital to local partners that allow the community to determine what businesses to invest in, with a focus on employee-owned businesses. Through low-cost flexible capital and technical assistance, Seed Commons can create a virtuous cycle within historically under-invested BIPOC communities, allowing local businesses to hire, invest and increase employee wealth. Covid-19 has hit these communities hard, so five-year capital gives Seed Commons and its partners more time to support their borrowers and investees in communities where there are no other sources of capital. We think providing funds like Seed Commons with more capital is essential to promote racial justice in the United States.
2. Channel capital into underinvested communities via Southern Opportunity and Resilience (SOAR) Fund subordinated notes. The SOAR Fund is an innovative structure that channels capital into 12 local Community Development Financial Institutions (CDFIs) in the South to provide businesses with low-cost capital to cope with Covid-19.  The subordinated notes pay up to 2.5 per cent interest and carry some risk of impairment if the economic crisis is prolonged. But this subordinate tranche is essential to encourage senior lenders to invest more capital in the SOAR fund structure. For every dollar invested in the subordinate tranche, we are enabling 6-8x that amount in lending. 

3. Invest in Slauson & Co Fund I, which seeks to promote racial equity by providing venture capital to underserved BIPOC, women, and LGBTQ entrepreneurs with strong business models and management teams in the technology and retail sectors. The Slauson team also manages an accelerator program focused on providing mentorship and connections to often overlooked entrepreneurs. With this investment in an emerging manager, we are seeking to achieve venture capital returns over a 10-year horizon.
As a complement to our lower -and higher-risk parts of the portfolio, we want to gain market exposure and maintain liquidity through a balanced portfolio of equity and fixed income funds. To achieve this, we invest in active and passively managed equity funds that own good actors, screen out the bad ones, and are managed by firms that engage with corporate management teams to support diversity and inclusion, as well as the fair treatment of customers, suppliers, and employees. The fixed income portion of the portfolio includes funds that own bonds to fund infrastructure and other services in traditionally under-invested communities. One example of this type of balanced portfolio is the Economic Mobility impact portfolio offered by National Philanthropic Trust. This portfolio, which is managed by CapShift Advisors, provides a values-aligned source of market exposure and provides daily liquidity for grant-making on behalf of NPT’s donors.

The barbell to seek multi-dimensional returns 

Through this barbell approach, we create a balanced portfolio that drives near- and long-term impact to support diversity and inclusion, racial equity, and racial justice, while also planning to provide returns to support future grant making as well as near-term liquidity for giving. We are confident we can keep pace or potentially outpace the markets in the core of our portfolio, while driving progress toward racial justice on both ends of the barbell. 

We understand that each investor has his or her own risk tolerance and core areas of impact focus. We hope this hypothetical portfolio to support racial justice aids our readers in their own journey. As more investors act and provide capital where it is needed most, we see great potential for historically underrepresented and underinvested BIPOC communities to thrive. 

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