Catalyst Fund

Living Cities is a pioneering partnership among major foundations and financial institutions that invests in revitalizing America's cities. Members of Living Cities include leading foundations such as Ford, Gates, MacArthur and Rockefeller, as well as banks and insurance companies such as Chase, Bank of America, Prudential, and MetLife.

Since 1991, Living Cities has invested more than $543 million in 23 cities. Our funding has helped build homes, stores, schools, daycare, healthcare, job training centers and other community assets that exceed $15.9 billion in total value -- a remarkable leverage ratio of 29:1.

Cities are both the engines of America's global competitiveness and our best hope for a dynamic, sustainable future. At a time when cities are challenged by funding shortfalls, aging infrastructure and the rising tide of foreclosures, Living Cities members are helping to bring opportunities and the power of mainstream markets to urban neighborhoods and residents historically left behind.

The Living Cities Catalyst Fund is a pool of patient, flexible capital directed specifically toward investment in not-for-profit organizations that create opportunities and make markets work better for low income residents of America’s cities.

Finding ways to steer capital to underserved urban communities and populations is central to the Living Cities mission. Many investors who care about the future of cities want to invest in revitalizing these communities, but lack the staff resources or skills to source, underwrite and monitor social investments. The Catalyst Fund is a convenient, low-cost way for institutional and individual investors to make a difference for urban America.

The founding investors of the Catalyst Fund are The Ford Foundation, The Annie E. Casey Foundation, MetLife Foundation, Robert Wood Johnson Foundation, The Kresge Foundation, DeutscheBank Americas Foundation, and The MacArthur Foundation. The fund is open to new investors.

The Catalyst Fund is an attractive vehicle for investors who want to put their money to work creating opportunity and improving the quality of life for low income communities in America’s cities. The Fund will provide capital to outstanding organizations in the fields of education, economic expansion and workforce development, health and wellness, neighborhood change, and the green economy.

The Fund enables investors to maximize the impact of their dollars by carefully selecting programs and organizations to support, pooling capital from a variety of investors, and recycling loans over the life of the fund. An investment in the fund is protected by a 10% loss reserve. Investors benefit from the diversification that can be achieved in a portfolio of loans without having to "staff up" to identify and manage multiple investments.

The Catalyst Fund is targeted at $30-50 million. Founding investors have committed $20 million as of the fund's first closing, which was held in July 2008.

The Catalyst Fund will provide term loans, lines of credit and guarantees at below-market rates to not-for-profit organizations and local governments that are focused on:

1. Improving public education

2. Providing opportunities for low income and disadvantaged individuals and communities to build income, wealth and financial stability

3. Promoting health and wellness, especially expanded access to fresh foods

4. Revitalizing and enhancing distressed neighborhoods and communities

5. Providing capital to urban “triple bottom line” initiatives that create green jobs and energy savings for low-income people, reduce carbon, and deliver financial returns to investors

Although Living Cities has a long history in the affordable housing field and recognizes the importance of this area, the Catalyst Fund is designed primarily to support other areas of the Living Cities agenda. Catalyst Fund investments must meet the charitability standards of Program-Related Investments (PRIs).

Program-Related Investments (PRIs) are defined by the U.S. tax code as investments made by foundations to support a charitable project or activity. PRIs may be structured as loans, loan guarantees, or lines of credit. PRIs must meet three tests:

1. They must further an aspect of the foundation’s mission

2. They must not be made primarily with the purpose of producing income or generating property appreciation

3. They must not support lobbying or political campaign activities.

PRIs are expected to be repaid, generally with a below-market rate of return. They are counted toward a foundation’s 5% payout requirement.

PRI loans and grants serve different purposes. PRIs offer foundations flexibility and leverage, augmenting a grant strategy and extending the reach and impact of philanthropic programs.

1. PRIs can unlock additional, conventional financing for the projects they support. By taking real or perceived risks that traditional investors are unlikely to accept, PRIs often attract new resources to an organization.

2. PRI-makers have the opportunity to make larger awards than they could using grants, as capital is returned for recycling into new awards.

3. PRIs foster the independence and sustainability of their recipients. They enable recipients to gain credibility and strength by providing the opportunity to build a track record and demonstrate that they are financially disciplined, well managed, and credit-worthy.

4. PRIs can fill financing gaps that might otherwise impede viable projects.

In order to be considered for a loan from Catalyst, an organization must have a source of revenue (other than an expected flow of grant funding) that would support debt service and repayment of the obligation. These sources might include government contracts, payment for services rendered, or sale of assets.

Historically, most PRIs have been backed by real estate assets. The Catalyst Fund will consider lending to organizations that do not have real estate to offer as collateral for the loan, provided that the organization’s business plan demonstrates how repayment of the loan can be secured.

Requests for investments may come through referrals from Living Cities members or staff, from programs recommended by leaders in Living Cities’ priority cities, or directly from organizations seeking support.

All potential investments must fit with Living Cities’ priorities and demonstrate the ability to service and repay debt in a timely fashion. The Catalyst Fund will consider a range of criteria when evaluating potential investments, including:

1. Programmatic significance (scale, impact, innovation)

2. Alignment of the investment with Living Cities’ programmatic and geographic priorities

3. Ability to leverage substantial additional funds from other public and private investors

4. Financial strength of the borrower

5. Strength, experience and stability of the borrower’s management

6. Potential to create systemic change

7. Ability to integrate previously isolated services and structures

8. Portfolio diversification and balance of risk.

Potential investments must meet both programmatic and financial thresholds. All deals will be screened first for programmatic significance and fit with Living Cities’ priorities. The programmatic review will be conducted by the staff and membership of the Program Committee of Living Cities.

Borrowers that meet the programmatic screen will be recommended for financial review. This review involves three steps:

• Preparation of a brief "greenlight memo" for consideration by the Catalyst Fund Credit Committee;
• Due diligence, structuring and underwriting of the credit; and
• Review and approval by the Credit Committee, a group with substantial experience in lending to not-for-profit organizations.

Most loans will have terms of 2-5 years, although longer terms are possible. All loans must be repaid in full by mid-2018. Loans may range in size from $250,000 to approximately $2 million. Interest rates will range from 4-5%, with interest to be paid quarterly.

The Catalyst Fund may also offer lines of credit and guarantees.

Living Cities will actively monitor investments to ensure that borrowers are reaching their planned programmatic and financial milestones. All borrowers will be required to report on their activities and provide updated financial statements on a quarterly basis. The Credit Committee will conduct a formal risk rating review for each investment once a year.

The Fund will generate both financial and social returns. Fund investors may choose to receive 0-3% interest per annum. Social returns will be assessed on an ongoing basis, with reports provided annually.

Investors will receive interest semi-annually, with 50% of principal returned at the end of the ninth year, and 50% returned at the end of the tenth year. Living Cities has created a loss reserve which will absorb the first 10% of any losses generated by the Fund’s investments.

The Fund is open to socially motivated investors, including foundations of all kinds, endowed institutions, faith-based institutions, corporations, family offices and qualified individual investors. Catalyst investors do not need to be members of Living Cities.

Program-Related Investments can be complicated and labor-intensive to source, structure and manage. Investors new to PRIs may find it useful to leverage the experience of the pioneers of the PRI field. By participating in the Living Cities fund, investors who care about the future of America’s low income urban neighborhoods can:

1. Leverage the experience of the leading foundations in the community development field

2. Build a diversified portfolio of investments quickly, efficiently and cost-effectively

3. Lower transaction costs through economies of scale

4. Reduce risk

5. Access a broader pipeline of potential investments

6. Avoid the need to underwrite and monitor individual investments

7. Maximize the impact of their investment dollars.

Qualified investors can participate in the fund by making a ten-year commitment and choosing an annual interest rate of 0-3%. As the Fund is targeting a blended cost of capital of less than 2.5%, investors are asked to specify the minimum interest rate their investment program would allow. Grants are also accepted. Investments may be made at closing, or in three payments over the course of eighteen months.

There is no fixed minimum investment to participate in the Catalyst Fund. Investors of $2 million or more will be eligible to join the Advisory Council, which meets twice annually to oversee and set policy for the Fund. Investors of less than $2 million will be invited to participate in the Advisory Council as observers.