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Future Returns: Investing for Public Policy Impact - Barron's

One way to earn a financial return while also having a positive impact on society is to invest in economic development programs designed to fulfill public policy objectives such as providing housing or jobs or tackling climate change.

Enhanced Capital Group, a US$4 billion New York-based asset manager, has taken this approach for more than 20 years, channeling private debt and equity capital into public-good enterprises, such as rooftop solar projects in New Jersey and a mixed-use facility in New Orleans Ninth Ward offering educational and exhibition space and affordable housing for seniors. Government incentives, including tax credits and programs such as federal opportunity zones, are often part of the equation, as they are created by governments to spur investment. 

“We don’t just deliver cash-on-cash returns, we also deliver some form of quantifiable metric-driven impact,” says Michael Korengold, Enhanced Capital’s president and CEO. 

Before investing, the firm makes sure each investment meets specific impact criteria—such as creating a specific number of jobs or demonstrable community revitalization. After investing, Enhanced Capital requires quarterly or annual reporting on how their investment targets are meeting their goals. 

The firm’s investors, who include wealthy individuals and family offices in addition to institutional investors such as banks and insurers, invest through separately managed accounts or in narrowly drawn mandates that line up with their specific objectives, Korengold says. 

Banks, for instance, may want to invest in a designated neighborhood that will allow them meet their federal Community Reinvestment Act obligations, while individuals may want to restrict their investments to a specific state or city.

In addition to loans, investors can participate in “tax-equity” investments in renewable energy projects, historic building rehabilitation projects, and low-income community businesses that qualify for tax credits. “In those cases, the investors receive tax credits and other tax benefits in addition to cash returns on their investments,” Korengold says. 

Penta recently spoke with Korengold about Enhanced Capital’s approach to investing, which it does primarily in three areas: small business, climate change, and what it calls impact real estate.

Financing Small Business 

The firm has served primarily as a lender to small businesses since its inception with a focus on those in low-income and underserved communities, including rural areas. The firm also invests in enterprises owned by women, people of color, and veterans, and in those focused on addressing climate change. 

The loans it provides are often less than US$5 million, which is a challenging amount for a business with growth plans to attain, Korengold says. 

Community development financial institutions that work in low-income and underserved communities generally provide loans that are far smaller, while small business investment companies and business development companies focus on more sizable loans, typically above US$10 million.

“We find lots and lots of businesses that deserve to get financed but just haven’t had that access to capital,” Korengold says. 

About four years ago the firm provided Vertical Harvest, a women-run hydroponic farming business in Jackson, Wyo., with a loan through the Wyoming Small Business Investment Credit program. Vertical Harvest used the funds to expand operations of its vertical greenhouses, which provide a sustainable way to grow vegetables and fruits year-round. 

Recently, more investors, particularly individuals and families, have been interested in channeling funds to businesses that are not just located in areas that are underserved, but that are led by women and people of color, Korengold says.

“People understand that there’s a meaningful capital divide, that solving that issue is going to be necessary to address some of the social ills that affect the country,” Korengold says. 

Climate Change Finance 

Financing projects that address climate change also are front-and-center for investors. That’s because of the evident need to address it as wildfires, drought, and severe storms increase, and because these investments can be in tangible items such as solar arrays or windmills. 

“People see how they can make an investment that has a direct impact,” he says. 

Many renewable energy projects in the U.S. have been built because of federal tax credits. Enhanced Capital will invest in these kinds of projects by financing the credits. “Instead of cash-on-cash return, [investors] get cash and tax credits as part of their return,” Korengold says. 

The firm also has invested in the underlying equity of renewable energy projects located in opportunity zones, which are qualified low-income communities throughout the U.S. In 2020, as part of a multi-year partnership with Solar Landscape of New Jersey, Enhanced Capital invested US$5 million of equity in opportunity zones in North Bergen and Camden, N.J., for example. 

The Solar Landscape project also involved tax-equity financing of nearly US$9 million in community rooftop solar projects, which also were installed in Edison and Woodbridge, N.J. 

Impact Real Estate 

Some of Enhanced Capital’s investments straddle climate finance and impact real estate, such as those financing energy-efficiency projects in new and existing buildings. A strictly impact real estate project might be a community revitalization effort, such as the restoration and repurposing of an historic building.

“We finance those projects as a lender, and we also finance the incentives,” Korengold says. “If it’s a historic building, there are typically state and federal historic tax credits.” 

An example is the US$118 million redevelopment of the abandoned Copley Hospital campus in Aurora, Ill. Enhanced Capital partnered with Fox Valley Developers—a group of Aurora business leaders—to finance it. According to Enhanced Capital, the firm provided a total of US$60 million in financing “through a bridge loan secured by Historic Rehabilitation Tax Credits and contributions from the City of Aurora, Illinois’ Energy Conservation Authorities’ Property Assessed Clean Energy (PACE) program, and equity to monetize Illinois River Edge Historic Rehabilitation Tax Credits.” 

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Korengold notes that tax credits aimed at achieving public policy goals are supported by both Democrats and Republicans in the U.S. President Joe Biden’s climate and social-policy legislation known as Build Back Better may be stalled, but Korengold is cautiously optimistic about the fate of some of its tax-incentive proposals.

“Democrats favor the public policies these programs help finance and Republicans favor the free market approach to using private capital and providing an incentive for it,” he says. “Whatever happens in Build Back Better there are likely to continue to be these incentives and that will create more opportunities for impact investors.”