17 Mar REDF Impact Investing Fund
REDF Impact Investing Fund
Interview with Carrie McKellogg; Chief Executive Officer of the REDF Impact Investing Fund
Jen: How was the REDF Impact Investing Fund Created?
Carrie: REDF is a 25 year-old venture philanthropy investing exclusively in businesses that exist to help drive participation, equity, and growth — employment social enterprises. These small businesses create jobs for people who face significant and often structural barriers to employment faced by people experiencing homelessness or mental health challenges, or those who have been impacted by the justice system, opportunity youth, survivors of domestic violence or human trafficking, and refugees and asylees. In response to demand from the social enterprise community, REDF now offers impact loans and lines of credit through the REDF Impact Investing Fund, a non-profit CDFI designed to increase access to capital and improve financial sustainability of borrowers, particularly enterprises led by people of color and people with lived experience of employment barriers.
Jen: How are your investment funds catalytic in a way that is different from other funds?
Carrie: We help borrowers who have been impacted by the financial sector’s inequitable distribution of credit to gain financial sustainability and build assets for businesses run by people of color and those who have experienced barriers to employment.
RIIF’s primary differentiators are our non-traditional underwriting and risk assessment criteria, flexible loan structures and terms, and integration of technical assistance (to promote business growth and improve financial management) as core to our partnership.
Our underwriting centers on the mission of the enterprise and the outcomes it is able to achieve for its employees. We incorporate traditional credit rating principles while also acknowledging the value of lived experience and community connections in growing a business, providing supportive work, and repaying RIIF’s loan.
In 2022 RIIF developed an innovative new risk rating system which values the lived experience and community capital of borrowers in mitigating risk, co-creates de-risking actions with the borrower while also using some traditional measures of repayment ability. RIIF builds financial sustainability for borrowers who have been impacted by the financial sector’s inequitable distribution of credit and we avoid personal guarantees or other more extractive forms of collateral in the process. RIIF lending catalyzes business growth, revenue, employment and asset building for businesses run by people of color and those who have experienced barriers to employment. These companies reinvest profits into the enterprise to provide greater support to individuals transitioning back into the workforce. In 2021 RIIF added a member to the credit committee representing the employment social enterprise community (a former ED) to better represent the ESE voice at the table.
We provide term loans, bridge loans, and lines of credit to accommodate the needs of our borrowers. We provide unsecured loans, offer flexible repayment terms including interest-only repayments, and structure loan repayments to maximize the enterprise’s potential to fulfill its employment mission.
With a model of “smart loans and the technical assistance needed to repay them”, each borrower will have the opportunity to receive at least one targeted capacity building engagement executed by an expert consultant over the term of the loan, to build their investability over time.
By taking these steps, RIIF is modeling a more equitable approach, providing greater transparency to borrowers as well as to investors by more accurately acknowledging the risk in the portfolio and balancing this risk among borrower, lender, and investor.
Photo: Firebrand Artisan Breads, Oakland, CA
Jen: How do you describe the kind of non-financial returns the fund offers?
Carrie: RIIF Impact Goals for 2021-25 are: 1) Equity Focused Investments that Create Well Resourced Leaders and Organizations; 2) Developing Strong & Sustainable Organizations; and 3) Investing in Employment and Create Pathways to Financial Stability.
RIIF works throughout the underwriting process to build borrower creditworthiness and reduce bias in underwriting to provide credit to enterprises led by people of color and those who share the lived experience of the people they employ.
RIIF’s diligence begins with an assessment of the borrower’s mission – providing supported transitional employment and permanent “good jobs” to employees. We conduct an annual programmatic survey of borrowers around the types of support provided (e.g. case management, transportation support, etc.), and through participation in a peer community of practitioners, offer borrowers training, networking, and partnership opportunities to improve employee outcomes in terms of job retention, income, and upskilling
The portfolio has a target of 60% of loans to BIPOC entrepreneurs by 2023 to correct for high barriers in accessing credit faced by social enterprises led by BIPOC and leaders with lived experience. At end 2022, 50% of the loans in RIIF’s portfolio were made to enterprises led by leaders of color, and 50% were made to enterprises run by leaders with lived experience. These relationships help inform how RIIF can adapt underwriting and risk management to expand access to credit for entrepreneurs that have historically been excluded from capital access.
Our underwriting process helps prepare borrowers to take on other forms of credit by advising borrowers on traditional lender requirements, and helping prepare for future investment and growing in a financially sustainable manner. As our borrowers grow, they hire more individuals whose lives are positively impacted by a job and what it brings: dignity, agency, and income. We measure outcomes of our borrowers’ employees, including advancing in their jobs, life stability, and community connections.
Jen: Can you describe how you use integrated capital to do your work?
Carrie: RIIF brings capital, capacity and community to borrowers. Capital: In 2023, RIIF plans to deploy $3 Million in loans and lines of credit to enterprises and communities that have not enjoyed access. By delivering strong portfolio performance and investor returns while creating employment impact, we aim to bring in new sources of capital from foundations to the ESE sector. Capacity: RIIF provides tailored capacity building alongside financing to nonprofit and for-profit borrowers. Community: RIIF borrowers join a 225+ community of practitioners for peer support. With the combination of capital, capacity, and community, RIIF supports borrowers to improve financial sustainability and access capital grow, generate revenue, and employ more people that have experienced barriers to work, the key dimensions of impact for RIIF and portfolio social enterprises.
During the Covid crisis we pivoted to provide more flexible finance options, including deploying technical assistance, loan modifications, and eligibility for REDF grants to RIIF borrowers, and offering Lines of Credit to social enterprises that are grantees of REDF. Since our team engaged with the enterprise as both grant-maker and lender, we needed clear and transparent communications when blending loan and grant tools while supporting an organization.
Jen: How do you address racial justice, income inequality, and/or gender justice through your products and services?
Carrie: RIIF works at the intersection of racial and income justice. We lend to businesses that are creating and providing supportive jobs for largely low-income people who have experienced significant and structural barriers to work including homelessness (26%), incarceration (21%), mental health challenges (23%) and opportunity youth (5%). Employees of the portfolio are 75% Black or Latinx. Therefore, we work to expand representation of borrowers with a minimum requirement that 45% of portfolio companies be led by people of color (50% at end 2022) and a target to increase this to 60% by 2023. Leaders who have faced employment barriers themselves have more employee loyalty and retention and better financial performance of the business, allowing them to reinvest profits into the enterprise. Their success helps other impact investors see an untapped pool of eligible borrowers generating employment for an untapped pool of talent.
In 2020, we formed the RIIF Advisory Council, comprised of some of the sector’s best experts and leaders to ensure RIIF reflects the diverse voices of the social enterprise movement and the communities we serve. With their input, we launched a new, alternative risk-rating system in 2021 and used it to underwrite and manage our portfolio in 2022.
Jen: Can you share with us an example of an investment?
In early 2023 RIIF closed a Line of Credit with the Forestry Fire Recruitment Program, a social enterprise founded by justice-involved individuals (see video of FFRP founder) who served in Fire Camp while incarcerated and wanted to develop pathways in forest fire prevention and suppression for similarly trained individuals leaving incarceration. The social enterprise performs land management and fire prevention services for public and private sector clients and the Department of the Interior/CalFire and employees from FFRP transition into full time firefighting careers. RIIF’s LOC will bridge payroll against receivables from contracts with CalFire and other entities.
Jen: What do you tell people who think your fund is risky?
Carrie: Our vision is an economy that works. For everyone. We invest in businesses that exist to help drive equity and growth – Employment Social Enterprises. These are businesses with a social purpose to create jobs for overlooked talent. We believe they are bankable and by investing, we build creditworthiness of leaders whose experience is their collateral. Our portfolio to date has been distributed over 9 States with 20 borrowers, funded by capital from impact investors, foundations, and philanthropy.
Our fund is delivering a pathway to economic mobility for some of the 10 Million people in the U.S. today can and want to work and find pathways to economic mobility but because of significant and often systemic and structural barriers, are unable to enter the workforce and contribute their potential to the economy and our communities. The employment social enterprise model is an evidence-based solution for successfully transitioning people into the workforce, while generating earned revenue to cover most of their costs. The individuals employed at RIIF portfolio companies see increases in wages, income, and economic opportunity and often a job in a supportive environment is the first step in stronger connections to family and community. The alternative of not investing in this solution leaves talented individuals with so much to contribute on the sidelines, while perpetuating and exacerbating many of the systemic inequities that are responsible for the current state of affairs.
Investment Thesis/What is your rationale for your approach to investing? Employment social enterprises are bankable; by investing, we build creditworthiness of leaders whose experience is their collateral with flexible capital and capacity building to support business growth, and in so doing, bend the narrative of what and who is “worthy” of investment towards leaders whose talent has been historically overlooked.
Geography: National 501.c.3 debt fund and CDFI that lends to employment social enterprises and mission-driven businesses whose focus is to create jobs for people who face significant and often structural barriers to employment like poverty, homelessness, and involvement with the justice system.
Year Founded: 2019
# of Investments: 21
# of Investors: 14+ (donors, funders, supporters, investors)
Funds Raised: $8.5 Million since inception
What’s on Carrie’s Mind?
Book: Slowly working my way through The Half Has Never Been Told by Edward Baptist
Song: Carnaval! We’ve been listening to a lot of samba this weekend. I’d have to go with A Deusa Dos Orixas by Clara Nunes
Podcast: WTF or Pod Save America, depends on the mood!