Our new Managing Director of the Catalyst Loan Funds reflects on her first couple of months at Living Cities, sharing her thoughts on how those in the investment world can more effectively collaborate.
During my first two months at Living Cities, I have noticed that collaboration is key to how Living Cities operates. But, as the new Managing Director overseeing our Catalyst Loan Funds, it is surprising and slightly unnerving. This is particularly true in the investment world where, for various reasons, there are few incentives for parties to share information or work together; they can even be antagonistic toward one another. In contrast, a key differentiator of Living Cities’ Catalyst Loan Funds is the significant transparency – around a pipeline of new transactions, risk, failure, new financing models and what we’re learning. This transparency is used to promote collaboration among our investors, borrowers and other stakeholders.
Witnessing the way Living Cities operates has pushed me to think more about collaboration: when does it work well, particularly in the investment space? Below are five key elements that I believe make for effective collaboration:
1. Work toward a common goal. At Living Cities, our members and fund investors are collectively focused on improving the lives of low-income people in U.S. cities. Having a shared mission makes it easier to prioritize resources and objectives and to overcome challenges.
2. Take the time to understand one another. Living Cities is a cross-sector collaboration: our members and investors range from financial institutions to foundations. They have different ideas, styles and processes. Understanding these differences, and communicating them upfront, is an important piece of effective collaboration.
For example, if an amendment to a multi-party financing agreement is required, it is helpful to know upfront about each investor’s internal processes and timeline for obtaining approvals. This understanding helps the group to set expectations appropriately.
3. Harness complementary assets. The Blended Catalyst Fund (BCF), our most recent fund which is capitalized by senior and subordinated debt, is one such example. BCF’s senior lenders are largely financial institutions, which are fiscally conservative and less risk tolerant but able to provide larger amounts of capital if there is subordinated money that sits below them in a capital structure. BCF’s subordinated lenders are mostly foundations who are motivated by social impact and the desire for financial leverage. They are also willing to take on more risk when compared to financial institutions. Separately, neither the financial institutions nor the foundations would be able to complete a full capital structure, but—when layered together—they become compelling and complementary partners.
Separately, neither the financial institutions nor the foundations would be able to complete a full capital structure, but—when layered together—they become compelling and complementary partners.
Another example of complementary assets is skill set. The financial institutions we work with tend to primarily bring a fiscal lens to our work, while our foundation investors bring an increased level of sophistication around targeting and measuring social impact. Together, Living Cities’ funds benefit from both of these perspectives, ensuring we make investments that are financially sound and capable of delivering measurable impact.
4. Find partners with different constraints. Complementary constraints are the flip side of complementary assets, allowing partners to accomplish their goals through one another.
A complementary constraint could be different regulatory requirements for financial institutions and foundation investors. These requirements may include Dodd Frank or Community Reinvestment Act regulations for the financial institutions, and Program Related Investments regulations for the foundations. The requirements can lead to different constraints, mandates, risk-return profiles, and social-impact objectives, which mean financial institutions and foundations can play different roles within a single fund’s capital structure.
5. Ensure buy-in from the top, and a good, practical working relationship at the other levels. Many of the Catalyst Funds’ investors are also Living Cities’ members. This relationship is important to note because our members’ CEOs and senior program officers sit on our Board of Directors, helping to set our organization’s direction. They also provide guidance on how their organizations will interface with ours as part of the larger collaboration—an element of which is Catalyst Fund investment. Our main points of contact for the funds, however, are our members’ investment staff. The fact that leaders within our member organizations are bought into Living Cities as a whole paves the way for a smoother day-to-day working relationship with members’ investment staff.
Collaboration is not an end in and of itself, but it is a way to accomplish more than we could do on our own. In an increasingly inequitable world, addressing poverty and opportunity gaps is crucial. Living Cities knows that we alone can’t create the necessary social change. For the system to evolve, all players need to be at the table, working together in optimal ways.