Citi tries new tack to push its social agenda: Venture investing. American Banker Newspaper. By John Reosti February 10, 2020, 4:09 p.m. EST
Citigroup operates a big foundation that focuses
on philanthropic priorities such as workforce development, financial inclusion
and sustainability.
Now, the banking giant is building on these
commitments by launching a venture capital fund that will invest in
private-sector firms that are developing solutions to improve worker training,
increase consumers' access to the financial system, improve access to
transportation, health care and affordable housing, and address issues related
to sustainable energy and water use.
Citi is calling the impact fund the largest
ever involving a bank using its own capital. Investments could be as large as
$10 million in more established companies, said Ed Skyler, Citi's vice
president for global public affairs.
Citi is also setting a portion aside for
earlier-stage seed investments. Seed funding will be allocated exclusively to
investments in businesses led or owned by women and minorities. The bank plans
to manage the fund largely in-house.
William Michael Cunningham, an authority on
impact investing and CEO at Creative Investment Research in Washington, D.C.,
called the prospect of the fund putting capital in the hands of
African-American entrepreneurs “exciting," but questioned why Citi is not
soliciting outside advice to help find investment targets.
Citi and other big banks “have not been
productive in making investments in black companies,” Cunningham said in a
recent interview. “Ideally, they’d adopt an open-source approach” and accept
input from a variety of sources. “There’s a boatload of black companies that
need capital.”
Still, Cunningham is encouraged Citi is
offering equity capital, rather than debt that would “hang over the heads” of
many minority entrepreneurs.
News of Citi’s impact fund comes as the
concept of investing with an eye toward driving social as well as financial
returns is gaining increasing currency among investors of all stripes. A June
2019 survey by the Global Impact Investing Network estimated the size of the
global impact investing market at $500 billion.
“I don’t think it’s quite mainstream yet, but
it’s becoming more mainstream,” Eric Hsueh, director of manager due diligence
at Cornerstone Capital Group in New York, said in an interview.
“As with anything the devil is in the details
[but] I think it’s certainly a good first step,” Hsueh said of the Impact Fund.
“It’s good to see large financial institutions like Citi dipping their toes in
this arena.”
While Citi itself is positioning the fund as
an extension of its socially conscious philanthropic and lending activities,
Robert Johnson, a professor of finance at Creighton University in Omaha, Neb.,
said it could also help to burnish banks' image.
“Financial firms want to send the message that
they embrace the narrative of broader stakeholder considerations, beyond
shareholder wealth maximization,” Johnson said.
Johnson, however, expressed concern that the
growing popularity of impact investing could lead to a bubble. “Everyone, it
seems, has a form of [impact investing] FOMO — fear of missing out,” he said.
“Firms really don’t know how to properly position themselves, but that isn’t
stopping them.”
Skyler, though, said that the fund fits
squarely within Citi's stated mission of promoting "growth and economic
progress." He spoke to American Banker recently about the fund and its
prospects or helping to solve pressing social problems while generating returns
for the bank and its investors. The interview has been edited for length and
clarity.
American Banker: Why did Citi choose to create
the Impact Fund? What is the bank aiming for?
ED SKYLER: We launched the Citi
Impact Fund as another way to make capital available to those who are trying to
solve some of the problems our communities are facing.
When you look at some of the tools we’ve used,
we’ve used a couple of them. Through the Citi Foundation, our global “Pathway
to Progress” initiatives aims to help close the job skills mismatch by helping
young people get the skills they need to compete in today’s economy. We have
used the foundation to work with cities to fund innovative projects which they
wouldn’t be able to spend taxpayer dollars on.
We’ve pursued financial inclusion
opportunities in microfinance working with nonprofits like Grameen, and the
Ford Foundation, and government organizations like [U.S. International
Development Finance Corp.] in lending to entrepreneurs in emerging markets.
To me, what the fund does is complement our
existing activities where we’re trying to play a positive role. … This is an
opportunity to try to address the same types of challenges through equity
investing.
In launching the fund, Citi is the first bank
to be using its own balance sheet. We’re not taking investor money to make
these types of equity investments in double bottom line companies.
If you look a little more broadly at some of
the business we do, it’s all very consistent, as well. For example, Citi has
been the leading affordable housing lender in the United States for the last
nine years. If you look at sustainability, we’ve eclipsed our $100 billion
environmental finance goal. Instead of reaching it in 10 years, we did it in
seven.
What makes this project so important that Citi
would want to make an investment of this magnitude? This is a lot of money.
It’s absolutely a lot of money.
While we donate roughly the same amount of
$150 million a year to different nonprofits globally, this is an opportunity to
help solve problems and generate a return for our shareholders. For us it fits
squarely in the bull's-eye of our mission to promote growth and economic
progress.
If you look at where capital is being made
available at this level, for venture investing, we know it hasn’t been
distributed evenly. The gender and ethnic gap is very real. Our intention is to
not only help women- and minority-owned startups scale and thrive, but to also
shine a light on the investment opportunities among this pool of
often-overlooked, high-potential entrepreneurs.
How will it work? How long will it take to
deploy the capital?
We’re not going to throw money out the door
just to get it allocated. We’ve spent the past year doing two things. First was
gaining internal support and setting up the internal infrastructure to manage
this. We have been working with the investment professionals at Citi Ventures
and also in our municipal securities division.
The second is has been developing a pipeline
of companies we could invest in, and we already have dozens of companies that
we’re looking at.
"We’re really not trying to win any business,
but in five or 10 years if one of these companies goes public and we’re on the
IPO, that’s great," says Ed Skyler, Citi's head of global public affairs.
Was the seed component always part of the
project or was it added as things were fleshed out?
It came as things were fleshed out. … We
always knew there would be some seed funding as well as some later-stage
funding. We decided toward the end we wanted to make the seed funding exclusive
to minority- and women-owned or -led businesses.
Can you talk a little more about the response?
Generally, what have you been hearing since you disclosed the full extent of
your plans?
There’s been great internal feedback. We’ve
also received great feedback from clients, including in the private bank,
who’ve wanted to learn more about it and see if there’s an opportunity for them
to get involved.
People are even asking if we would take
outside money for the fund — which we won’t. It’s a clear signal of the
appetite there is from investors for this type of social impact investing.
More broadly in the marketplace, I think our
stakeholders see this as a good use of our financial resources. I think that
reflects an environment where people see the role of business changing. The
concept of shareholder primacy has been challenged. There are people who are
looking at their portfolios and making allocations for social impact — perhaps
not all, but some amount.
I’m wondering also as you unroll this $150
million program about the types of synergies you might have for traditional
banking business. Was that something you thought about, or is it a byproduct
that might come from this?
It’s hopefully a byproduct, but it’s not the
driving force.
We’re really not trying to win any business,
but in five or 10 years if one of these companies goes public and we’re on the
IPO, that’s great.
Do you have any geographic regions you’re
focusing on, or will you consider investing anywhere in the United States?
It’s the latter.
You mentioned that you spent about a year
developing internal support, getting commitments to access the resources you
have within the company; that they would be onboard and help with this.
Obviously, it seems you were successful with that. I guess that’s another
indicator that this is really a Citi project, not just the money but expertise
as well. It’s all coming from the bank.
We met with the treasurer, Michael Verdeschi,
early on in the process to see if he was comfortable with the concept since he
owns the balance sheet.
One of the first calls I made was to our chief
innovation officer and head of Citi Ventures, Vanessa Colella, about working
with her team. Our risk team is obviously involved, and we reached out to
global spread products and municipal securities as well, because they have a
lot of experience doing this.
We got to a point where we pitched our CFO,
Mark Mason. He saw what we were trying to do and made it better. We originally
proposed $100 million and Mark said he was willing to do $150 million — if we
put an emphasis on women and minority entrepreneurs. We were embarrassed we
hadn’t thought of that ourselves.