Generating strong financial returns while investing in your community
In a prior post, Gary Community Ventures’ CEO Santhosh Ramdoss outlined the potential for investment capital to have impact in service of our own communities while generating competitive returns. This isn’t to imply that this is easy or straight forward. Traditional place-based thematic investing often underperforms due to a narrow focus on specific geographies and industries. Gary Community Ventures (GCV) initially experienced this by focusing on several verticals only in Colorado. The returns were lackluster at best given the limited universe of investments geographically, compounded by focusing on a limited number of industries. Indeed most of the best performing impact funds have also had to diversify geographically to generate competitive returns.
Based upon this experience, GCV shifted to investing with best-in-class fund managers nationwide across the desired themes, relaxing the geographic constraint to generate better returns. This approach yielded strong returns but lacked local impact, as very little of the capital or companies reached Colorado.
GCV’s “goldilocks solution” involves being an active Limited Partner (LP), combining competitive financial returns while overindexing for Colorado exposure. This is achieved through partnership with funds in several ways:
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- Capital: GCV leverages its Colorado networks to direct high-potential local companies to fund managers, encouraging more capital allocation within the state and achieving a “multiplier effect” on its investments. If we put $3mm in a fund and that fund invests $5mm in a Colorado company, that’s better than putting only $3mm directly into that company.
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- Community: GCV helps facilitate the entry of products and services from out-of-state portfolio companies into Colorado communities
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- Systems Change: GCV applies insights from its investments to influence state and local policy, exemplified by Prop 123 for affordable housing solutions
There are two private fund examples of place-based investing that Illustrate challenges generating market rate returns in thematic investing across a limited geography – DBL and SJF
DBL has generated competitive returns over the last decade, with it’s 2018 and 2020 vintage funds generating strong returns. However, DBL originally started as the Bay Area Equity Fund, which was an initiative spun out of JP Morgan to invest in the SF Bay Area for impact. It’s first two funds that were attempting this place-based approach were not as successful, with fund II at a net IRR of 4.2% This is despite the bay area being the home of most of the nation’s venture capital and arguably the largest impact investment ecosystem in the country. It was only after they removed the geographic constraint that performance followed.
SJF – Originally launched as the Sustainable Jobs Fund, the initial focus was on investing in businesses that would create quality jobs in the Southeast of the United States. However, as with DBL, SJF found that investing in a subset of businesses and a narrow geography was difficult for providing quality returns. Consequently, they also expanded their geographic focus and thematic focus from businesses that would create jobs locally to businesses that would focus on three themes: energy transition, education and health, with a view that all three of these industries were undergoing significant secular change with quality investment opportunities. Similar to DBL, the financial performance improved dramatically when they expanded the scope of their mandate, with several of their funds in the top quartile for their respective vintages.
For this model to succeed, GCV emphasizes a multi-asset class approach. This diversifies themes and provides broader geographic reach. Private equity (PE) and venture capital (VC) opportunities are often urban, while real asset or private credit opportunities (like sustainable agriculture) can be rural. This allows us to deploy capital that will reach more than just the front range, which is where the best PE/VC investments exist.
Finally, successful place-based thematic investing requires three conditions:
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- Strong Secular Drivers: Themes must have positive macro trends (e.g., consumer trends, market imbalances, policy support)
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- Critical Mass of Opportunities: Sufficient investment opportunities must exist within the target geography
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- Attractive Entry Valuations: A robust local ecosystem with less capital than leading geographies can lead to better valuations
Building on the success of this approach at GCV, COinvest is an investment manager mobilizing more capital for Colorado impact and extending GCV’s model to other investors. We have chosen verticals for investing based on a combination of the above conditions in Colorado, as well as GCV’s deep relationships and expertise in many of these sectors (Climate, Digital Health, Education, Workforce Housing, ESOP financing). We look forward to sharing more about our progress through periodic updates on the investments we have made and our learnings about implementing this model.