The Capital Aggregator

total construction costs (hard and soft), b.) a rendering, c.) square footage of different components of the building (multifamily/office/retail/child care, etc. as applicable), d.) number of units, e.) unit mix (bedrooms/baths), f.) target market, g.) investment capital needed, h.) projected return profile, and i.) impact profile (jobs created, impact groups served, child care space, etc.).

a.) executive summary of company, b.) problem experienced by target market, c.) total addressable market, d.) solution company provides for target market, e.) metrics of success serving existing clients, f.) letters of intent (LOIs), or indications of interest from new potential clients, g.) investment capital needed, h.) what investment capital will be used for, i.) projected return profile, and j.) impact profile (jobs created, impact groups served, child care space, environmental initiatives, etc.).

If you have a local market maker in your area, they’ll be your best connection to potential local capital sources. They should be engaged in your strategy development from Day 1 and be your guide on identifying investors and going to market.

If you don’t have a local market maker with connections, you’ll have to start finding investors on your own. We’ve developed a short list of funds that we’ve seen express interest in investing in colleges and universities. You can find that list here. There’s a far broader world out there, though – groups like CitiVentures, Novogradac (a national accounting firm), and the National Council of State Housing Authorities maintain long-form lists of publicly announced Opportunity Funds.

Several “deal hosting” platforms have arisen over the last few months to broadly market deals to the world. These include The Opportunity Exchange, OppSites (which also hosts Smart Growth America’s OZ Marketplace), and Citi’s CityBuilder platform. While these platforms focus on Opportunity Zone deals, they are all moving away from strict focus on OZ to host broader community-oriented deal flow as well, and could be valuable resources for you regardless of where your deals are located. Other crowdfunding oriented platforms for hosting deals have been around for years, and could offer an equally strong base from which to host a pipeline. One of the advantages to the platform approach is that the process of uploading project materials tightens the marketing pitch on a deal.

As discussed above, alumni are a virtually untapped resource for resiliency-oriented investment – and you’re in the perfect position to harness them. Work with your Advancement or Alumni Relations office to identify the top 15-30 most likely candidates that might have a desire to do something beyond annual giving and have an affinity for what you’re doing. As an added bonus, try identifying those with a unique tax situation (e.g., sources of recurring gain events that could make them good candidates for an Opportunity Zone investment play) so you can help them “solve a problem” through partnership.

The easiest structural path to closing is with one or more capital sources loaning or investing directly into the project itself. Most existing capital sources – like banks, family offices, or private equity funds – will have their own diligence teams, underwriting processes, and standard term sheets. Even high net worth individuals (alumni or locals within the community) who have enough capital to invest directly will typically be “accredited” and have enough sophistication to diligence the deal you are putting in front of them. These capital sources have standard operating procedures that will either result in a “no” without any need for you to build your own vehicle. However, avoiding complexity comes at a price on the equity side – getting third party capital directly into your deal may require you to pay more return over time than a group of individual impact-motivated investors you could assemble yourself would demand.

This pathway is almost identical to Pathway A (direct sourcing from capital) – you’ll still source debt and incentives directly for the deal itself. The key difference here is where the equity comes from. In this model, we assume your deal sponsor or your institution puts together an investment vehicle specifically for the project you are promoting. You can do this by setting up a project-specific equity fund (normally for 5-20 investors writing larger checks), or even by setting up a crowdfunded offering (for dozens of investors, particularly if writing smaller checks). 

There are a few big benefits to this approach over getting equity directly from established sources:

• Your cost of capital may be less / you may have an easier time closing capital if you are able to successfully identify investors who are more motivated by the deal (e.g., they are alumni and want to support the school).
• Having a vehicle lets you take smaller checks from more people – meaning you can go beyond the small handful of people in your network with the capacity to write checks with several zeros or more. 
• Depending on your project, you may be able to do some of the creative capital stacking at the fund level that can produce a blended capital fund (though this typically occurs for multi-asset funds, not single-asset funds – see Part C below for more).

Those benefits come with some major additional compliance responsibility.

• Putting multiple investors into a common investment vehicle triggers securities law implications you’ll have to address. The more investors you have, and the more widely you advertise the opportunity, the more concerns you’ll have. Choosing the right partner for this step that can help you navigate compliance issues (e.g., a top-notch crowdfunding platform or a seasoned fund manager) makes all the difference in your ability to execute. 
• If not conducted properly, approaching individual investors can be a lot trickier than approaching sophisticated investment funds with their own management teams. Depending on who the individual investor is and how much experience they have looking at varied types of investments (from student housing deals to grocery stores), they might need a substantial degree of “hand-holding” to get through the underwriting process. Make sure that the people you approach are sophisticated enough to understand, appreciate, and mitigate the risks of the investments you’re putting in front of them. If possible, limit your initial conversations to individuals who are accredited investors – and ask them if they’ve consulted with a financial advisor or other professional before getting them into an investment vehicle. 

As a result of these extra compliance hurdles – we strongly encourage any institution that is thinking about aggregating capital by attracting individual investors into a fund vehicle to seek professional counsel from your legal and accounting teams about the difficulty of this path. These conversations will typically result in a recommendation that you work with one or more established partners to set up your multi-investor vehicle. That can be whatever combination of investment adviser, fund manager, broker-dealer, or professional team (legal and accounting) you need to feel comfortable taking this step.

Whether you are raising for a specific opportunity or setting up a fund to invest in a specific opportunity, the process will run as follows:

● Initial Introduction

The hoped-for result of your cold outreach described above, most capital sources will want to set up an introductory call between the group of principals responsible for the investment opportunity (e.g., deal team, developer, CEO, college officials, etc.) and the capital source’s diligence team as a first step.

● Diligence

If your introductory call goes well, the capital source will request backup information behind the initial marketing materials submitted – demand studies, environmental reports, construction budgets, comprehensive business plans, and everything else the deal has put together. We’ve compiled a sample diligence list so you can know what to expect once you get to this stage.  Note that, if you are raising from individuals / you have set up your own project-specific investment fund, you’ll have to have these materials ready, as some of your individual potential investors may not know to ask for all the appropriate material.

● Negotiating Terms / Letter of Intent (For Direct Introductions Only)

If the deal has strong potential upside and you/the deal team have been able to mitigate risk, it’s time to negotiate terms that work for both the deal sponsor and the capital source. a variety of factors dictate project return. These include expected annual cash distributions (rent), the back-end sale price/repurchase option in Year 10 or later, the amount of incentives that a project receives (and whether those incentives are up front or over time), how much debt a project takes on (and how expensive that debt proves to be), and the ultimate risk profile of the project. Your deal team will continue manipulating these variables within the model until you can get to a point where the project can sustain itself and the capital sources can get the payback/return they need. Once you’re there, the capital source will issue a Letter of Intent, which starts the deal down the closing process. To help you understand what this negotiation looks like, we’ve included sample LOIs in our Resource Room.

● Forming Your Fund (For Multi-Investor Funds Only)

Once you’ve got enough investors interested to fill the equity requirement, it’s time to actually form the fund. Doing so will require you to execute a term sheet with all your investors similar to the LOI process described above – but instead of getting out of the way while the deal sponsor and the capital source negotiate, you (or your fund management / crowdsource platform partner) will be the intermediary that proposes terms and “settles” the deal around its key terms (expected investor return, length of holding period, etc.). With enough LOIs from your investors, you can form the fund, creating the equity capital source necessary to get the deal closed. 

● Closing

With an LOI/investors in place, much of the remainder of the process gets turned over to the lawyers and the accountants to get the right documents and procedures in place to make sure the investment structure works – and that the diligence provided is complete and accurate. With this final vetting step and the right structure in place, the fund will simply cut the deal a check for the required amount.

Thus far, we’ve only discussed ways that you can be a capital aggregator for specific projects. In certain situations, you might prefer to aggregate capital for a vehicle that can fund multiple projects at once, in some cases without having those projects pre-identified. In that case, you’re raising a fund – and the tool you wield becomes far more powerful (but also far more complex). 

There are a few principal reasons why you’d want to set up a true fund to accomplish your Capital Aggregator objectives:

• The most common reason for creating a multi-asset, multi-investor fund is having a large and recurring stream of projects (5-10+ consistently, on an annualized basis). You’d get this as an Opportunity Sponsor, Local Anchor, or Capacity Builder, and if you want the best chance at getting all those deals done, it can be administratively easier to raise money once and build one vehicle instead of having to repeat the process every time. 
• The second most common reason is for the blended sources of capital you can attract. Many national foundations (and even some local ones) find it easier to offer incentives like first loss-capital, foundation guarantees, or program-related investments at the fund level instead of having to apply those incentives to every individual deal. (E.g., Guaranteeing a single deal is a riskier proposition than guaranteeing a certain minimum return on a bucket of five deals that refreshes each year.) Having a blended capital fund will let you get more impactful projects done at a lower cost of capital than you could manage if working on a deal-by-deal basis. To date, the best examples of these regional blended capital funds  are from Arctaris.

We’ve highlighted the infrastructure and partnerships you’ll need to launch your multi-asset fund in the space below.

01 Management Team

This will be the biggest partnership decision you make. Most multi-asset funds have a small team that does nothing but underwrite deals, call investors, and manage the day-to-day operations of the fund. Investors want to see a fund management team with a proven track record of taking money and making returns over a long period of time. Particularly in blind pool funds (discussed below), investors want to know that the people in charge of investing their money know what they’re doing. So – if you’re considering launching your own fund, you’ll want to find a partner willing to work with you to build a diligence infrastructure for your pipeline. These managers get paid an annual management fee based on the size of the fund (usually about 2% of capital raised) and get a big chunk of the equity (usually about 20%) in the fund itself.

02 “Closed-End,” “Blind Pool” or “Semi-Blind Pool” Structure

Every multi-asset fund has a long list of potential deals. Some underwrite that full pipeline, commit to a handful, then go seek individual investors on the strength of a handful of those specific deals (just like the single-asset funds described above). Others perform their initial underwriting, then go straight to investors, asking for commitments to a fund rather than an investment into particular projects. These “blind pool” funds will take the capital they raise and selectively deploy it (typically over a 6-12 month period) into the pipeline they’ve identified. In between, “semi-blind pool” funds are exactly how they sound – funds that ask for investors to make blind commitments, but that show investors the top handful of deals they are most likely to invest in, allowing investors to perform their own diligence on the underlying investments without having to place 100% of their trust in the management team. First time funds are far more likely to succeed using a closed-end and semi-blind pool model than a true blind pool model.

03 Fund Administration, Legal, and Accounting

 You’ll need someone to help with the legal, accounting and compliance work around managing a fund (like issuing investor statements and tax forms). Sometimes the management team does this; other times it’s outsourced to a third party firm like Gainvest or NES Financial. 

04 Creative Capital Stacking Options

One of the best parts about a multi-asset fund is that – with the right management team and structure – you can get really creative with “blending capital.” In other words – if you’re able to harness some of the Creative Capital Stacking options discussed in our Guidebook, you may be able to attract market-rate investors – but then be able to offer your projects a much cheaper cost of capital. The sources of creative capital you access will dramatically impact the size, complexity, and legal structure of your fund – so if you plan to pursue this, be sure to choose a fund management team that has worked with blended capital before.