Equity Equivalent Investments - CDFI Fund

E 1 Q 2 Equity Equivalent Investments T HE N EED D EVELOPING A S OLUTION 1. The equity equivalent is carried as A strong permanent capital base is criti- In 1995, National Community Capital an investment on the investor’s cal for community development finan- set out to create a new financial in- balance sheet in accordance with cial institutions (CDFIs) because it in- strument that would function like eq- Generally Accepted Accounting creases the organization’s risk tolerance uity for nonprofit CDFIs. To realize Principles (GAAP) and lending flexibility, lowers the cost this goal, National Community Capi- of capital, and protects lenders by pro- tal chose an experienced partner— 2. It is a general obligation of the viding a cushion

against losses in ex- Citibank—to help develop an equity CDFI that is not secured by any of cess of loan loss reserves. It allows equivalent that would serve as a model the CDFI’s assets CDFIs to better meet the needs of their for replication by other nonprofit markets by allowing them to engage CDFIs and to make a lead investment 3. It is fully subordinated to the right in longer-term and riskier lending. A in National Community Capital. The of repayment of all of the CDFI’s larger permanent capital base also pro- equity equivalent investment product, other creditors vides more incentive for potential in- or EQ2, was developed through the vestors to lend money to a CDFI. All Citibank/National Community Capital 4. It does not give the investor the right of these results help CDFIs grow their collaboration and provides a new to accelerate payment unless the operations and solidify their positions source and type of capital for CDFIs. CDFI ceases its normal operations as permanent institutions. Unlike for- (i.e., changes its line of business) profit corporations, which can raise T HE E QUITY E QUIVALENT – equity by issuing stock, nonprofits W HAT I S I T ? 5. It carries an interest rate that is not must generally rely on grants to build The Equity Equivalent, or EQ2, is a tied to any income received by the this base. Traditionally, nonprofit capital product for community devel- CDFI CDFIs have raised the equity capital opment financial institutions and their they need to support their lending and investors. It is a financial tool that al- 6. It has a rolling term and therefore, investing activities through capital lows CDFIs to strengthen their capital an indeterminate maturity grants from philanthropic sources, or structures, leverage additional debt capi- in some instances, through retained tal, and as a result, increase lending and Like permanent capital, EQ2 en- earnings. However, building a perma- investing in economically disadvantaged hances a CDFI’s lending flexibility and nent capital base through grants is a communities. Since its creation in 1996, increases its debt capacity by protect- time-consuming process, and one that banks and other investors have made ing senior lenders from losses. Unlike often generates relatively little yield. It more than $70 million in EQ2 invest- permanent capital, the investment must is also a strategy that is constrained by ments and the EQ2 has become an in- eventually...

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