Managing Director & Senior Partner
BCG’s Center for Illinois’ Future and JPMorgan Chase Foundation are collaborating with Chicago’s philanthropic community to boost the number, efficiency, and impact of investments in the city’s disinvested neighborhoods. BCG has identified 4 factors that can amplify these investments and 3 steps for stakeholders to take to effect change.
Dedicated community organizations. Aspiring entrepreneurs. Committed funders. Valuable projects. Chicago’s neighborhoods have all of these and more. Yet, despite our efforts, we frequently fall short of our ambitions to drive positive change throughout our city. How can we change that? Boston Consulting Group’s recent study suggested there are several discrete obstacles that, if addressed, could dramatically change the future trajectory of our city and its citizens. But urgent attention and coordinated action is required.
In 2017, BCG’s Center for Illinois’ Future (BCG CIF) assessed opportunities to enhance the well-being of residents in Chicago. One of the most promising ways identified to drive positive outcomes throughout the city was by mitigating the shocking disparities in well-being indicators between affluent and disinvested neighborhoods. While all cities face challenges within and across their neighborhoods, the gaps in socioeconomic outcomes between Chicago’s disinvested neighborhoods and the rest of the city are far greater than they are in comparable cities like New York and Los Angeles.
As part of BCG CIF’s ongoing commitment to a more equitable Chicago, a BCG team has engaged with the JPMorgan Chase Foundation and the broader Chicago philanthropic community to determine how to increase the efficacy and impact of investments in communities that have not benefited equitably from the city’s economic progress.
In the 2018 recent study, BCG CIF explores:
The analysis draws on the research led by a dedicated BCG team over the past three months, including more than 50 interviews conducted with key players in the Chicago philanthropic and impact investing community in late 2018. The team has engaged with private foundations, local government, community development corporations (CDCs), community development financial institutions (CDFIs), impact investment funds, various nonprofit organizations, for-profit corporate social responsibility initiatives, and leading academic researchers in the field.
BCG CIF estimates that the total amount of mission-driven capital invested in Chicago—including government incentives, below-market lending, and equity impact investing—exceeds $7 billion for 2018. (For additional background on Chicago’s philanthropic landscape, see the report commissioned by Chicago Community Trust and with the Lilly Family School of Philanthropy.
Historically, the public and philanthropic sectors have sought to encourage investment in disinvested neighborhoods through numerous financial instruments that subsidize or incentivize investments in low-income communities. These include CDFI funds, new market tax credits (NMTC), low-income housing tax credits (LIHTC), tax-increment financing (TIF), and various other incentives offered by the public, private, and philanthropic sectors. This type of capital is designed to generate below-market (and sometimes zero) return with the purpose of stimulating additional private sector investment.
Given that a significant pool of capital seeks to drive positive change in Chicago through investments in low-income communities, the analysis sought to isolate opportunities to greater amplify the returns of these investments. In doing so, BCG CIF identified 4 amplifiers that can enable more capital to flow more efficiently through these and other investment instruments into the city’s disinvested neighborhoods to drive equitable development.
Numerous organizations have historically demonstrated a strong track record of community vision definition and strategic planning. However, there is opportunity to continue to build upon and expand the capacity building within these community organizations to further grow the execution and development capabilities of these organizations.
An opportunity exists to build on this work and attract investment from the social sector by developing these plans at a more tactical level. This approach would further emphasize the investable assets within the community—positioning both the community organization itself and the physical assets (such as land, green space, vacant buildings) as potential investment destinations.
Asset-based planning is not new to this sector, but should be further emphasized to capture investment capital. For example, communities can look to leverage empty lots to attract living-wage employment, provide needed indoor recreation space for residents, or refurbish a historical building for a new commercial purpose. These plans should be rooted in the goals already identified by the community and must be built in collaboration with community leaders.
Neighborhoods, the analysis shows, currently tend to focus on ongoing smaller-scale investments such as lending to small businesses and single family homes or on one-off deals such as the creation of major mixed-use developments or commercial areas. Instead, community impact can be amplified by translating strategic goals into economically feasible, prioritized pipelines of several return-generating projects.
The key challenge exists in committing longer-term, concentrated investment in neighborhoods. In focusing on more holistic and sustained investment, there is a greater opportunity to generate persistent momentum in neighborhoods that generates buzz and attracts peripheral investment.
Throughout the analysis, and in multiple instances, BCG CIF has found a common trend of a four-to-seven project pipeline generating enough momentum to unlock the synergy of concentrated investment. We observed multiple efforts in both Detroit and Chicago that have achieved proven success through multiproject initiatives designed to build neighborhood momentum.
Through comprehensive, more sustained efforts, neighborhoods attract additional private investment and execute more complex and impact-amplifying initiatives over time.
Of course, given the years and decades of disinvestment in many neighborhoods, achieving specific key performance indicators is likely to take an extended period of time in many situations. Even though a sustained and holistic investing strategy can accelerate positive results, investors will still require patience and must commit to a plan over the long term.
BCG CIF views collaboration across sectors as critical to generate and sustain the momentum of investments over several years. The creation of a marketplace within the investment ecosystem can provide a catalyst to execute pipelines of projects that neighborhoods create for the longer term. This role also enables collaboration within and across sectors so that each project can be financed and executed as a distinct—but interconnected—initiative.
Rooting community investment in a shared vision in this way—and combining it with skills from the private sector across investment, development, and growth strategy—presents an opportunity to create significant value. Most of the capital flowing into projects in disinvested neighborhoods is arriving through government incentives and below-market debt. However, debt capital flows remain constrained in historically disinvested neighborhoods due to underwriting restrictions and collateral obligations that are out of reach.
Increasing the diversity of skills and resources would position the collaborative to attract various forms of capital to the table, including equity, a segment of capital that has been largely absent from historically disinvested communities. Growth in equity investments would not only share the burden of risk but also align the governance and incentives of private investors with the needs of the public sector.
The kinds of collaborations needed to create the marketplace for community investments in Chicago would benefit greatly from a shared framework for measuring the impact of those efforts. To provide appropriate and adequate financial and societal returns, all investors need a consistent way to assess progress of the mission-driven investments.
The existing challenge in impact measurement is partially driven by neighborhood investments currently occurring as single events, requiring bespoke impact-measurement plans for each investment, which are laborious to track and inconsistent across investments. At BCG CIF, we view sustained and concentrated investment plans as an enabler to a more universal framework for impact measurement.
Through greater collaboration on more holistic and concentrated efforts, BCG CIF anticipates more consistent KPIs applicable across investments. We also see another opportunity to realize impact economies of scale: The time and effort put into a rigorous impact-measurement plan will return greater “bang for its buck” as it applies across a multiyear, multiproject investment pipeline. Identifying interim, shorter-term KPIs to ensure that the long-term plan is on track will be critical in building these plans.
To assess impact, BCG CIF has adapted BCG’s proprietary Sustainable Economic Development Assessment (SEDA) framework to measure well-being in US cities across 16 component dimensions. We believe that elements of this framework can also be applied at the community level, and we intend to focus additional efforts on impact measurement for communities.
Given the landscape of neighborhood investment in Chicago and the possibilities for improvements, communities can take 3 interventions to optimize the impact investing ecosystem.
In the quest to deploy capital in communities for maximum impact, continually building the capacity for further investment will play a critical role. Key to succeeding will be identifying strong community-based organizations and enabling them by helping them construct a vision and narrative that outlines the investment opportunities they offer. Those organizations will also require technical assistance and strategic planning help.
Such efforts are critically important since they form the basis of the community-driven vision that ultimately guides the pipeline of investable opportunities.
A dedicated entity is needed to coordinate and deliver the enhanced collaboration, detailed impact-measurement plans, and longer-term holistic community investment strategies that will drive greater investment.
Such an entity would focus primarily on translating high-level community-authored strategic plans into a pipeline of actionable projects that are economically feasible. It would help assemble the package of diverse investors, propose new and innovative financing mechanisms, and draft the plans for measuring the impact of these projects.
Today, some efforts to generate deals exist in various stages of development at the CDFI and CDC levels. However, many of these organizations can struggle to maintain the capacity necessary to carry out their daily operations while simultaneously focusing on longer-term strategic development. Further support and resources are needed.
Because historically disinvested neighborhoods face collateral constraints and difficulty underwriting deals, an opportunity exists for new, patient equity to enter the investment space. The introduction of true, patient equity would unlock growth in investment that debt financing alone cannot currently capture.
Beyond increasing capital access, building additional equity investment in disinvested neighborhoods would also more closely align the interests of investors. And it would draw in the much-needed “skin in the game” for investors to provide assistance and expertise to further drive positive results.
Appropriate return profiles could be created for various types of patient equity by combining investment in creative ways. Such an approach would move beyond traditional lending such as tax credits, TIF, and CDFI lending to also include new or previously underutilized investment vehicles such as opportunity zone financing, direct philanthropy, or other new financing incentives.
BCG and the Center for Illinois’ Future will continue to engage with the philanthropic, public, and private sectors to drive more investments and deliver greater impact in Chicago’s neighborhoods.
We envision our role as viewing the issues and solutions through different lenses, assessing the situation from the viewpoints of advocate, researcher, and advisor, for example. As we identify gaps that our organization may be well positioned to address, we will engage directly in forming and fostering strategic partnerships to strengthen collaboration and build a more equitable Chicago.
BCG's Christopher Means, Brian Tung, Connie Zuo, and Cassandra Di Prizio contributed to the investment analysis.
Managing Director & Partner