CDFI Fund awards to venture funds decline, equity investments increase

A new report from the U.S. Community Development Financial Institutions (CDFI) Fund shares performance data from federally certified CDFIs for FY 2020. Just five of the CDFIs covered in the data are certified as venture funds — a sharp decline from the 14 that were included in the FY 2019 report. However, FY 2020 saw 119 transactions listed as equity investments, an increase from 90 in the prior year.

The decline in certified venture capital CDFIs from the prior year likely indicates a drop-off in the number of venture fund CDFIs that received technical or financial assistance funding from the CDFI Fund. The CDFI Fund’s financial assistance awards are one of the federal government’s few sources of capital that can be used for equity investment, so this low participation may be a missed opportunity for regional tech-based economic development strategies.

The CDFI Fund report poses a few challenges to fully understanding the role of equity investment activity among CDFIs. Most importantly, many more certified CDFIs are active in the field during any given year than the number that have active federal funding awards, as CDFIs are not required to compete for CDFI Fund awards (406 CDFIs received awards, out of 1,144 total certified). Further, a fund’s certification type does not necessarily reflect the predominant type of financing which the CDFI provides currently (e.g., a “venture capital” CDFI may provide loans and vice-versa).

Despite these uncertainties in identifying CDFIs that provide investments, it is clear that the percentage is small. The approximately 100 equity investments in each year is out of more than 290,000 reported transaction each year. Notably, CDFIs also provide convertible notes and royalty-based repayments, but questions about the convertible note data makes a year-over-year comparison challenging.

CDFI certification not only allows financial entities to pursue federal funding, but also to be viewed as attractive targets for philanthropic support or as partners for banks looking to meet Community Reinvestment Act requirements. SSTI members that are certified CDFIs have discussed the benefits and challenges with the process in previous Digest coverage.

To become certified, organizations must submit an application to the CDFI Fund and meet requirements such as having a primary mission of promoting community development; serving one or more target markets; providing financing and other development services; maintaining accountability to its defined target market; and, being a non-government entity.

Additional information on the CDFI Fund and CDFIs can be found here.