Citi tries new tack to push its social agenda: Venture investing
Citigroup operates a big foundation that focuses on philanthropic priorities such as workforce development, financial inclusion and sustainability.
Now, the banking giant is building on these commitments by launching a venture capital fund that will invest in private-sector firms that are developing solutions to improve worker training, increase consumers' access to the financial system, improve access to transportation, health care and affordable housing, and address issues related to sustainable energy and water use.
Citi is calling the impact fund the largest ever involving a bank using its own capital. Investments could be as large as $10 million in more established companies, said Ed Skyler, Citi's vice president for global public affairs.
Citi is also setting a portion aside for earlier-stage seed investments. Seed funding will be allocated exclusively to investments in businesses led or owned by women and minorities. The bank plans to manage the fund largely in-house.
William Michael Cunningham, an authority on impact investing and CEO at Creative Investment Research in Washington, D.C., called the prospect of the fund putting capital in the hands of African-American entrepreneurs “exciting," but questioned why Citi is not soliciting outside advice to help find investment targets.
Citi and other big banks “have not been productive in making investments in black companies,” Cunningham said in a recent interview. “Ideally, they’d adopt an open-source approach” and accept input from a variety of sources. “There’s a boatload of black companies that need capital.”
Still, Cunningham is encouraged Citi is offering equity capital, rather than debt that would “hang over the heads” of many minority entrepreneurs.
News of Citi’s impact fund comes as the concept of investing with an eye toward driving social as well as financial returns is gaining increasing currency among investors of all stripes. A June 2019 survey by the Global Impact Investing Network estimated the size of the global impact investing market at $500 billion.
“I don’t think it’s quite mainstream yet, but it’s becoming more mainstream,” Eric Hsueh, director of manager due diligence at Cornerstone Capital Group in New York, said in an interview.
“As with anything the devil is in the details [but] I think it’s certainly a good first step,” Hsueh said of the Impact Fund. “It’s good to see large financial institutions like Citi dipping their toes in this arena.”
While Citi itself is positioning the fund as an extension of its socially conscious philanthropic and lending activities, Robert Johnson, a professor of finance at Creighton University in Omaha, Neb., said it could also help to burnish banks' image.
“Financial firms want to send the message that they embrace the narrative of broader stakeholder considerations, beyond shareholder wealth maximization,” Johnson said.
Johnson, however, expressed concern that the growing popularity of impact investing could lead to a bubble. “Everyone, it seems, has a form of [impact investing] FOMO — fear of missing out,” he said. “Firms really don’t know how to properly position themselves, but that isn’t stopping them.”
Skyler, though, said that the fund fits squarely within Citi's stated mission of promoting "growth and economic progress." He spoke to American Banker recently about the fund and its prospects or helping to solve pressing social problems while generating returns for the bank and its investors. The interview has been edited for length and clarity.
American Banker: Why did Citi choose to create the Impact Fund? What is the bank aiming for?
ED SKYLER: We launched the Citi Impact Fund as another way to make capital available to those who are trying to solve some of the problems our communities are facing.
When you look at some of the tools we’ve used, we’ve used a couple of them. Through the Citi Foundation, our global “Pathway to Progress” initiatives aims to help close the job skills mismatch by helping young people get the skills they need to compete in today’s economy. We have used the foundation to work with cities to fund innovative projects which they wouldn’t be able to spend taxpayer dollars on.
We’ve pursued financial inclusion opportunities in microfinance working with nonprofits like Grameen, and the Ford Foundation, and government organizations like [U.S. International Development Finance Corp.] in lending to entrepreneurs in emerging markets.
To me, what the fund does is complement our existing activities where we’re trying to play a positive role. … This is an opportunity to try to address the same types of challenges through equity investing.
In launching the fund, Citi is the first bank to be using its own balance sheet. We’re not taking investor money to make these types of equity investments in double bottom line companies.
If you look a little more broadly at some of the business we do, it’s all very consistent, as well. For example, Citi has been the leading affordable housing lender in the United States for the last nine years. If you look at sustainability, we’ve eclipsed our $100 billion environmental finance goal. Instead of reaching it in 10 years, we did it in seven.
What makes this project so important that Citi would want to make an investment of this magnitude? This is a lot of money.
It’s absolutely a lot of money.
While we donate roughly the same amount of $150 million a year to different nonprofits globally, this is an opportunity to help solve problems and generate a return for our shareholders. For us it fits squarely in the bull's-eye of our mission to promote growth and economic progress.
If you look at where capital is being made available at this level, for venture investing, we know it hasn’t been distributed evenly. The gender and ethnic gap is very real. Our intention is to not only help women- and minority-owned startups scale and thrive, but to also shine a light on the investment opportunities among this pool of often-overlooked, high-potential entrepreneurs.
How will it work? How long will it take to deploy the capital?
We’re not going to throw money out the door just to get it allocated. We’ve spent the past year doing two things. First was gaining internal support and setting up the internal infrastructure to manage this. We have been working with the investment professionals at Citi Ventures and also in our municipal securities division.
The second is has been developing a pipeline of companies we could invest in, and we already have dozens of companies that we’re looking at.
Was the seed component always part of the project or was it added as things were fleshed out?
It came as things were fleshed out. … We always knew there would be some seed funding as well as some later-stage funding. We decided toward the end we wanted to make the seed funding exclusive to minority- and women-owned or -led businesses.
Can you talk a little more about the response? Generally what have you been hearing since you disclosed the full extent of your plans?
There’s been great internal feedback. We’ve also received great feedback from clients, including in the private bank, who’ve wanted to learn more about it and see if there’s an opportunity for them to get involved.
People are even asking if we would take outside money for the fund — which we won’t. It’s a clear signal of the appetite there is from investors for this type of social impact investing.
More broadly in the marketplace, I think our stakeholders see this as a good use of our financial resources. I think that reflects an environment where people see the role of business changing. The concept of shareholder primacy has been challenged. There are people who are looking at their portfolios and making allocations for social impact — perhaps not all, but some amount.
I’m wondering also as you unroll this $150 million program about the types of synergies you might have for traditional banking business. Was that something you thought about, or is it a byproduct that might come from this?
It’s hopefully a byproduct, but it’s not the driving force.
We’re really not trying to win any business, but in five or 10 years if one of these companies goes public and we’re on the IPO, that’s great.
Do you have any geographic regions you’re focusing on, or will you consider investing anywhere in the United States?
It’s the latter.
You mentioned that you spent about a year developing internal support, getting commitments to access the resources you have within the company; that they would be onboard and help with this. Obviously, it seems you were successful with that. I guess that’s another indicator that this is really a Citi project, not just the money but expertise as well. It’s all coming from the bank.
We met with the treasurer, Michael Verdeschi, early on in the process to see if he was comfortable with the concept since he owns the balance sheet.
One of the first calls I made was to our chief innovation officer and head of Citi Ventures, Vanessa Colella, about working with her team. Our risk team is obviously involved, and we reached out to global spread products and municipal securities as well, because they have a lot of experience doing this.
We got to a point where we pitched our CFO, Mark Mason. He saw what we were trying to do and made it better. We originally proposed $100 million and Mark said he was willing to do $150 million — if we put an emphasis on women and minority entrepreneurs. We were embarrassed we hadn’t thought of that ourselves.