Investor Meeting in Baltimore
Patrice McConnell Cromwell, Program Development Fellow of the Open Society Institute (OSI), prepared her notes for her 9:00 AM meeting. Investors of the Baltimore Fund would soon be gathering in OSI’s Baltimore, Maryland office to hear the latest financial and workforce development report from the Fund’s investment manager. As she gathered her notes, Cromwell reflected on the major challenges the group had faced since April 2001 when they had initiated work on the fund.
Getting the Fund off the ground had not been easy. To meet billionaire George Soros’ challenge of securing $10 million in funds from at least two other sources, Cromwell and her colleagues had turned to private sector institutions as well as small and large foundations in the Baltimore region. Given the difficult state of the local and national economy, encouraging these institutions to make social investments had been challenging. Additionally, once investors had been secured, responding to the individual needs of each had resulted in an extremely complex deal structure. The structure had to reflect the various organizational concerns and cultures of the different participants – both for-profit and nonprofit – including certain private foundation investors that intended to characterize their participation as a Program Related Investment (PRI). As a result, handling all of the legal papers to capitalize the Fund had become more costly and difficult than expected.
Despite these challenges, OSI raised the needed capital and the Baltimore Fund was capitalized at $15 million in July 2002. After much consideration, the group made the decision to structure their investments as a “fund within a fund.” The capital was placed in the Urban Growth Partners Fund (UGP), a multi-state initiative managed by The Reinvestment Fund (TRF). UGP is a $48.5 million fund that invests in enterprises with the potential to generate a financial return for its investors and job opportunities for low-income urban workers. TRF had agreed to earmark 31% of its funds for investments in businesses in the Baltimore metropolitan area; a percentage proportionate to the sizeable amount of funds the Baltimore Fund had committed ($15M of the $48.5M) to UGP.
At the morning’s meeting, TRF would report on its investments to date including their first Baltimore-based investment. As the administrator of the Fund, Cromwell knew her co-investors would be anxious to hear TRF’s update as many of them still had questions.
Was it possible to earn a financial return for investors while meeting the social mission of the Fund? Would there be substantial enough deal flow from the Baltimore area to find good investment opportunities? With the types of businesses that the Fund targeted would there be an appropriate exit strategy? Given the small size of the Fund the carrying costs would be quite substantial. Would this cost be bearable given the goals of the initiative? What type of metrics could they use to measure success?
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Carin Rosenberg, Ricardo Joseph, Rebecca Martin, and Sharon Oster, “The Baltimore Fund,” Yale SOM Case 00-013, February 1, 2004
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