The US opportunity zone program is the reason for Jim Sorenson – impact investing pioneer, entrepreneur and Utah billionaire – entering the market as a real estate investment manager for the first time this year.
The opportunity zone program, a piece of bipartisan legislation included in the 2017 Tax Cuts and Jobs Act, offers tax benefits to investors that re-invest capital gains over the long term into communities across the country identified by the US government as economically distressed. For Sorenson, who has spent nearly 20 years as an impact investor and had been an early supporter of the legislation, the program presented an opportunity to launch impact investing into the mainstream. He saw a model in which investors, initially incentivized by the program’s tax benefits, could also become invested in the social impact of their projects on communities.
Sorenson, along with former Sorenson Impact Center chief executive Jeremy Keele and serial tech start-up founder and early-stage tech investor Patrick McKenna, established Salt Lake City-based impact investing firm Catalyst in January. The three managing partners worked together through the policy and advocacy organization Economic Innovation Group and advocated for the passing of the opportunity zone legislation before establishing Catalyst and subsequently launching its first fund in May.
The fund, a closed-ended commingled real estate vehicle that seeks to take advantage of the opportunity zone program, is aiming to raise $150 million in equity from an investor base of smaller registered investment advisors, institutions with capital gains and high-net-worth individuals and family offices that have previously shown an interest in impact investing. When PERE spoke to Keele in May, he said Catalyst had 50 projects lined up for fund investments and that the vehicle would follow an opportunistic investment strategy targeting “market-rate returns.” Most of the investments are expected to be mixed-use developments anchored by workforce housing, he said.
Once the real estate fund is raised and deployed, Catalyst plans to launch a second vehicle for private equity and venture investments in businesses. The firm hopes to find opportunities where the real estate and business investments benefit one another, and anticipates that some business investments will come from the tenants of the property developments. But regardless of asset class, Catalyst will be pursuing the dual goal of making a tangible positive impact and generating attractive investment returns.
When Sorenson heard about the proposed opportunity zone legislation, he saw an opportunity to incentivize impact investing among investors with capital gains. He leveraged his relationship with Utah senator Orrin Hatch and met with Paul Ryan, House speaker at the time, to help pass the legislation. The opportunity zone program was likely the only real bipartisan piece of the tax reform bill, Sorenson notes.
“It captivated me because I saw a real powerful incentive that could motivate mainstream investors. People that normally wouldn’t be looking at impact in their investment decisions could suddenly become impact investors.”
Though the legislation is purposeful in its aim to stimulate distressed communities across the US, the concept of impact investing is new to many of the program participants, according to Sorenson. By becoming a manager and participating in the program, he hopes he can draw on his impact investing experience and create a firm that will serve as a model for the industry.
“I want to see [the legislation] renewed in 10 years,” Sorenson says. “I don’t want this to be a once and done because there is question about its value.”
According to Sorenson, fulfilling the aim of the legislation will start with engaging communities in these opportunity zones so that the investments are aligned with local interests.
He says Catalyst’s underwriting process includes an impact score card, which takes community engagement into consideration. When evaluating an opportunity zone project, the firm will rate the developer’s relationship with the local government, philanthropic organizations and non-profit service providers. The firm also evaluates the level of support for a project among residents before allocating capital to it. Housing affordability and the potential for current resident displacement are also included as sections on the impact score card. The firm searches for projects that will create new affordable housing and workforce accommodation or preserve existing stock.
With the inclusion of an impact score card in the underwriting process, long-term focus and social impact measurement criteria developed by Georgetown University and the US Impact Investing Alliance, Sorenson hopes Catalyst can demonstrate to other investors that chasing dual financial and social returns is an attainable goal.
Not the retiring type
It would not be unusual for a man like Sorenson to retire at this point in his career. There is no pressure for him to try to debut as a real estate investment manager with an impact strategy in the opportunity zone field. After all, now in his late sixties and with several grandchildren, he already has a reputation as an impact investing pioneer.
“I’ve been successful, and I could be just clipping coupons and retired, living on an island somewhere,” he says. “But the reason that I decided to do this is that I really wanted to demonstrate best of class.”
Sorenson explains he has been promoting the investment strategy for almost two decades, before the term ‘impact investing’ became widely used.
The son of the late medical devices entrepreneur James LeVoy Sorenson, he first encountered impact investing as the founder of Sorenson Communications. The company was founded as a video conferencing business aimed at the masses. However, when the dotcom bubble burst in the 2000s Sorenson says it was left with little interest from investors and partners.
He decided to pivot the business after being introduced to a new service being trialed in the deaf community by a brother-in-law, himself deaf, who explained that the video relay service trials enabled deaf people to communicate with the hearing over the internet through a remote sign language interpreter in real time. Seeing an opportunity, Sorenson Communications focused solely on facilitating communication between the hearing and deaf communities. Within three years, Sorenson scaled up the business and sold it to private equity firm GTCR in 2005.
Realizing he could build a company that scaled quickly and created a positive impact, Sorenson began looking for business models like Sorenson Communications. He became involved with microfinancing, starting with grant funding then moving on to investing as some microfinancing institutions switched from non-profit to for-profit status in order to access greater pools of capital.
However, the impact investing field was still at a nascent stage and investors faced a lot of barriers, he says. Investment standards such as proper due diligence, available dealflow and managers with extensive track records were still developing in the impact investing space. He became an advocate of the impact strategy, which he saw as offering a solution to philanthropy’s problems with sustainability and scalability.
Defining impact investing
Impact investing takes place on a spectrum and is somewhat influenced by the eye of the beholder. However, Sorenson defines it as an investment that generates a financial return alongside intentional, measurable social impact. It also tends to be thematic, focusing on a singular issue such as education or financial inclusion.
Some investors remain skeptical about the feasibility of marrying the heart of philanthropy with financial goals and are not entirely convinced that such investments can offer market-rate returns. As with conventional funds, the key to success in impact investing boils down to fund selection.
According to a 2017 report by the Global Impact Investing Network and Boston-based portfolio manager Cambridge Associates, the distribution of individual fund returns varies widely. The study, which analyzed the financial performance of 20 real estate impact investing funds and 616 conventional real estate funds with vintage years ranging from 2004 to 2014, found that real estate impact investing vehicles provided better downside protection but limited upside compared with conventional funds. Real estate impact funds reported a pooled net internal rate of return of 0.8 percent, compared with the 4.9 percent net IRR reported by conventional funds.
But as the study noted, IRRs for impact funds were dragged down by the poor performance of a few large vehicles. On the other hand, impact investment funds with less than $50 million in assets under management returned a 10.2 percent pooled IRR, compared with 6.3 percent for conventional funds of the same size.
Still, Sorenson insists that impact investing can do good while still providing investors with favorable financial returns.
“I think you can generate outsized returns,” he says. “I think you can generate competitive returns and it’s important to note that impact investing, unlike traditional investing, is a spectrum.”
His own Sorenson Impact Foundation allocates 5 percent of its money to grants and the remainder to what he calls “mission-related investing,” which is gaining ground in the philanthropic world. In mission-related investing, an investment policy targets market-rate returns and a liquidity profile necessary to continue the annual grants and program-related investments. Much like traditional investments, it is designed for risk versus return. At the time of the interview, Sorenson said his foundation was around 60 percent converted to mission-related investments and had been performing 144 basis points ahead of its benchmarks.
Sorenson is already betting big on impact investing with his own capital and his own foundation. The next step is to show managers that impact investing, particularly within the context of opportunity zones, is a viable fund strategy.
Catalyst considers more than the financials when evaluating an investment and uses an impact score card that measures a variety of social factors, including:
• Community engagement by developers
• Project support by local residents
• Housing affordability and displacement rate
• Inclusion of minorities and women
• Access to services
• Job creation or job training for low-to-middle income individuals
Catalyst Fund I
Equity fundraising target
Structure Traditional closed-ended commingled fund
Investment strategy Opportunistic
Investor base Smaller registered investment advisors; certain institutions with capital gains; and high-net-worth individuals and family offices that have shown a prior interest in impact investing
Bonus Includes some of Sorenson’s own capital gains