It was always only a matter of time before impact investing guru Jim Sorenson established a business decidedly focused on investments in US opportunity zones.
Catalyst, a Salt Lake City-based firm, was established just three months ago by Sorenson, along with former Sorenson Impact Center chief executive Jeremy Keele and serial tech start-up founder and early-stage tech investor Patrick McKenna. The three managing partners worked together through the policy and advocacy organization Economic Innovation Group before establishing Catalyst. They later brought on former Fortress Investment Group senior vice-president Kristian Peterson to head the real estate investments.
Catalyst launched its first investment vehicle this week: a real estate fund that seeks to take advantage of the US government’s opportunity zone program. The program promises a series of tax benefits to investors that invest capital gains over the long term into designated zones across the country – specifically into distressed communities that the US government has identified. Aiming to raise $150 million in equity for the fund, the team has lined up more than 50 projects in which to invest, according to managing partner Jeremy Keele.
These would only be the latest impact efforts for Sorenson – a man better known for his investments into microfinancing institutions and video technology for the deaf and hard of hearing community.
Jim Sorenson, the son of medical device inventor and billionaire philanthropist James LeVoy, is one of the early leaders of the impact investing movement. He is the founder and chairman of the Sorenson Impact Foundation, which has directed more than $100 million in impact investments around 15 countries. He also endowed the social impact think tank Sorenson Impact Center at the University of Utah with $13 million. Sorenson first entered the impact investing space with the launch of Sorenson Communications, a telecommunications business for the deaf and hard of hearing that used Video Relay Service (VRS) to interpret sign language in real time. He has also been an early investor in microfinance institutions, committing capital to the first privately-funded early-stage venture vehicle focused on microfinance: Unitus Equity Fund. Separately from impact investing, he is credited with the development of a digital compression software – which has been licensed to tech firm Apple – and the co-founding of private equity firm Sorenson Capital.
Keele expects to raise capital from an investor base likely to consist of 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. Like most firms vying to meet opportunity zone program criteria, Catalyst will use the fund to invest in opportunistic real estate projects.
The firm is aiming to raise a traditional comingled fund and use the capital to take a limited partner position in projects with local developers and sponsors. Keele expects most of the investments to be mixed-use projects anchored by workforce housing. He said the firm will target “market rate returns.” Catalyst declined to provide specific return targets.
Once the real estate fund is raised and deployed, Catalyst will launch another fund to make private equity and venture investments in businesses, Keele said. Ideally, the firm is hoping to find opportunities that offer common ground between real estate and business investments in these distressed communities. He predicted that some of the businesses that Catalyst invests in can also be tenants of the properties it develops.
The common theme and primary aim among all investments, regardless of asset class, is to invest in projects supported by the local community, according to Keele. As a “double-line” private equity firm, Catalyst will be pursuing the dual goal of tangible positive impact and attractive investment returns. To measure the social impact of its investments, the firm will be following criteria developed by the US Impact Investing Alliance and Georgetown University.
The opportunity zone legislation originally provided more clarity around real estate than business investments, according to fund administrator NES Financial executive vice-president and general manager Reid Thomas. The Treasury Department and IRS then rolled out the latest set of regulations in April, which provided private equity and venture capital investors with more clarity. The increased comprehension of the program led to an increase in firms looking to also make opportunity zone investments in businesses.
NES Financial currently has 30 funds under contract for which it provides social impact metrics alongside fund management. Thomas noted that Catalyst is not the only firm to come out with an impact investing fund focused on opportunity zones, estimating that around 20 percent of the funds NES Financial has under contract can be classified as such. Though impact investing funds are still a minority in the opportunity zone fund market, investors are increasingly engaging when it comes to investments’ impact and want reports, he said.
Both Thomas and law firm Seyfarth Shaw partner Steven Meier viewed an opportunity zone strategy that combined real estate and business investments favorably. However, Meier warned that firms looking to act as both landlord and tenant through their investments need to take steps to minimize any conflicts of interest. Though acting on both sides of the equation is not a legal violation under the opportunity zone legislation, a third party should be brought in to evaluate any leasing agreements.
I think Catalyst’s model is an interesting one that gets to take full advantage of the legislation, not only on the real estate side but on the business development side, Meier said. However, he added that unless the firm can monetize its investments into businesses or sell the businesses, much of the opportunity zone business fund benefits will come from the capital gains tax deferral that acts like an interest-free loan for the fund.