STATE OF THE M ARKET Private Funds Group - AUT VIAM INVENIAM AUT FACIAM - Webflow
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STATE OF
THE MA RKET
Private
STATE OF THE MARKET 2021
Funds Group
EVERCORE
AUT VIAM INVENIAM AUT FACIAMThe contents of this document are not provided for This document may not reflect information known To the extent this document or any statement con-
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or sell any security or other investment in connection which are otherwise applicable to such recipient. Front cover photograph by Jeffrey Grospe
therewith.19
Impact investing: Start with a theory of change,
then add capital
BY DAMIEN DWIN, FOUNDER AND CEO OF LAFAYETTE SQUARE
I
mpact investing is becoming the zei- just a dollar provider. We leverage our invest- ts’ financial health is an underreported but
tgeist. Global asset managers are lau- ment process to invest and serve companies, fundamental contributor to risk-adjusted re-
nching impact offerings, and greater communities, and individuals. turns. In the long run, an asset is worth less
numbers of both institutional and if people can’t afford to live there! We match
retail investors are asking how they HOUSING, JOBS, AND FINANCIAL INCLU- with investors who share our belief in ever-
can invest with meaning. It’s beco- SION green fund structures to bring fairly-priced,
ming standard practice to question, ‘How can In housing, we face a new development long-term capital to the development and
I create social change without being conces- ‘barbell’, with government-subsidised units preservation of sustainable housing.
sionary?’ Impact is becoming the next fron- on one end and high-end units on the other.
tier for our industry, and that’s positive. For development in between those two extre- Alongside our investments, our housing
mes, in general capital is either not available funds pay a social services fee to enhance the
Investing should confront the challenges or it is too expensive. This strains both ends of lives of residents. This money could be used
we face as a society. Too many are burdened the market and forces people to live beyond to provide internships, free WiFi, or after-s-
by unaffordable housing costs. Too many their means. We see two factors driving this: chool programmes. We argue that this spend
are unemployed or underemployed. Too few (i) unsustainable return expectations; and (ii) is not philanthropic. Aligned residents likely
really participate in our highly financialised fund vehicles with insufficient durations. have lower turnover and take better care of
economy. The problems are numerous and the property, which could enhance long-term
easily identifiable, but real solutions are less To address this, Lafayette partners with returns.
clear. Change-making requires more than 20,000
institutions which recognise that its residen-
just capital. It requires an understanding of 15,000
how change is actually created, or, phrased
Figure 1 – Commercial banks in the US
differently, a theory of change is needed. 10,000
20,000
On a personal level, I’m driven by a com- 5,000
pulsion to improve the lives of the under 15,000
privileged. I grew up in a working-class 0
neighbourhood; my father was a bus driver. 10,0001984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
Communities like mine have suffered this
year. This is why I founded Lafayette Square 5,000
(Lafayette) with the intention to become the
0
leading provider of impact-driven capital. La-
1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
fayette is structured with two ideas in mind –
what change do we want to affect, and how is Source: Federal Reserve Economic Data, data accessed Q2 2020
that change made possible – everyone on our
team has their own why.
Figure 2 – Private equity and debt deals in a given quarter
While it’s been challenging, 2020 has left
significant space for new ideas and innova- 2,000
tion. Despite being a fledgling firm, Lafayette
deals equity deals
is unconstrained by legacy and moulded to 1,500
match the moment.
1,000
2,000
THE LAFAYETTE ‘THEORY OF CHANGE’
Private equityPrivate
Our theory of change boils down to a sim- 500
ple adage: housing, jobs, and financial inclu- 1,500
sion. In each area, traditional thinking needs 0
disruption, and traditional institutions are 1,000
0 100 200 300 400 500
leaving large numbers underserved. To help,
500 Private debt deals
Lafayette provides capital and services – we
think change requires both. Lafayette is not Source: Preqin, data accessed December 2020. Timeline shown is from 2010 to 2020
0
0 100 200 300 400 500
Private debt deals
STATE OF THE MARKET 59
© 2020 by Voluntas. All rights reserved.In jobs, for small and medium-sized busi- Sticking to the same theme, Lafayette
nesses not owned by private equity sponsors, provides critical services to managers on our
we’re dealing with a capital markets crisis. platform, including fundraising, back-office
The not-so-secret dirty secret is that few insti- support, and mentorship.
tutions want to lend to these businesses. Lar-
ge banks have been regulated out. Regional PARTNERSHIPS FOR GREATER IMPACT
banks have closed or consolidated. Non-bank Many existing asset management firms
private credit firms largely only lend to their and corporations make proclamations about
counterparts in private equity. The data pro- impact but lack follow-through. My intention
ves this out: Figures 1 and 2 show (i) there are for Lafayette Square is to create a business
almost 10,000 fewer banks than there were in that delivers on impact by design. However,
1984, and (ii) there’s a suspicious correlation the magnitude of the inequalities we face
between private debt and private equity ac- in housing, jobs, and financial inclusion is
tivity. enormous, and we need partners.
In response, Lafayette is building a cre- Our first investment, Factory_OS (F_OS),
dit platform that can lend to businesses up demonstrates our partnership approach. La-
and down the EBITDA scale that will focus fayette led a Series B round, backed by Au-
on firms owned by management teams and todesk, Citi, Facebook, Google, and Morgan
founders. Lafayette will originate and invest Stanley, raising $55 million for the housing
in opportunities regionally with targeted geo-innovator. F_OS uses cutting edge software te-
graphic deployment and a ‘remote-first’ in- chnologies and lean manufacturing to create
vestment team spread across the country. Si- efficiencies in multi-unit housing construc-
milar to our housing funds, these funds will tion, primarily for affordable housing develo-
be structured as permanent capital to avoid pment. F_OS produces modular multi-family
the mismatch between a six-year fund and a homes, which are typically faster to produce Damien Dwin is a black American busi-
perpetual-term company. and less expensive than onsite construction. nessman, philanthropist, and credit impact
In this case, our partners contributed capital investor. In November 2020, he founded La-
Again, Lafayette will seek to provide ser- and lent credibility as well-known innova- fayette Square to use debt financing to ma-
vices with its capital. This could be giving tors, positioning F_OS to deliver badly nee- terially impact under-realised housing, em-
financial and operational advice for a com- ded affordable housing at scale. We’re not ployment, and financial market inclusion
munity development financial institutions going to solve the affordable housing crisis in opportunities. Prior to his current role as
(CDFI) investment, or providing financial America in our lifetime, but, with investmen- CEO of Lafayette Square, Damien served as
coaching to portfolio company employees for ts like F_OS, we can preserve and increase the co-Founder and co-CEO of Brightwood Capi-
a business development company (BDC) in- number of affordable housing units available tal Advisors from its founding in 2010 to Oc-
vestment, in conjunction with partners and and provide impactful services to residents. tober, 2020.
our own foundation.
TL;DR; Mr Dwin began his finance career as a
In financial inclusion, despite automation To drive change through investment, un- trader with Goldman Sachs, New York & Lon-
and the increasing use of technology, finance derstand the what and how through a clear don, there earning the Michael P. Mortata
remains deeply relationship-based, which is theory of change. Ask yourself how you can Award for Innovation. He further developed
unlikely to change. And, the reality is, peo- make the investment process impactful by his finance expertise working for Credit Suis-
ple are social beings prone to in-group beha- partnering capital with services. Build part- se, where he was the co-Founder and Head
viour. This creates a meaningful disadvanta- nerships to create leverage. of the North American Special Opportuni-
ge for out-of-group individuals. In America, ties business until 2010. At Credit Suisse, Mr
there are more than seventy trillion dollars All the views and opinions expressed herein are those of Dwin also served on the Vice President Selec-
Damien Dwin and not necessarily those of any other per- tion Committee and led the Fixed Income Di-
of advisory assets; less than two percent are son or organisation.
managed by female or diverse-owned firms.1 vision Credit Training Programme.
1. Bella Research Group / Knight Foundation
Lafayette’s response is to be generous. Mr Dwin is an active thought leader con-
We plan to share our platform with female, cerned about mass incarceration, unrealised
diverse, and veteran managers as well as tho- potential of vulnerable communities, ra-
se that align with our theory of change. We’ll cial justice and representation, and the use
do this through bespoke transactions that of credit financing as a force for good. He
provide some shared economics without sti- has written for Entrepreneur and Inc.com.
fling the entrepreneurship (or the cashflows) A committed philanthropist, Mr Dwin cur-
of emerging GPs. Lafayette is purpose-built rently serves as Chair of the Board of Trustees
to increase participation. These managers for Vera Institute of Justice. He also serves on
frequently find themselves trapped in the vi- non-profit boards, including the Children’s
cious cycle of being subscale. They struggle Hospital of Philadelphia, Studio Museum in
to raise money because they’re not big enou- Harlem, National Trust for Historic Preser-
gh, and they’re not big enough because they vation, Woodberry Forest School and Boys’
struggle to raise money. Lafayette provides Club of New York. Mr Dwin received a BSc/
out-of-the-box efficiencies of scale to mana- BA from Georgetown University, where he la-
gers on its platform. ter served two terms on the Board of Regents.
STATE OF THE MARKET 60STATE OF THE MARKET 2021
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