Introduction To Community Investment Trusts

1. Introduction To Community Investment Trusts • Private leadership for a fair and sustainable world can be financed by professionally-managed Community Investment Trusts that invest private equity (PE) capital in profitable businesses benefitting communities that satisfy the Trusts’ requirements for profit and risk mitigation • This show introduces the Community Investment Trust (CIT) as a generic business model for local-area development, offering to visionary leaders a proposal to create these Trusts through local initiatives wherever their missions can be defined and their values, principles, and purposes supported by defined Communities of interest • A CIT owns capital invested in profitable businesses controlled by entrepreneurs of the Community who are part of its mission, adopting its values, principles, and purposes. With oversight by its Trustees, the Trust’s growing portfolio of equity assets is managed for perpetual growth for benefit of this Community • Community Supported Agroforestry-based Learning (CSAL) is a new program that applies the CIT instrument to the participatory development of agroforestry and biodiversity in selected ecological zones, targeting economic, social, and environmental benefits for defined communities.

2. 2. The Need for a New Approach to the Finance of Social Enterprise • Finance and industry leaders of the Information Age are looking for effective ways to connect with social entrepreneurs to leverage their impact investment through social enterprise • They want to do it profitably, through profitable businesses that create social and environmental value • Longstanding institutions offering development finance, both private and official, want to lend their large resources to this new movement, but they have been unclear about how best to leverage these smaller-scale, bottom-up initiatives • Social Impact Investing needs a new approach to the problem of connecting global resources to the ground, the grass roots of Earth ecosystems • Systemic change is required, entailing institutional innovations, including… • Community Investment Trusts, created to introduce and test a new approach to this challenge of connecting resources to the ground

3. 3. Concept of a Community Investment Trust (CIT) • The mission of any Community Investment Trust (CIT) is to demonstrate how Private Equity (PE) finance, guided by a program that provides risk mitigation through comprehensive services to entrepreneurs (here called a Business Development Services or BDS Program), can be the engine of balanced rural/urban, land/sea progress that is equitable and environmentally sustainable • Similar to any investment trust, the functions of any CIT are (1) to perpetuate itself, (2) to serve its for-benefit mission, and (3) to give back enduring value to its beneficiaries • Beneficiaries are the members of the engaged Community, which may be any affinity group of people united for action by a common cause, who aim to contribute to the CIT’s capital and use its resources • Having oversight of the CIT are Trustees, distinguished citizens of this beneficiary community, individuals with high reputation for wisdom and expertise as well as integrity and commitment to the mission of the CIT • Also on the Board of Trustees is the CIT’s Fiduciary (professionally qualified Investment Manager), as well as official representatives acting as watchdogs against impropriety

4. 4. CIT’s Value Proposition about Private Equity • Private Equity can be the bridge between micro/small business loans and venture capital through bottom-up, financially sustainable investment in/for beneficiary communities • PE finance by any CIT engages a program designed to serve the CIT’s mission, here called a Business Development Services (BDS) Program • Deployed by the beneficiary Community along side PE finance, the BDS Program mitigates the investment risk both of the CIT and of its co-investing impact investors • BDS Programs are the key to risk management of PE investments in capable entrepreneurs who are preparing their early-stage enterprises to go to efficient scale with a manageable level of debt

5. 5. Why Entrepreneurs Value PE Finance • Unlike borrowing, PE finance adds to the net worth of the entrepreneur’s company, which raises capacity to borrow and grow • Given the role of BDS programs in the process of PE investing and program management , shareholding by the CIT and its co-investors does not threaten the entrepreneur’s effective control of her/his company so long as trust is maintained by all who share in the success of the enterprise • The entrepreneur’s capacity for leadership of the company should be enhanced by the “knowledge capital” that is contributed along with cash by the PE investors • All the shareholders have the same agenda: to maximize the sustainable total return on investment through their company’s long-run profitability, and this shared goal enhances cooperation • Cooperation among the owners is conducive to building trust across cultural divides, a key social asset of the company • The CIT expects to exit (preferably by selling its shares to the founding owners) in 3 to 10 years, achieving a satisfactory rate of return on its investment and having clear evidence that the beneficiary Community has actually benefitted

6. 6. How Private Equity Works • An Investment Manager (the Fiduciary) has legal responsibility for investment decisions under principles and guidelines agreed with the CIT’s Trustees, who set the investment goals and the terms of agreement with contributors of capital • The Fiduciary, having special expertise in investing the assets of the CIT, invests the Trust’s capital in the shares of early-stage corporations set to grow within the engaged beneficiary community • The Investment Manager contracts with the Manager of the CIT’s BDS Program for services that improve the return/risk ratio of these PE investments • The Trustees and the Manager of the BDS Program and their advisors have no liability for losses of capital of the Trust • The Trust’s ownership of shares in its investee enterprises is used --to leverage co-investment with commercial industrial partners that stand to gain from better development of their value chains --to leverage co-investment with financial partners, which may be other PE “impact investors”

7. 7. Raising Capital for the CIT • Raising the CIT’s capital for investment is a function of the BDS Program of a For-Benefit Corporation, assisted by the Fiduciary and the Trustees • Leading contributors of capital to the CIT are usually high-net-worth individuals and institutions who are members of its beneficiary Community • A crowdfunding platform may be used (local laws permitting) by the BDS Program to raise and bundle small contributions from many members of the beneficiary Community • These local contributions may leverage contributions from global “impact investors” (individuals and institutions) who/that believe that this business model leverages their money most effectively to achieve their goals • Contributions of capital may be unrequited transfers (grants) in any form including land, deductible from taxable income where permitted by local law • The Trustees may set policies conferring rights to contributors of capital to receive income (capital gains) from the sale of the CIT’s assets, on terms agreed with them

8. 8. Investing Contributed Capital For Profit • Capital contributions to the CIT will be invested in medium-to-long-term private equity investments in profitable early-stage enterprises owned by members of the beneficiary Community • The CIT Trustees will contract with a qualified Fiduciary as CIT Investment Manager, having full responsibility for the performance of the portfolio of PE assets and operating under a Private Placement Memorandum, Prospectus, and Operating Agreement with the Trustees • While there are many qualified Fiduciary companies in the world, the Trustees will wish to engage those that are committed to the novel business model of the CIT • The Trustees of the CIT and any other individuals who are part of its operations will have limited liability under pertinent local law for the performance of the CIT’s PE portfolio • Over time the responsibility of the Fiduciary will extend to decisions regarding exit from the Trust’s equity holdings as mandated by its policies, reinvestment of capital, and use of both principal and dividends to finance the mission of the CIT

9. 9. The CIT Investment Process • Identification and pipeline development: The Investment Manager will identify investment opportunities from a pipeline created by the CIT, assisted by its BDS Program • Preparation of an Investee: The applying entrepreneur prepares her/his project, helped by the BDS Program • Appraisal: The Investment Manager, assisted by the CIT’s BDS Program and Advisory Group for Pipeline Development, appraises the investment opportunity • Negotiation: The Investment Manager, assisted by the BDS Program and interested partner stakeholders including potential co-investors, negotiates the terms and conditions of the investment with the investee firm • Approval: The Investment Manager approves the investment • Supervision: The Investment Manager supervises the investment, with participation by the BDS Program Manager and all interested partner stakeholders of the project • Exit: The Investment Manager may in due course, at its discretion and within the terms of its contract with the Trustees, sell part or all of CIT’s stake in the investee firm to its owners or other investors

10. 10. The Role of Technical Partners and Co-investors • The CIT invites partnership with organizations that are specialized in particular sectors targeted as CIT investees—partnership that leverages the CIT’s private equity investments through co-investment or some other cooperative agreement • The CIT welcomes experienced impact investors as mission partners, valuing the intellectual capital as well as the finance that they can contribute • Social partners --non-profits and public agencies-- may bring expertise, Program Related Investments, affordable loans, tax credits, guarantees • Partner commercial companies offer technologies and know-how that the CIT intends to embed in its private equity holdings • Co-investment with commercial partners can help them make profits in previously under-served areas, creating good reputation there, while their investments leverage the CIT’s own equity in creating jobs, income, and other benefits for the Community

11. 11. The Business Development Services Program • The Business Development Services (BDS) Program is designed to provide (1) entrepreneurial education, planning and start-up help, and technical support services to entrepreneurs and their early-stage companies in preparation for PE investment by the CIT, and (2) technical assistance over several years to CIT investees through the stages of rationalizing and scaling their businesses to qualify for mainstream finance • The BDS Program serves as an intermediary, helping both enterprises and investors: helping enterprises by serving as a one-stop shop for specialized technical services, and helping investors through mentoring and support that underpins the performance of the Trust’s investee companies and their managers • The BDS Program itself is a social business that aims for long-run operating surpluses to finance further business investment, while also contributing to research and education at schools that feed the investment pipeline • The BDS Program functions as an adjunct of the CIT, with a Manager responsible for a BDS Program Account that is separate from the CIT’s PE Investment Account

12. 12. BDS Program Finance • The CIT invests in a For-Benefit Corporation (a B-Corp, as in U.S. law available in some States, or the closest equivalent in local law) housing the BDS Program, and it uses the proceeds from this share issue for initial operating capital • The BDS Program earns revenue in three ways: (1) it earns income from raising capital for the CIT; (2) it receives fees for management services supporting the use of these capital contributions, complementing the Fiduciary’s oversight; (3) it manages contractual services provided to CIT investee companies by diverse specialized sources of technical/managerial assistance • In addition to fundraising and management costs, Program revenues pay for activities that support the CIT through: (1) grants to promising start-up managers to help pay their costs of business planning, (2) grants to cooperating schools to improve research-backed education for business development, (3) fees for technical assistance to investees, and (4) R&D of the BDS Advisory Group for Pipeline Development

13. 13. BDS Advisory Group for Pipeline Development • The BDS Advisory Group for Pipeline Development is a network of experts of diverse technical and professional experience who volunteer to advise the Trust on matters relating to research, technology, business, and fundraising • The Group advises the CIT Trustees on matters of technical assistance for project pipeline development, appraisal of businesses for PE investment, and the operations of the BDS Program including contractual services and fundraising • This Group is coordinated by the Manager of the BDS Program, who manages a budget for the Group’s expenses • Members of the Group may propose and undertake R&D projects with specific deliverable outputs deemed relevant to building the future investment pipeline of the Trust, on terms agreed with the BDS Program Manager • Members will typically be leaders of organizations cooperating with the Trust: investors in the CIT, schools, other non-profits, commercial partners, public development agencies, and private co-investors with the CIT

14. 14. Illustrative BDS Program Account • A Excel file “Illustrative Projections for a BDSCom” provides a 10-year baseline scenario for a BDS Program. This model reaches a steady state at year 9. The assumptions are stated in the table stub and can be changed by editing the functions. • An arbitrary scale assumption is that the CIT (an ongoing holding company) aims to invest $10 million per annum of its own capital in 20 PE projects, at an average level of $500,000. If the average holding period before exiting an investment is 5 years, the stock of these equity assets reaches a sustained level of $50 million (valued at cost) by year 8, with 100 companies in the portfolio. • Program revenues and expenditures derive from these assumptions about scale and from the other parameters identified, which the user can modify to achieve a different but internally-consistent scenario. • While the scale of total expenditures is limited by the revenue, its composition involves choices. For example, fees for technical assistance to investees represents a demand for the outputs of established partner suppliers that can contribute to achieving the CIT’s mission. Such organizations should become supporters of the CIT, as should cooperating non-profit organizations such as schools.

15. 15. Illustrative PE Investment Account • The Excel file “Illustrative PE Investment Account for a CIT” provides a 15-year baseline scenario for the CIT’s PE Investment Account (the role of debt requiring a longer-term view). In this scenario, capital contributions to the CIT are matched by PE co-investors, and the total is managed by the CIT’s Fiduciary. • The rate of growth of equity holdings in this Account (Assets Under Management, AUM, valued at cost) depends on the rate of return on investment (assumed 15% p.a. on average), the leveraging of contributed capital with bank debt (assumed 33%), the average yearly rate of capital loss (assumed 5%), the interest rate on bank debt (assumed 6%), various other cost factors, and the Fiduciary’s standard incentive (20% of net profits). Exits at cost are reinvested and thus do not affect AUM. • Net annual payments to the BDS Account amount to about 3% of the CIT’s annual sustained investment (after recoverable grants have been repaid), a reasonable cost of risk mitigation through services rendered to the portfolio. • Over 15 years, AUM grows from zero to an amount 16 times the capital contributed to the Trust, or 8 times the total after matching by co-investors.This result is achieved with conservative use of financial leverage: bank debt as per cent of AUM peaks and then falls, remaining below 50%. On this basis the Trust assets and debt can grow in perpetuity through reinvestment, with reasonable provision for risk.

16. 16. Results • In this illustration, $100 million of capital is raised over a period of 7 years for use by the CIT and its co-investors • An annual rate of PE investment of over $50 million is achieved by year 8, which can be sustained in perpetuity as exits finance new investments • On conventional assumptions about the marginal efficiency of capital, this investment will add over $150 million per annum to the Community’s income, which is sustainable in perpetuity • If the capital raise of $100 million were accomplished by bond issues carrying 6% interest p.a., the tax rate on the resulting increases in income that would be sufficient to pay this interest in perpetuity would be 4%, probably less than the annual increase in revenue of the tax authority issuing the bonds, implying that government can gain revenue by issuing bonds to finance the CIT • But private community self-reliance is a better way: innovative philanthropy and private equity used together to create the CIT and thus its B-Corps, with the BDS Program to provide essential supporting services

17. 17. First Applications of CITs • The CSAL Network is promoting the creation of CITs to finance B-Corporations that in turn invest PE capital in innovation-driven enterprises providing comprehensive development in well-defined Communities, using the integrated disciplines of agro-forestry • Through CITs, schools affiliated with CSAL in these Communities explore potentially profitable businesses such as inexpensive power from biofuel, produced within integrated agro-forestry ecosystems in varied ecological zones (often using marginal land not optimal for food), while improving food, water, land, and air • CITs provide private equity capital that is optimal for scaling up profitable businesses started on lands owned by CSAL Programs –businesses whose plans satisfy the Trusts’ criteria as applied by their contracted Fiduciaries • CITs use their resources to capitalize early-stage companies mentored and launched by BDS Programs, with a view to promoting comprehensive, integrated development starting with healthy food and healthy environment