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Catalyst, a Salt Lake City-based private equity firm co-founded by longtime social-impact investor Jim Sorenson, is raising $150 million fund aiming to capitalize on the Opportunity Zone program. The goal is to maximize financial returns while helping improve low-income communities.
The first round of investments will be executed in the next four to six months, focusing on four or five deals of commercial and retail housing, Patrick McKenna, a co-founder and Catalyst managing partner, told Karma in an interview.
“We’re going to get the returns, and we are going to get the impact,” McKenna said. Social impact investors won’t have to settle for a lower return to make a difference in the communities where their money is put to work, he said.
Catalyst expects to raise a second Opportunity Zone fund focused on job-creating operating businesses in the same communities.
Catalyst’s latest fund joins a wave of investments propelled by the 2017 Tax Cuts and Jobs Acts, which included the Opportunity Zone program to encourage investments in low-income communities across the country. The deferral and reduction of capital gains taxes under the program could lead to as much as a 40% increase in annual returns, according to Forbes. Treasury Secretary Steven Mnuchin predicted that low-income communities will see about $100 billion in private investment.
About 64% of all Opportunity Zone investments are likely to be real estate or construction projects, according to research published in State Tax Notes.
The danger of an Opportunity Zone investment is that it might not yield the capital gains necessary to tap the program’s tax benefits, McKenna said. “The real risk is that the places we make investments actually remain distressed,” he told Karma.
To minimize that risk, Catalyst will evaluate such factors as the availability of affordable housing, the composition of the available workforce, and potential for job growth in the area, McKenna said. “It’s a process of identifying places that have some green shoots, some sense of growth,” he said. It could take months to find a proper investment.
Catalyst plans to stand out from other Opportunity Zone-focused funds by tapping the social-impact investing experience of its co-founders. Sorenson provided $13 million in 2013 for the University of Utah’s Sorenson Impact Center, which marshalls “capital for social good.” Another Catalyst co-founder, Jeremy Keele, is the former CEO of the Sorenson center.
While the Opportunity Zone program doesn’t specify any social-impact requirements, Catalyst is working under a framework developed by United States Impact Investing Alliance and Beeck Center of Georgetown University. McKenna said the fund is developing ways it will measure the social impact of its investments.