Investment as Extraction

Investment as extraction: The agenda behind funds for community investment

by Gabriel Piemonte

The South Side is on the verge of dramatic change, and while we ordinary people talk about how we are feeling about it, major forces are being marshaled to engage in the newest version of the old game of wealth extraction from African American communities. Generation after generation, people in power find ways to thwart the efforts of African American families to accumulate wealth. Each manifestation is slightly different, but the game is all-too-familiar to those who have watched it play out across the years.

If you want to understand how the latest round of development is going to reinvent this malfeasance, there is a central idea that you have to come to terms with: extractive investment.

Extractive investment : It is an almost self-contradictory phrase, but it is also an essential concept to grasp for anyone who cares about the South Side of Chicago, because it is about to be the centerpiece of a unified strategy to use our communities to make a lot of people who do not live here a lot of money – and to strip wealth from our neighborhoods. In some ways, it is the same story that communities of color have experienced throughout American history, but there is a depth of intentionality in this latest version – and a couple of new tricks – that make this a substantially different threat.

It is critically important to understand this now because a major push is just around the corner to advertise this strategy as a good thing. It will be presented as a lifeline to communities that are very much in need of real investment. Removal of resources will be marketed as investment, and in the doubletalk conspicuous to exploitation, this will be hailed as a great act of generosity.

Capital flow, and why it matters

The idea has its foundation in the simple principle of capital leakage. When people outside of a neighborhood – or anywhere – own the neighborhood’s commercial and other assets, every purchase or transaction is certain to reduce the amount of wealth in the community. Banks based outside of a neighborhood lend there, and the installment payments go elsewhere. Stores make sales, and the money leaves the community. People pay rent to absentee landlords, and that money is gone.

This is a simple illustration, but there are many permutations. Take the real estate company Pangea Properties, which could be described as investing in South Shore and the broader South Side, with its portfolio of 8,000 units across the city, largely in and around the South Lakefront. As a recent Chicago Reader article described, they are an aggressive evictor of tenants, putting people on the streets with little compunction and no compassion. One could say they are investing in the neighborhood, but when a company traumatically disrupts the lives of hundreds and thousands of people, the ripple effects across a community can be far worse than any benefit that might come from that investment (and not only in economic terms). Communities are people first and property last, but as long as money is allowed to define our relationship to the spaces we live in, that principle is not necessarily reflected in the conditions on the ground.

And there are even more complex forms of predation. Some of the newest forms are based on the fact that extracting wealth from communities no longer requires a physical presence. As long as one is willing to pay into a fund that will do that work on your behalf, you can be a part of the dubious American tradition of theft from the vulnerable and remain an invisible perpetrator. Two such funds have emerged that will be used to target the South Side, and the South Lakefront in particular.

The coming investment funds

The city’s announcement of a $100 million fund to invest in underserved communities should be setting off alarms. Sadly, I have only seen uncertainty or downright enthusiasm for the idea. I respect uncertainty; these sorts of investment tools are sometimes confusing – intentionally so, I think. But enthusiasm is entirely misguided.

The perilous nature of this fund is revealed in the fine print, where the way in which it will function is described:

“Rather than award grants or invest in businesses directly, the idea is to seek proposals from the private sector to create a variety of independent investment funds. Managers of those funds would request access to some of the city’s cash by laying out a case for a targeted, community-focused investment strategy and committing additional funding from private investors.” (italics mine – from this news report)

It is extractive investment at its most basic level. The fund is meant to provide loans between $100,000 and $1,000,000. It also is obviously going to have to produce a return on investment. Nowhere is there discussion of directing those funds towards local entrepreneurs. Of course, the unschooled will equate investment in businesses on the South Side with investment in local entrepreneurs, but we know that a massive number of our businesses are owned by people who do not live here. (See this article for more.) We also know about the nation’s white-biased lending patterns. (Oh, you don’t? Here, here, and here.) This will be exacerbated when the lending is profit-driven but limited to communities where local business owners have unique challenges that investors from the outside do not. I say so-called investment because if the net outcome is a loss for the local economy, how can that really be considered an investment? 

A more pernicious iteration of extractive investment is the fund that the Chicago Community Trust established just before providing seed money for a private development corporation to oversee development proposals in Woodlawn, South Shore, and Washington Park. According to the Trust, investors in the fund “… purchase Chicago-targeted Community Investment Notes. The pool of combined capital from the purchase of these fixed-income securities will make low-interest loans and other investments to Chicago-serving nonprofits and social enterprises …” (from their website)

Like the city’s fund, this fund will provide a return on investment, as it must when using this model. There is absolutely no way to work with nonprofits and provide a return on investment without extracting some of the funding that could be used to help people. There is also a built-in disincentive to provide services to the most difficult cases when there is a return-on-investment calculus built into one’s business model. If the fund indeed helps nonprofits grow, this disincentive will become a structural characteristic of the nonprofits it invests in. Most importantly, the investors distort the mission of the organization to the extent that they seek returns on investment, and they are designed to seek returns on investment. As has been observed in the pro-business publication Forbes of all places, the investors think they are getting a win-win, but the organizations are hurt by this model in more ways than one.

Also like the city’s fund, the Trust’s fund is beginning with a $100 million pool of capital, which it intends to grow with private investment. $100 million is an important number, because it is too little money to make a real impact but large enough to make for an impressive headline. To provide a sense of scale, when city officials were spending federal money to tear down public housing in Chicago, they talked terms of in billions of dollars. Expansion of just one terminal at O’Hare – not building new, just expansion – is budgeted at $300 million. $100 million seems like an impressive number. But it is not a serious number in a city with a nearly $10 billion budget.

Predatory investment

Stated briefly, there is a growing body of research on the changing understanding of Wall Street’s predation in communities of color. As Maurice BP-Weeks, co-founder of the Action Center on Race and the Economy (ACRE) explains, “ …the way these companies operate is built on the extraction of wealth from people of color. It is not an afterthought, it is actually core to their business model.” ACRE is a newly established organization that focuses specifically on this phenomenon. It is not surprising to me that they chose to establish their headquarters in Chicago.

This essay is the most superficial of analyses regarding these funds, but one main point to remember is that there is no local oversight integrated into these projects. People without any personal investment in our communities will decide who deserves support and who does not. And you can be sure that they will not take things into consideration like the generosity of business owners who make a point of hiring local kids or of letting community groups meet in their store and take up a whole bunch of table space. They will be looking at the bottom line, because they have to.

There is little we can do to directly impact the establishment of these funds, although we can demand some input into their decision making.  We should also support truly local business owners and nonprofits to benefit from these opportunities – and insist that the funds operate the way they ought to, as real opportunity for local development, as much as that is possible. Another modest way in which we can mitigate the negative impact of these funds is through control of land. Because their potential clients – businesses in one case and service-oriented nonprofits in the other – are dependent upon having a physical location in the community, there is some opportunity for engagement especially with companies that are newly arriving to a neighborhood or expanding and therefore developing new space. Local development councils would have influence here. Further, we will know the companies that are receiving investment from the city fund and can demand the same information from the Trust’s fund and can monitor the actions of these organizations more closely.

Ultimately, the best response will be to develop local alternatives and locally oriented infrastructure as quickly as possible – and to support local organizations and infrastructure that already exist. Above all, we must combat the misguided belief that these funds are truly intended to benefit our communities. They are designed to make money for investors, and the methods they will use will diminish local resources. The practice of extractive investment in 2017 still comes with a smile and in a suit – some things may have changed, but you can see the same old danger if you are paying attention.

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Gabriel Piemonte