Emerging Manager Monthly Interviews Deborah La Franchi

SDS Capital Lays Foundation With Affordable Housing Fund
By Emerging Manager Monthly
Article Posted December, 2021

SDS Capital Group is building a new out­look on poverty and affordable housing in California.

Los Angeles-based SDS Capital re­cently closed its private equity real estate impact fund, the SDS Supportive Housing Fund, at $150 million.

With a projected total of 160,000 indi­viduals experiencing homelessness in the state of California currently, the average permanent support housing (PSH) being built ranges from $500,000 to $700,000 per unit, according to SDS Capital Pres­ident and CEO Deborah La Franchi, who noted that’s because a PSH development will typically tap into seven to 12 govern­ment funding sources.

But SDS Capital is utilizing their fund to approach the process in a new way.

“Using private equity – rather than government subsidized sources – we are financing more than 1,800 units of per­manent support housing for individuals experiencing homelessness in California,” La Franchi said, adding that “we provide private equity to finance the land acquisi­tion and construction of PSH units.”

Additionally, only one source of capi­tal is used beyond the developer’s equity, versus the seven to 12 government fund­ing sources, which allows for a “seamless” and low-cost closing transaction process, with underwriting and closing able to oc­cur in less than 60 days, according to La Franchi.

“This model scales the number of units to be built, while also having a cost per unit that is a fraction of most PSH: $200,000 compared to $500,000 to $700,000,” she said.

The six-year revolving fund has al­ready made six investments and expects to make a total of 30.

“This fund and its approach is cer­tainly at the far end of the innovation spectrum, appealing to a more narrow set of investors,” La Franchi said. “We are re­lieved that we were able to raise this fund during the height of COVID and excited that private equity is playing a central role in showing a more cost-effective ap­proach to housing our community mem­bers currently living on the streets of Cal­ifornia.”

Investors in the Supportive Hous­ing Fund include Ally Bank, Annenberg Foundation, California Community Foun­dation, CIT Bank, Charles Schwab Bank, East West Bank, Fidelity Charitable, First Republic Bank, Hudson Pacific Properties, Kaiser Permanente, Pacific Premier Bank, Synchrony Bank, Weingart Foundation and Western Alliance Bank.

La Franchi is no stranger to the af­fordable housing space, as she previously served as assistant deputy mayor for eco­nomic development for Los Angeles in the mid-1990s under Mayor Richard Riordan.

While there, she assisted in the de­velopment of private equity funds that would have market rates of return for investors and would specifically invest in low-income communities, the first of which was the Genesis Real Estate Fund, managed by Roy Disney’s family office Shamrock Holdings.

“At the time we called it ‘double bot­tom line investing’ – impact investing as a term did not yet exist,” she said. “The first bottom line represented financial return and the second bottom line represented community impact.”

This eventually led her to completely pivot out of government and launch SDS Capital in 2001 while utilizing that same double bottom line mission.

Through that mission, SDS Capital also boasts its value-add fund, the Ameri­can South Real Estate Fund, which had its final close in 2017 at $58 million. The firm also recently saw its first close for Ameri­can South Real Estate Fund II this summer at $35 million and is preparing to close on a second deal, La Franchi said.

Both funds focus on making diverse asset investments into low- and moder­ate-income communities in the south, with the first fund completing 14 invest­ments in communities that had an aver­age 36% poverty rate and were 80% mi­nority and 51% African American.

Other funds include the firm’s Na­tional New Markets Fund, Develop Michi­gan Real Estate Fund and the Sustainable Communities Fund.

Overall, La Franchi has seen the em­brace of impact investing evolve over the last 20 years and especially over the last two years.

“The past 24 months have brought more positive change to impact investing that targets low-income community proj­ects than the prior 18 years did,” she said.

“Globally, investors are focused on green products and solutions. It is nice to see impact funds focused on reducing poverty are now receiving more attention from institutional investors”

– Deborah La Franchi, Founder & CEO, SDS Capital Group

“This heightened focus on pover­ty has undoubtedly been influenced by the George Floyd protests and the range of dialogue and reflection they sparked across the country. It became clearer to so many that the U.S. still has a substantial amount of work to do. We have seen many companies and inves­tors step back and ask themselves ‘Is there a role we can play? Can we use our investment capital in innovative ways that would help address these disparities?’”

While La Franchi admitted she thinks she may have started launching impact funds “15 to 17 years too early,” she does not regret it and now finds that SDS Capital is “in the right place at the right time.”

She cited Kaiser Permanente’s $50 million investment in the Supportive Housing Fund as an example, noting that the firm had never approached or been approached by a healthcare company to invest in one of their funds.

“Healthcare companies simply weren’t active in this space,” she said. “Yet Kaiser’s $250 million Thriving Communities Fund makes impact investments across the country. They are using their capital – not just their healthcare services – to make a dif­ference and generate return.”

“Fund managers in this space, SDS included, seek the op­portunity to be evaluated and compared (in our case) to other value-add, preferred equity real estate funds,” she said. “Com­pare our team, our strategy, our return targets, and our track record. We ask that the door not close on us from the start sim­ply because we are using our investment acumen to make a dif­ference in distressed communities of color.”

“The broader the universe of investors willing to consider impact funds grows, the more SDS can make a difference in dis­tressed communities,” she added.