There’s a $6 trillion opportunity in Opportunity Zones… Here’s what you need to do to make good on it.
A recent headline estimated the potential market for the Opportunity Zones program, the new tax-break that allows investors to defer taxes on realized capital gains with investments into “O-Funds” with the intention of incentivizing long-term investment in low-income communities in the U.S., at an eye-popping $6 trillion.
Excitement has followed as developers and fund managers race to set up O-Funds, eager to start channeling these trillions into communities. As an industry, we will not fully realize the potential because of a common and crippling assumption in impact investing: that interest translates into action.
Many of these funds are being built on the assumption that – because of the tax-incentive – capital raising will be a cinch, like shooting 6 trillion fish in a barrel.
Let’s unpack that number. $6.1 trillion is the total estimated unrealized capital gains that both American households ($3.8 trillion) and American corporations ($2.3 trillion) hold. These are two different pots of money that require different strategies to address. Let’s focus on the bigger number – American households, the key word being “households.”
$3.8 trillion is a tremendous amount of money, but that money is disaggregated across millions of individual accounts both large and small, and those individual accounts are managed across thousands of different institutions and platforms.
Want to offer an O-Fund to a bank’s private wealth management client? Have a personal account that you manage online that you’d like to use to invest in an O-Fund? How about getting your O-Fund in front of a family office? Each of these platforms has a distinct – and significant– set of legal, operating, regulatory and compliance hurdles that you must clear before accessing their client’s capital. Even then, products need to be marketed effectively in a language that advisors and clients understand.
Given the challenges of clearing hurdles to access investor capital, how much of that $6 trillion can you actually reach? In other words, the Total Addressable Market (TAM) is $6 trillion – what is your Serviceable Addressable Market (SAM), the portion of the TAM that you can address? It’s not $6 trillion; it’s likely not even close.
The failure to understand and distinguish between TAM and SAM isn’t unique to O-Funds, it’s something we’ve witnessed often in private impact markets. Products and funds are increasingly built to address market demand, which is the right side of the market to emphasize, but building for market demand doesn’t mean ignoring the realities of if and how investors can access those funds and products. Because of this, the capital raising process for impact funds and businesses has become more about who you know than about the quality of the product.
In impact investing, once you’ve solved for the challenge of access and determined your SAM, it is further narrowed by the issue of appetite. What is your share of the serviceable addressable market, your SOM (serviceable obtainable market)?
Let’s say your O-Fund is one of several similarly structured funds that can tap family office networks to raise capital. Impact is personal and for many investors it has a very particular definition– it’s this sector, this region, this population, measured with these metrics and nothing else. Your fund’s focus on small businesses might not appeal to an investor whose main concern is affordable housing.
When investing for impact, many investors adopt a philanthropic attitude, creating a major impediment to scale. It’s a challenge facing all of us in impact investing – we must move away from an obsession with outputs and articulate the importance of systemic change and scale that impact investing is built to do. Yes, we’re building homes and schools, but we’re also building markets and infrastructure that can distribute capital in a more just and equitable way.
So, is there really a $6 trillion market opportunity for O-Funds?
Absolutely. And some funds will tap into this market quickly, raising hundreds of millions from the lowest hanging fruit. But if we want to realize the full potential and move anything close to the $6 trillion, it’s another question entirely. We have to start building for scale – not only moving hundreds of millions from a small group of investors – but moving billions for systemic change. The ability of investors to access impact funds and products can’t be afterthought; it must be a driving concern.
It’s certainly ours. We know how challenging, but ultimately game-changing, it is when you get it right. And while global industry stats on the amount of capital invested for impact and exciting demographic trends about the impending wealth transfer to women and millennials are exciting indicators of potential, they aren’t a substitute for disciplined market segmentation, analysis, structuring, and effective distribution.
So the next time a stat about the trillions of dollars waiting to be invested for impact catches your eye, get excited – and then get serious about making sure the dollars have a way to get to the communities that need them.
Read the full article at Forbes.