Founded in 2009, Arctaris Impact Investors is a social impact investment firm that invests in private equity, business operations and large-scale infrastructure projects, all with an eye towards creating pathways to prosperity for low-income individuals.
The organisation has launched seven funds so far that focus on opportunities in underserved US communities: Arctaris Co-Investment (2009), Arctaris Royalty Ventures Co-Investment (2013), Arctaris Income Fund (2011), Arctaris Michigan Income & Principal-Protected Growth Fund (2014), Arctaris Impact Fund (2018), Arctaris Opportunity Zone Fund (2019) and Arctaris Opportunity Zone Fund (2020).
Arctaris intends to launch a new fund roughly each year, and this is partly down to the rules surrounding the opportunity zones tax incentive, the legislation around which was approved by the US Congress in 2017. The rules generally require that investors don’t sit on their capital, and put their money to work in designated low-income communities.
We invest with a very long-term horizon, and we invest in low-income communities.
Opportunity zones are federally designated low-income communities where an investor can reap significant capital gains tax benefits through participating in a real estate investment or a private equity operating business investment.
There are three principal benefits when investing in opportunity zones, according to Tower. The first is that the investor, after realising a capital gain, is exempted from that year’s tax bill on that gain and can defer the current-year gain out to 2026. The second incentive is that that tax bill, after the five years have passed, is then 10% smaller. The third is that after 10 years, the private equity gains are exempt from long-term capital gains tax, so it is free of that tax at that point.
“We invest with a very long-term horizon, and we invest in low-income communities, so this tax legislation was very well suited for the type of investing that Arctaris has done since day one,” says Tower. “We also partner with charitable foundations and government agencies to create very specific targeted-impact strategies for cities, states and minority-owned businesses. These partners help to provide principal protection cushions to the fund and also participate in some cases in the individual transactions to reduce the overall risk premium of the portfolio.”
Searching for opportunities amid the pandemic
Tower says the Covid-19 pandemic has exacerbated the need for broadband internet access, particularly in low-income communities, which now depend on it for school, work and even telehealth. He views this as a key opportunity for the organisation, as Arctaris had been active in broadband fibre work prior to the pandemic.
The map of communities that lack broadband fibre in the US actually looks a lot like the map of the US that was designated for opportunity zones.
“The map of communities that lack broadband fibre in the US actually looks a lot like the map of the US that was designated for opportunity zones,” says Tower. “Opportunity zones are low-income areas, and low-income areas tend not to have high-speed broadband access, so the correlation between those two maps enables Arctaris to invest opportunity zone capital into city- or countywide broadband fibre networks and accelerate the deployment to the families and businesses that need it most for survival at this point.”
What’s more, the Biden administration’s plan to invest heavily in the US’s roads and transportation infrastructure is also seen as an opportunity within Arctaris. The organisation has plans to assist in building this new infrastructure in an environmentally sustainable way, which could include electric charging stations and more public transit options. “A lot of the cities that could benefit from having public transit don’t have the money to pay for it, so we could use opportunity zones capital to help alleviate that budgetary stress on these communities,” says Tower.
Looking towards the future, Tower explains that blended financing will be a significant way to ‘build back better’ in the post-pandemic world. Blended financing is going to be an important theme over the next two to four years because of the unprecedented levels of federal spending in the US. “The combination of money from the government and the private sector results in a positive synergy that could not be accomplished if the private or public sector was trying to do this alone,” says Tower.
Arctaris’s ESG focus
Arctaris invests through an environmental, social and corporate governance, or ESG, and impact lens, and it measures companies before and after investing in them in terms of their alignment of with the UN’s Sustainable Development Goals (SDGs).
For a company to be attractive for us, it doesn’t have to be perfect from day one, as we want to be active in helping them to improve their impact alignment.
The organisation typically looks at certain areas where it can exert influence to make improvements in a company, and tracks the key performance indicators over time to measure the progress towards the SDGs.
“For a company to be attractive for us, it doesn’t have to be perfect from day one, as we want to be active in helping them to improve their impact alignment,” says Tower.
Arctaris takes into account all the positive and negative externalities of each potential investment and looks to develop a comprehensive assessment of how an investment will solve for community needs. This is crucial, especially for investments in opportunity zones, as it boosts sustainable development in low-income communities.
Arctaris’s ethos fits in nicely with a world looking to build back better from the Covid-19 pandemic and get back on track towards meeting the 2030 SDG goals. The opportunity zones within the US give the company a firm focus domestically, but its approach will resonate on a global level.
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