Giving Compass' Take:

• Baltimore's philanthropists are utilizing impact investing practices to provide capital for community development financial institutions so they can help strengthen small businesses.

• In what other ways are collaborative impact investments spurring community development?

• Read about philanthropy's unique role in impact investing as both investor and field builder.

When James Wahls came to the Annie E. Casey Foundation in Baltimore, Md., three years ago, he wanted to replicate an effort he helped design at the W.K. Kellogg Foundation in Detroit, that is, supporting entrepreneurs of color in the city to start small businesses.

Detroit's Entrepreneurs of Color Fund was able to triple in value from $6 million to more than $18 million in three years, creating even a greater ripple effect throughout the city. But Wahls, senior investment analyst with the Annie E. Casey Foundation’s social investments team, found that in Baltimore, the existing community development financial institutions, or CDFIs, didn’t have the capacity to take in investment capital to deploy to potential small business owners.

“Foundations are looking for ways to work in a revolutionary way,” says Melanie Audette, a senior vice president at Mission Investors Exchange, a 250-member network for foundations focused on impact investing.

“They are looking at how to make those grants and impact investments in their community on their own, but to do it in a way where they can scale their efforts because they are bringing in others with similar or the same purposes to make that change in the community,” Audette says.

The latest initiative, which, if effective, should lead to impact investments in the CDFIs, is a clear example of how collaboration has made philanthropists and the foundation arms of commercial banks more effective at achieving their goals. CDFIs are more effective than large banks at providing the smaller loan amounts that new small business owners require, Wahls says.

The idea is for the grants to provide the community lending institutions with the support they need to build their capacity for lending; the grant funding will also allow the partners to support local nonprofits that are educating entrepreneurs on how to get the financing they need, and on how to successfully run a small business.

Read the full article about impact investing by Abby Schultz at Barron's.