The investing opportunities with Indigenous projects

There’s a historically underutilized segment of the market showing new dynamism, and it’s looking to attract high-net-worth investors.

Yet, to describe Indigenous investment as an emerging sector, and to talk about it solely in market terms, do a grave injustice. The growing interest in the funds and trusts supporting Indigenous communities and businesses touch on histories far older than the investment market, long histories of oppression and discrimination undercutting the ability to raise capital.

However, what is new is a widening array of investment vehicles helping Indigenous financing and a number of organizations providing more options to attract investors.

These run the gamut, from regional Aboriginal Financial Institutions (AFIs) being able to increase lending, to venture-capital style approaches taking equity stakes in Indigenous businesses. Some estimate that a fully invigorated, properly funded Indigenous business sector could add up to $100 billion to the Canadian economy.

Still, capital remains relatively scarce. “If Indigenous entities were borrowing at the same rate that non-Indigenous borrowers access capital in Canada, there would be an immediate deployment of $80 billion in capital. That’s the gap,” says Dale Sturges, national director of Indigenous financial services at the Royal Bank of Canada. In other words, there’s a need, yet capital remains comparatively difficult to come by.

In terms of infrastructure investment, the gap is estimated at around $32 billion. “It would require about $32 billion to bring Indigenous communities up to the same infrastructure standards as non-Indigenous communities,” Sturges says. “When we think of health care, water, roads, housing, all of these things, that’s what would be required. That’s nowhere near what Canada’s budget is in terms of providing funding for infrastructure in these communities.”

This would seem like an obvious vacuum for investors looking for social-impact, as well as investment, gains. Yet, market watchers also see the current vitality in Indigenous investments as repairing a system which had previously been doomed to fail. “The whole financial system was not set up for Indigenous people,” says Shannin Metatawabin, chief executive officer of the National Aboriginal Capital Corporations Association (NACCA), which represents a network of 59 regional AFIs.

As Metatawabin explains, the network started with an initial government investment of $240 million and has since provided roughly 48,000 loans totalling $2.7 billion to Indigenous-owned businesses for more than three decades, successfully recycling that initial government investment close to 12 times over. These Indigenous businesses are typically small and often find borrowing from commercial banks difficult — compounded by hurdles such as often being geographically remote from other businesses and markets, or facing a lack of generational wealth to cushion entrepreneurs, and the list goes on.

NACCA is now looking to increase the network’s lending with a new $150 million Indigenous Growth Fund, allowing AFIs to provide larger loans and more of them. “Everybody knows that you need a certain sized bank account to ensure that you have enough income coming in to cover operations, and [businesses] have always said that you need at least $15 million to be sustainable. So, they’ve never been set up for success,” Metatawabin says.

According to NACCA, the fund, once fully utilised, will enable AFIs to increase lending by $75 million annually with approximately 500 loans to Indigenous-owned businesses.

“What it is, it’s an evergreen fund. Now, when you say ‘evergreen,’ it essentially means it’s a continuous fund that doesn’t just open and close, and then investors get paid out. It continues. We are trying to perpetually grow this fund,” Metatawabin says. “Investors can come in and cash out, and we have a mechanism to allow them to do that.”

Initial investors in the fund are the Government of Canada, the Business Development Bank of Canada, Farm Credit Canada and Export Development Canada, Metatawabin notes. But the target audience are private investors. “The whole reason it’s created is for social-impact investors, family offices and high-net-worth [investors] to also participate in reconciliation. A certain segment of the market doesn’t just want a return for using the money, they also want a social impact.”

Although the fund is new, Metatawabin says that NACCA already has social-impact investors looking to join. Among them, “we’ve got a family office that wants to participate, and there’s a private equity company that also wants to put some money in.”

He adds: “I want to tell family offices and high net-worth [investors] that we want to connect with them. We want to know who they are. I, for one, always want to know what the expectation of the capital is, because everybody’s got different ideas of what they want their money to do. And then we’ll see if that matches and aligns with what we’re trying to do.”

Another type of fund getting especially wide attention is Raven Indigenous Capital Partners’ $25 million equity-based Impact Investment Fund, backed by 38 investors from across Canada and the United States. Taking a hands-on, venture-capital approach and focusing on tech-minded Indigenous companies, Raven expects a net annualized target rate of return between 6 to 8 per cent over the fund’s 10-year life, the firm has said. The fund closed in January, 2021.

Another different kind of investment drawing attention is the Canada Infrastructure Bank’s new Indigenous Community Infrastructure Initiative, for instance, aiming to invest up to $1 billion for revenue-generating infrastructure projects, through loans of at least $5 million and as much as 80 per cent of total project costs.

Meanwhile, First Nations trusts are also being looked at with interest, particularly by banks seeking to offer loans to trusts, as another way for communities to access more capital. A trust would then pay back the loan from the income that the trust makes from its investments in the larger market — although some trusts are more careful and don’t allow borrowing. Trusts obviously have to be planned around the needs and interests of the communities they represent.

In the past, the creation of trusts was a policy generally encouraged by Ottawa to preserve the capital received from land settlement claims. The government has since appeared to have relaxed that mandate, says Mark Sevestre, the long-time general manager of the Mississaugas of the New Credit First Nation Community Trust. He is also a founding member of the National Aboriginal Trust Officers Association (NATOA).

But as trusts become more interwoven with the larger investment community, problems can arise if financial advisors investing trusts’ money don’t fully appreciate the specific needs of communities. As Sevestre notes, “We recognized that now that we’re investing in and utilizing the appropriate investment management firms, nothing was being done to ensure that we were investing with our traditional cultural values, because the managers were saying, ‘Now let me tell you how we’re going to invest your money to make you money.’

“What we recognized was that that could be contrary to our communities’ cultural and traditional values. And more directly, we could be investing in companies that are actually infringing on our Indigenous rights, polluting our environment, encroaching on our traditional territories,” Sevestre says.

NATOA has joined with the non-profit shareholders’ association SHARE Canada to create the Reconciliation And Responsible Investment Initiative (RRII) to address these issues, by meeting with the impact investment community, together with Indigenous financial managers and investment managers in the larger market. SHARE’s outreach to foundations, for instance, is a link for foundations to become more involved in Indigenous investing.

“Some family offices, as well as a number of foundations, are part of our network at SHARE. So, they regularly are involved in shareholder engagement that’s related to Indigenous rights and reconciliation,” says Katie Wheatley, program manager at SHARE Canada.

There is an obvious connection between Indigenous concerns and impact investing, which favours investments sufficiently meeting environmental, socially conscious and good-governance (ESG) standards. Just as ignoring environmental or governance concerns add risk to an investment, the same goes for Indigenous concerns, Wheatley notes.

“There are more than enough examples of what can go wrong when things like Indigenous-rights due diligence is not undertaken. I’m thinking particularly of pipelines, say, the Dakota Access Pipeline. There’s been really good research on that — that the material costs and potential financial and reputational damage, stemming from not taking Indigenous rights seriously, is something that has gotten the attention of a lot of folks.

“But there’s also the positive side of realizing that we can contribute to positive outcomes here, the same way that a lot of investors are starting to think more about how to combat climate change within their portfolios,” Wheatley says.

And there is a plethora of other groups getting involved: “In all of our organizations, we’ve tried over the last couple of years to do a better job ensuring everybody knows what everybody else does. For example, the National Aboriginal Capital Corporations Association, the Canadian Council for Aboriginal Business, the National Indigenous Economic Development Board, the First Nations Major Projects Coalition, First Nations Financial Management Board; there are a lot of organizations out there. And we’re all working in concert and understanding what each other does, trying not to step on each others’ toes,” Sevestre at NATOA says.

Nevertheless, all the different work being done and the various investment approaches don’t mean that difficulties no longer exist, says Sturges at RBC. “There continue to be huge capital requirements. I don’t want to convey the idea that because there are these different options, that it’s somehow easier. I think these options exist because it is harder. All of these different options are there to try to overcome, or go around, the barriers that exist.”

Yet, it can also be seen as a time of promise, he adds. “High net-worth individuals have the option of filling one of the gaps around capital and turning that into an investment opportunity.”

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