Oct 28 (Reuters) – It started with a Zoom call in the first days of the pandemic.
Morrison & Foerster corporate partner Susan “Suz” Mac Cormac was speaking with two friends, Jay Banfield from the non-profit All Home, which focuses on creating economic opportunities for extremely low-income people, and Elliott Donnelley, a founder of KD Venture Partners and the White Sand Investor Group.
The trio shared a common concern, Mac Cormac said: How could small businesses in poor communities weather COVID-19 related shut-downs? And what could they do to help them?
That call led to the creation of the California Small Enterprise Task Force and eventually the California Rebuilding Fund – a $1 billion private-public loan program to support California’s smallest entrepreneurs.
Mac Cormac, who chairs MoFo’s energy and social enterprise and impact investing practices, led a core team of 17 firm lawyers in developing an innovative blended finance structure for the fund. Dozens more lawyers and staff also pitched in.
For their work, she and the firm, which to date has donated 5,300 hours of work to the effort, are Legal Action’s Pro Bono Heroes for October.
Litigators tend to dominate pro bono accolades thanks to their courtroom skills. But it took a sophisticated corporate ace (The Financial Times in 2015 named Mac Cormac the most innovative lawyer in North America) to conceive of the fund’s structure and get it up and running fast.
“It hadn’t been used before,” Mac Cormac said of the model, which leverages state guaranty funds, philanthropic funds, senior bank capital and subordinated loans from foundations and program-related investments. “We created it.”
The fund provides low-interest loans to businesses with up to 50 employees and no more than $2.5 million in gross revenue in 2019. Such micro-businesses, especially those in economically-disadvantaged areas, were not likely to benefit much (or at all) from federal assistance, the fund’s organizers feared.
“We all independently recognized that (federal aid) was not reaching small businesses in the poorest communities,” Mac Cormac said.
The California Rebuilding Fund, which by last week had funded 778 loans totaling $50 million, was designed to fill the gap.
One business owner in rural Gonzales, California used her loan to set up online booking and appointments for income tax, bookkeeping and citizenship application business. She also bought an air purifier to make in-person interactions less risky.
Another loan recipient owns three brick-and-mortar women’s shoe stores in the San Francisco Bay Area that were shuttered entirely for the first three months of the pandemic. She’s using the money to rebuild her stock and invest in marketing.
In its initial stage, the project was relatively modest. The task force, whose members also include the Berkeley Center for Law and Business at Berkeley Law School, where Mac Cormac is a lecturer, created a resource guide for business owners in English and Spanish.
Working for free, lawyers also began staffing virtual “office hours,” where small business owners could get information and ask questions.
To get the word out, task force members contacted community development financial institutions, or CDFIs – private financial institutions that were started in the 1970s to provide affordable lending to disadvantaged people and communities.
The CDFIs responded that what they really needed was capital, Mac Cormac said. These institutions “used to get 60 (loan) applications in a week, and were now getting 600 a day.”
But she saw drawbacks to the conventional approach. If capital came from “a fund where people make money from money, you have a lot of compliance costs,” she explained. And if the underlying loans were bundled and sold, “the financial institutions then have direct recourse against the small businesses.” (Also, she added, “Anyone remember 2008?”)
The solution was to form a public benefit limited liability company owned by Kiva, a San Francisco-based nonprofit founded in 2005, to “manage and deploy money very, very efficiently and at a very, very low cost,” she said.
Using a third-party nonprofit as the fund manager allows for donations and program-related investments. The platform “is designed to take on whatever capital is available,” Mac Cormac said.
It also brings loans off the balance sheet for CDFIs, easing “a major limiting factor in their ability to scale,” according to MoFo.
The project has been a substantial time commitment for Mac Cormac, who has led some of the highest-profile late-stage investments in recent years, including SoftBank Group’s $7.7 billion investment in Uber.
But she values the pro bono work. “When you’re lucky enough to have education and opportunity,” she said, “you have an obligation to pay it back.”
In addition to Mac Cormac, the MoFo team advising the loan fund was led by corporate partner David Lynn; finance partner Mark Wojciechowski, senior counsel Joe Gabai, and of counsel Kelley Howes; tax partner Tony Carbone and of counsel Linda Arnsbarger; and associates Jesse Finfrock, Maureen Linch, Aisulu Masylkanova, Olga Terets, Michael Santos, John Tawadrous, and Jeff Xu.
Opinions expressed here are those of the author. Reuters News, under the Trust Principles, is committed to integrity, independence and freedom from bias.
Reporting by Jenna Greene