Opportunity Zones: Aligning Public and Private Capital
At the end of 2017, a potential $6.1 trillion in unrealized capital gains was available for reinvestment.
Throughout the U.S., unrealized capital gains have significant tax implications with enormous potential. Unrealized capital gains occur when the value of an asset has gone up on paper, but has not yet been sold for a profit. Taxes are triggered once the asset has been sold.
Investors can offset or defer these taxes in a few ways, including one new strategy: investing in opportunity zones.
Today’s infographic from Bedford Funds explains what opportunity zone funds are, their core benefits, and their potential impact across the country.
What is an Opportunity Zone?
Opportunity zones are U.S. Census tracts whose citizens experience economic distress.
Originating in the 2017 Tax Cuts and Jobs Act, they offer the potential to connect long-term capital with low-income communities across the country to drive return and impact.
How are opportunity zones chosen? The initial base is low-income census tracts, which have:
- Poverty rates of at least 20%; or
- Median family incomes lower than 80% of the surrounding area
The state’s governor or chief executive then nominates up to 25% of these areas as opportunity zones. Nationwide, a total of 8,700 opportunity zones exist, and 7.9 million of the areas’ residents live in poverty.
Overall, 35 million people live in these opportunity zones. There are a number of disparities between opportunity zones and notional averages across key variables:
|Poverty Rate||Median Family Income||Education*|
*Adult with Bachelor’s degree or higher
It’s evident these cities could benefit from increased investment.
What is an Opportunity Zone Fund?
An opportunity zone fund (OZF) is an investment vehicle that provides tax benefits for private capital to help revitalize economically distressed communities. Both operating businesses and real estate are eligible for investment.
Many investor types may take advantage of opportunity zone funds:
- Corporations– Also includes partnerships
- Accredited investors– Defined as high net worth individuals, brokers, and trusts
- Nonresident foreign investors– Only on capital gains earned in the U.S.
- Retail investors– Through funds that have lower minimums, though options are more limited
In addition to their wide eligibility, OZFs have a number of potential benefits.
Tax breaks on capital gains can be organized into three tiers:
- Initial Tax Deferral– Once the previously-earned capital gains are channeled into a qualifying OZF, federal tax is deferred until December 31, 2026 or the date the investment is sold— whichever comes sooner
- Step-Up In Basis– 10% of the original capital gains will be excluded from federal taxes if an investment is held for five years
- Capital Gains Tax Exclusion– Federal tax on capital gains earned within the OZF is 100% eliminated if an investment is held for 10 years
All things being equal, OZFs realize after-tax outcomes that are over 40% higher than a standard portfolio investment. For example, the potential after-tax value of a $100 investment after a 10-year holding period would be as follows.
|Initial Investment||Net after-tax value|
|Standard portfolio investment||$76.20 ($100- 23.8% capital gains tax)||$132.36|
*Note: assumes long-term federal capital gains tax rate of 23.8%, no state income tax, and annual appreciation of 7% for both the OZF and alternative investment.
While it takes a few years to realize these tax benefits, OZFs have long-term horizons to encourage sustained investment with a lasting impact. The result is the potential for sustainable and equitable wealth creation.
Although real estate investments have captured significant attention, recent regulation has clarified that operating businesses are also eligible OZF investments.
By investing in businesses, OZFs can have a direct impact on economic growth and job creation.
Ultimately, OZFs have the potential to catalyze collective impact through their scalable operating company and real estate investments. Working directly with community leaders, OZFs can help drive long-term rejuvenation from within, versus gentrification from outside forces.
Opportunity zone funds are projected to raise $44 billion in capital designed specifically to invest in this future growth.
ESG Investing: Finding Your Motivation
New research around ESG investing highlights that there are three common motivators for investors to invest in ESG assets.
ESG Investing: Finding Your Motivation
Environmental, social, and governance (ESG) factors are a set of criteria that can be used to rate companies alongside traditional financial metrics.
Awareness around this practice has risen substantially in recent years, but how can investors determine if it’s a good fit for their portfolio?
To answer this question, MSCI has identified three common motivations for using ESG in one’s portfolio, which have been outlined in the graphic above.
The Three Motivators
According to this research, the three primary motivations for ESG investing are defined as ESG integration, incorporating personal values, and making a positive impact.
These goals are not mutually exclusive, though, and an investor may relate to more than just one.
#1: ESG Integration
This motivation refers to investors who believe that using ESG can improve their portfolio’s long-term results. One way this can be achieved is by investing in companies that have the strongest environmental, social, and governance practices within their industry.
These companies are referred to as “ESG leaders”, while companies at the opposite end of the scale are known as “ESG laggards”. From a social perspective, an ESG leader could be a firm that promotes diversity and inclusion, while an ESG laggard could be a company with a history of labor strikes.
To show how ESG integration may lead to better long-term results, we’ve compared the performance of the MSCI ACWI ESG Leaders Index with its standard counterpart, the MSCI ACWI Index, which represents the full opportunity set of large- and mid-cap stocks across developed and emerging markets.
The MSCI ACWI ESG Leaders Index targets companies that have the highest ESG rated performance in each sector of its standard counterpart. The result is an index with a smaller number of underlying companies (1,170 versus 2,982), and a relative outperformance of 7.9% over 156 months.
#2: Incorporating Personal Values
ESG investing is also a powerful tool for investors who wish to align their financial decisions with their personal values. This can be achieved through the use of negative screens, which identify and exclude companies that have exposure to specific ESG issues.
To see how this works, we’ve illustrated the differences between the MSCI World ESG Screened Index and its standard counterpart, the MSCI World Index.
The MSCI World ESG Screened Index excludes companies that are associated with controversial weapons, tobacco, fossil fuels, and those that are not in compliance with the UN Global Compact. The UN Global Compact is a corporate sustainability initiative that focuses on issues such as human rights and corruption.
#3: Making a Positive Impact
The third motivation for using ESG is the desire to make a positive impact through one’s investments. Also known as impact investing, this practice enables investors to merge financial gains with environmental or social progress.
Investors have a variety of tools to help them in this regard, such as the MSCI Women’s Leadership Index, which tracks companies that exhibit a commitment towards gender diversity. Green bonds, bonds that are issued to raise money for environmental projects, are another option for investors looking to drive positive change.
ESG Investing For All
With various angles to approach it from, ESG investing is likely to appeal to a majority of investors. In fact, a 2019 survey found that 84% of U.S. investors want the ability to tailor their investments to their values. Likewise, 86% of them believe that companies with strong ESG practices may be more profitable.
Results like these underscore the high demand that U.S. investors have for ESG investing—between 2018 and 2020, ESG-related assets grew 42% to reach $17 trillion, and now represent 33% of total U.S. assets under management.
How to Avoid Common Mistakes With Mining Stocks (Part 5: Funding Strength)
A mining company’s past projects and funding strength are interlinked. This infographic outlines how a company’s ability to raise capital can determine the fate of a mining stock.
A mining company’s past projects and funding strength are interlinked, and can provide clues as to its potential success.
A good track record can provide better opportunities to raise capital, but the company must still ensure it times its financing with the market, protects its shareholders, and demonstrates value creation from the funding it receives.
Part 5: The Role of Funding Strength
We’ve partnered with Eclipse Gold Mining on an infographic series to show you how to avoid common mistakes when evaluating and investing in mining exploration stocks.
Part 5 of the series highlights six things to keep in mind when analyzing a company’s project history and funding ability.
View all five parts of the series:
- 1. Common mistakes made with the team
- 2. Common mistakes made with the business plan
- 3. Common mistakes with the jurisdiction of the project
- 4. Common mistakes with the project and technical risks
- 5. Common mistakes with raising money
Part 5: Raising Capital and Funding Strength
So what must investors evaluate when it comes to funding strength?
Here are six important areas to cover.
1. Past Project Success: Veteran vs. Recruit
A history of success in mining helps to attract capital from knowledgeable investors. Having an experienced team provides confidence and opens up opportunities to raise additional capital on more favorable terms.
- A team with past experience and success in similar projects
- A history of past projects creating value for shareholders
- A clear understanding of the building blocks of a successful project
A company with successful past projects instills confidence in investors and indicates the company knows how to make future projects successful, as well.
2. Well-balanced Financing: Shareholder Friendly vs. Banker Friendly
Companies need to balance between large investors and protecting retail shareholders. Management with skin in the game ensures they find a balance between serving the interests of both of these unique groups.
- Clear communication with shareholders regarding the company’s financing plans
- High levels of insider ownership ensures management has faith in the company’s direction, and is less likely to make decisions which hurt shareholders
- Share dilution is done in a limited capacity and only when it helps finance new projects that will create more value for shareholders
Mining companies need to find a balance between keeping their current shareholders happy while also offering attractive financing options to attract further investors.
3. A Liquid Stock: Hot Spot vs. Ghost Town
Lack of liquidity in a stock can be a major problem when it comes to attracting investment. It can limit investments from bigger players like funds and savvy investors. Investors prefer liquid stocks that are easily traded, as this allows them to capitalize on market trends.
- A liquid stock ensures shareholders are able to buy and sell shares at their expected price
- More liquid stocks often trade at better valuations than their illiquid counterparts
- High liquidity can help avoid price crashes during times of market instability
Liquidity makes all the difference when it comes to attracting investors and ensuring they’re comfortable holding a company’s stock.
4. Timing the Market: On Time vs. Too Late or Too Early
Raising capital at the wrong time can result in little interest from investors. Companies in tune with market cycles can raise capital to capture rising interest in the commodity they’re mining.
Being On Time:
- Raising capital near the start of a commodity’s bull market can attract interest from speculators looking to capitalize on price trends
- If timed well, the attention around a commodity can attract investors
- Well-timed financing will instill confidence in shareholders, who will be more likely to hold onto their stock
- Raising capital at the right time during bull markets is less expensive for the company and reduces risk for investors
Companies need to time when they raise capital in order to maximize the amount raised.
5. Where is the Money Going? Money Well Spent vs. Well Wasted
How a company spends its money plays a crucial role in whether the company is generating more value or just keeping the lights on. Investors should always try to determine if management is simply in it for a quick buck, or if they truly believe in their projects and the quality of the ore the company is mining.
Money Well Spent:
- Raised capital goes towards expanding projects and operations
- Efficient use of capital can increase revenue and keep shareholders happy with dividend hikes and share buybacks
- By showing tangible results from previous investments, a company can more easily raise capital in the future
Raised capital needs to be allocated wisely in order to support projects and generate value for shareholders.
6. Additional Capital: Back for More vs. Tapped Out
Mining is a capital intensive process, and unless the company has access to a treasure trove, funding is crucial to advancing any project. Companies that demonstrate consistency in their ability to create value at every stage will find it easier to raise capital when it’s necessary.
Back For More:
- Raise more capital when necessary to fund further development on a project
- Able to show the value they generated from previous funding when looking to raise capital a second time
- Attract future shareholders easily by treating current shareholders well
Every mining project requires numerous financings. However, if management proves they spend capital in a way that creates value, investors will likely offer more funding during difficult or unexpected times.
Wealth Creation and Funding Strength
Mining companies that develop significant assets can create massive amounts of wealth, but often the company will not see cash flow for years. This is why it is so important to have funding strength: an ability to raise capital and build value to harvest later.
It is a challenging process to build a mining company, but management that has the ability to treat their shareholders and raise money can see their dreams built.
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