Over the past year, economically distressed communities across the US have been engaged in an intense discussion about mobilising private capital. Why? As mayors, governors, real estate developers, entrepreneurs and investors have learnt, buried in the 2017 Tax Cuts and Jobs Act was a provision that created a significant tax incentive to invest in low-income “opportunity zones” across the country. 

The law was promoted by its sponsors as a way to move market capital from wealthy coastal cities to the lagging heartland. And for good reason: more than three-quarters of venture capital currently flows to companies in just three states — California, Massachusetts and New York.

Yet the law’s greatest effect, ironically, has been to unveil a treasure trove of wealth in communities throughout the nation. Some of the country’s largest investors are high-net-worth families in Kansas City, Missouri, and Philadelphia; insurance companies in Erie, Pennsylvania, and Milwaukee; universities in Birmingham, Alabama, and South Bend, Indiana; philanthropists in Cleveland and Detroit; and community foundations and pension funds in every state.

These pillars of wealth mostly invest their market-oriented equity capital outside their own communities, even though their own locales often possess globally significant research institutions, advanced industry companies, grand historic city centres and distinctive ecosystems of entrepreneurs. The wealth-export industry is not a natural phenomenon; it has been led and facilitated by a sophisticated network of wealth management companies, private equity firms, family offices and financial institutions that have narrow definitions of where and in what to invest.
The US, in other words, doesn’t have a capital problem; it has an organisational problem. So how can capital flows be rewired to reverse the export of wealth? 

Three things stand out. First, information matters. The opportunity zones incentive has encouraged US cities to create investment prospectuses to promote the competitive assets of their low-income communities and highlight projects that are investor-ready and promise competitive returns. Dozens of cities with diverse market conditions have already published their own prospectuses, following a common template promoted by Accelerator for America, a new intermediary led by Los Angeles mayor, Eric Garcetti. With further refinement, investment prospectuses could become a ubiquitous market tool to match eager investors with worthy investments.

Second, norms and networks matter. The opportunity zone market will be enhanced by the creation of “capital stacks” that enable the financing of community products such as workforce housing, commercial real estate, small businesses (and minority-owned businesses in particular) and clean energy, to name just a few. Initial opportunity zone projects are already showing creative blends of public, private and civic capital that mix debt, subsidy and equity. As innovative financial packages in one city are codified, they can then be adapted to others. 

Finally, institutions matter. Opportunity zones require cities to create and capitalise new institutions that can deploy capital at scale in sustained ways. Some models already exist. The Cincinnati Center City Development Corporation, backed by patient capital from Procter & Gamble, has driven the regeneration of the Over-the-Rhine neighbourhood during the past 15 years. Washington University in St Louis deployed a small portion of its vast endowment to help create the Cortex innovation district, now a thriving hub for start-ups and scale-ups that commercialise university research. These models can easily be adapted to cities across America, unlocking local capital and stimulating business demand in areas long devoid of investment.

More institutional innovation, however, is needed. As Ross Baird, author of The Innovation Blind Spot, has argued, the US must create a new generation of community quarterbacks to provide budding entrepreneurs with business planning and mentoring, matching them with risk-tolerant equity. These efforts will succeed if they unleash the synergies that flow naturally from urban density. New institutions will not have to work alone, but hand-in-glove with the trusted financial firms that manage this locally-generated wealth.

The irony is rich. A federal tax incentive intended to entice coastal capital into the heartland may end up helping to keep local capital local.

This article was originally published by the Financial Times and written by MBEP 2019 Regional Economic Summit Keynote Speaker, Bruce Katz, director of the Nowak Metro Finance Lab at Drexel University.