Wafra is the U.S. investing arm of Kuwait’s sovereign wealth fund. In keeping with its long-term focus, the fund seeks to embed environmental, social, and governance (ESG) considerations in its investment decision-making. Recently, Wafra management and MIT Sloan’s Finance Lab (Fin-Lab) worked together to develop a class project centered on the affordable housing crisis in the United States. Students were tasked with conducting due diligence on a proposed private equity fund that would invest in affordable housing with the twin goals of providing both social impact and financial return.
The challenge posed to students was: Can private equity help solve the housing crisis?
Three students teamed up to address this question: Marcus Imbert, MFin ’21, Priscilla Liu, MBA ’21, (MPA ’22, Harvard Kennedy School), and Mike Smithers, MBA ’21. With the benefit of extensive course guidance from Fin-Lab faculty as well as other resources, they conducted stakeholder interviews and secondary research to understand the market space and determine where Wafra could add value. They found that not only is there a dire need for affordable housing in the United States, but that the housing crisis also disproportionately affects households of color. Black and Latino households spend a higher percentage of their income on housing than white renters.
The students also found that low vacancy rates and government financing make affordable housing a stable investment, although returns are typically lower than they are for market-rate housing. The students outlined a variety of investment mechanisms, provided case studies of comparable funds, and suggested to Wafra that the best way to preserve returns—as well as the affordability of the housing—would be for the company to establish and maintain relationships with mission-aligned partners, consider investments in mixed-income developments, and potentially create an evergreen fund structure through a real estate investment trust (REIT).
Gita Rao, the finance faculty teaching lead for Fin-Lab, says the Action Learning lab gives students the chance to put classroom learning into immediate practice in collaboration with faculty and project hosts. “Finance Lab provides Sloan students with immersive learning that cuts across the biggest issues in impact investing: venture valuation, due diligence, and ESG research,” she says.
Liu says, “Fin-Lab was an amazing opportunity to deep dive into a highly impactful and relevant topic, while honing our finance toolkit beyond an academic setting.”
Imbert says the Wafra project gave him new insight into affordable housing, a large sector with complex dynamics. “I learned how significant the cost burden of housing is for many people in the U.S.,” he says. “I also learned more about the different investment vehicles in the market and the operating dynamics in an affordable housing project.”