PitchBook Unpacks Expected Impact of Opportunity Zones on Investors and Communities
February 22, 2019
SEATTLE, Feb. 22, 2019 -- PitchBook, the premier data provider for the private and public equity markets, released a new report entitled, A Window of Opportunity. The report provides an overview and analysis of the Investing in Opportunity Act of 2017, a recent piece of legislation that uses tax breaks to encourage investment in low-income communities, referred to as Qualified Opportunity Zones (QOZs). The legislation aims to put unrecognized capital gains to work in underserved communities by incentivizing reinvestment of gains in Qualified Opportunity Funds (O-Fund). According to the Economic Innovation Group, there's an estimated $6.1 trillion of idle capital gains income tied up in capital markets. These incentives could help funnel an unprecedented sum of private capital toward community development.
In the report, PitchBook analysts review investment considerations for real estate, VC, and impact investors, as well as potential externalities for residents of QOZs. This analysis is based on the proposed legislation; however, the IRS is expected to publish updates in the coming months at which time the report may be updated accordingly.
"The success of O-Funds will depend heavily on an investor's experience with and understanding of the local market, and subsequent ability to source quality investment opportunities," said Joelle Sostheim, analyst at PitchBook. "While the underlying assets of O-Funds are expected be predominately real estate investments and equity stakes in local businesses, the risk and return considerations of an O-Fund will vary significantly depending on which QOZs the fund targets and on the underlying assets of the fund."
Report findings and key takeaways are outlined below:
The QOZ legislation is particularly well-suited for real estate investors and impact investors, as nuances of the tax code narrow investable opportunities to businesses primarily serving communities in QOZs and properties are majority-operated in a QOZ.
PitchBook analysts expect to see more commercial real estate investors concentrate capital in up-and-coming census tracts such as downtown areas, suburbs or college towns that will deliver high yields. Impact investors, however, will likely target more economically distressed regions in order to realize the legislation's economic development goals.
The legislation could create a host of externalities for recipient communities including job creation, economic development, and – most concerning – price inflation. The effects of QOZ investments on recipient communities will be largely informed by how investors and communities do or do not engage with one another.
PitchBook is a financial data and software company that provides transparency into the capital markets to help professionals discover and execute opportunities with confidence and efficiency. PitchBook collects and analyzes detailed data on the entire venture capital, private equity and M&A landscape—including public and private companies, investors, funds, investments, exits and people. The company's data and analysis are available through the PitchBook Platform, industry news and in-depth reports. Founded in 2007, PitchBook has offices in Seattle, San Francisco, New York and London and serves more than 23,000 professionals around the world. In 2016, Morningstar acquired PitchBook, which now operates as an independent subsidiary.