Private Equity, Underserved Markets

1
Private Equity, Underserved Markets the
Double Bottom Line

• Dr. Michael A. Stegman
• Director, Center for Community Capitalism,
• Frank Hawkins Kenan Institute of Private
  Enterprise
• University of North Carolina at Chapel Hill
• Presented to the Small Business Investment
  Alliance in New York
• May 19, 2005

2
The Opportunity
5.7 Million Firms in the US (2002)
5-100 M in Receipts 4.5
gt100 M in Receipts .2
1-5 M in Receipts 14
lt1 M in Receipts 81
3
Underserved Markets Defining the Space
Customer-based
Firm-based
Majority
Majority/Male Owned

Minority/ WomenOwned Small Firms
Ethnic and Racial Minorities
Urban Rural
Ethnic/Racial Minorities Low-Income
Majority
Suburban
Geography-based
Employee-based
Adapted From In Your Own Backyard, Gregory B.
Fairchild, Council of Urban Investors Institute
4
Firm-Based Strategy
Women-Owned

• 26 of businesses (incl. 0 employees)
• growing at 2x national average.
• 5 of Venture Capital.

• Minority-Owned
• 15 of businesses.
• Receive less than 2 of Venture Capital.
• African Americans 50 more likely to start
  business.
• Latinos will own 1 in 10 businesses by 2007.

5
The Potential of Parity
Business Density Gap businesses/100 population
Non-minority
Hispanic
African American
6
The Potential of Parity
Narrowing the Gap 1987 - 1997
16.8

• 6x Annual Growth Rate in Number of Businesses

Minority
Minority

2.7
All
All
34.3

• 2.6x Annual Growth Rate in Receipts

Minority
13.3
All

• Achieving Parity By 20XX would mean
• More than double of MBEs,
• 8.1 Trillion more in sales,
• 35,000,000 new jobs.

7
Customer-Based Strategy
Majority
Ethnic and Racial Minorities

• Minority Population
• Nearly 1/3 of US.
• By 2020
• 36 of US
• Will grow 50 over 2000 (vs 18 overall)
• Minority purchasing power gt 1/3 of total (vs
  1/5 in 2000).

• Hispanic Population
• 35.3 million (2004) and 14 of US.
• Half US born, 27 undocumented.
• By 2020
• Will grow 60 over 2000 level to 64.6 million
  (3x the overall rate)
• 2/3 will be US born

8
Geography/Job Based Strategy

• Urban/Inner City
• 8 of US pop of private jobs.
• Underserved in retail.
• Inner City Gazelles making the case
• 54 CAGR,
• 17M average annual sales,
• 37,000 new jobs,
• 32 minority owned.

• Rural
• 19 of all businesses
• lt 2 of Venture Capital

Racial/Ethnic Minorities Low income
Majority
9
Underserved Markets Venture Perspective
Firms
Customers

Potential (Growth)
v
Opportunity (Need/Gap)
v
Proven DBL Results
?
Geography
Employees
10
How Much Capital is Chasing DBL Deals?(really
hard to tell)
From Bradford Bates survey of 24 funds
11
Measuring Social Returns Many tools(ButMore
Talk Than Action)
Not much data yet
12
Why is Social Benchmarking Important?

• Displays track record to current and future
  investors.
• Builds internal discipline and maintains focus on
  mission.
• Informs stakeholders of progress.
• Enhances expertise within organization.
• Results in instant intellectual property.

13
California Community Venture FundsCCC/BofA
Benchmarking Partnership

• Validate the DBL-equity concept (opportunities,
  performance,
• social dimensions)
• Develop more inclusive benchmark

• Are funds that focus on underserved markets more
  likely to invest in minority- or women-owned
  companies, or companies that are located in inner
  cities and rural areas?
• Are minority/women managed funds more likely to
  invest in minority/women owned companies, or
  those located in underserved communities?
• Do minority- /or women-owned companies hire more
  minorities? More women-minorities? More low- and
  moderate-income residents? Are they more likely
  to locate in underserved geographies?
• Do the companies provide benefits to employees,
  and does the absence or presence of benefits
  systematically vary by characteristics of fund
  managers?

14
California Community Venture FundsCCC/BofA
Benchmarking Partnership

• Early Profile of Funds is Diverse
• 3 funds closed for around 500M.
• Over 1.5B (13 Funds) approved or
• in advanced stages of due diligence.
• Anticipate 15-20 funds,
• at least 120 companies.
• All funds seeking to invest in underserved
  geographies

15
Benchmarking Project Principles

• Simplicity in Data Collection
• For accuracy full participation

How/How Often
What Were Tracking
Investor Reports/At funding

Basic funding information/profile
Investor Reports/Annually
Summary financial data
Company
Owner/CEO gender/ethnicity Jobs ,
gender/ethnicity, payroll jobs with benefits
Special Report/Annually

Fund
Investor Reports/Quarterly Special
Report/Quarterly
Financial Activity Reports Pipeline report on
companies considered (gender/ethnicity, jobs,
why disadvantaged)

• Confidentiality Rules
• No identification of individual firms data
  presented in aggregation
• Review of publications
• Subject to all confidentiality requirements of
  investor

16
The Importance of Benchmarking

• Historically, Mainstream Bank/Investors Defined
  CDFI Space
• Banks Significant Investors in CDVC
• CDVC Requires Subsidies w/o Evidence of Impact,
  a Hard Sell
• If Banks Can Get DBL Returns w/o Sacrificing IRR,
  Why Invest in CDVC?
• CRA Has Driven Bank Investment in Underserved
  Markets, How Much of This is CRA-Eligible?
• What are Implications of a Weakened CRA?
• With SBIC PS Program Closing, Where DO Those Bank
  Dollars Go?
• Are We at or Near Point at Which Too Many Dollars
  Chasing Too Few Good Deals in Underserved Market
  Space?

17
Private Equity, Underserved Markets the
Double Bottom Line

• Dr. Michael A. Stegman
• Director, Center for Community Capitalism,
• Frank Hawkins Kenan Institute of Private
  Enterprise
• University of North Carolina at Chapel Hill