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					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
The Opportunity
            5.7 Million Firms in the US (2002)

                $5-100 M in Receipts 4.5%
                                            >$100 M in Receipts

     $1-5 M in Receipts

                          <$1 M in Receipts

Underserved Markets: Defining the Space
         Firm-based                                                           Customer-based

                 Majority/Male Owned                                          Majority

                             Minority/                           Ethnic and
                             WomenOwned                          Racial
                             Small Firms                         Minorities

                                      Rural                      Ethnic/Racial

                 Suburban                                                          Majority

         Geography-based                                                      Employee-based
Adapted From: In Your Own Backyard, Gregory B. Fairchild, Council of Urban Investors Institute
                                   Firm-Based Strategy
Majority/Male Owned

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

             • 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.

                               The Potential of Parity
Majority/Male Owned

            Business Density Gap: # businesses/100 population

                      Non-minority F F F F F F F F F F

                        Hispanic   F FFF

                African American F F F

                           The Potential of Parity
Majority/Male Owned
                      Narrowing the Gap – 1987 - 1997:
   Minority Owned                                   16.8%
                          6x Annual
                          Growth Rate
                          in Number of              Minority
                          Businesses        2.7%


                           2.6x Annual
                           Growth Rate in   13.3%   Minority

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

Customer-Based Strategy                                                 Majority

                                                           Ethnic and
 Minority Population:                                      Racial
 • Nearly 1/3 of US.                                       Minorities
 By 2020…
 • 36% of US
 • Will grow 50% over 2000 (vs 18% overall)
 • Minority purchasing power => 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

              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.

                           • 19% of all businesses
     Urban Inner City      •< 2% of Venture Capital     Racial/Ethnic
     Rural                                                  Minorities
                                                        Low income

Suburban                                                             Majority
Underserved Markets: Venture Perspective

       Firms                         Customers

                  √   (Growth)

                  √   (Need/Gap)

                       Proven DBL
                  ?    Results

      Geography                     Employees

  How Much Capital is Chasing DBL Deals?
                                         (really hard to tell)
  Type             Capital            # funds      Avg. fund     Avg.       Underserved
                   ($B)                             ($MM)       trans
  CDVC             $       .87               68      $13         .2     Small firms, early stage
                                                                        Focus: quality LI jobs
                                                                        24% rural
  SBIC             $ 21.5                    450     $50         .6     5% minority/3% women
  & SSBIC                                                               22.5%LMI area
                                                                        50% early stage
  NAIC             $ 4                   40-50       $90         .5*    Minority-owned

  CUI-             $ 6                   40-50      $120                Urban markets (60%
                                                                        overlap with NAIC)

  VC               $250                  2000       $125        7.3
* From Bradford & Bates survey of 24 funds                                                     10
        Measuring Social Returns – Many tools…
Name/Sponsor                         Than Action)
                      (But…More Talk Application
CDVCA – Measuring Impacts Toolkit       Targeted VC –outcomes analysis
CDFI Fund – CIIS Community              New Markets CDE’s & CDFI’s –
Investment Impact System/Required       outcomes of varied programs
CDFI Data project – NCCA/Voluntary      CDFI’s performance: financial &
with broad industry participation       outcomes
Success Measures Project – NRC          Economic development module;
                                        standardizing impact reporting
MicroTest - Aspen Institute/Voluntary   Microenterprise lending benchmarking
RISE Project (Columbia) – DBL           59 ($2 B) early stage VC with some
Landscape/Survey                        DBL. Follow-on surveys planned.
CARS – NCCA/Fee for private rating      Rating system for CDFIs
Innonet/PointK – Web-based system       Non-profits, participatory self-assess-
                                        ment tool

                                         Not much data yet…
    Why is Social Benchmarking Important?
   Displays track record to current and future

   Builds internal discipline and maintains focus on

   Informs stakeholders of progress.

   Enhances expertise within organization.

   Results in “instant intellectual property”.
California Community Venture Funds
CCC/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

 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?
California Community Venture Funds
CCC/BofA Benchmarking Partnership
                                                            Venture (n=2)
Early Profile of Funds is Diverse
                                                                    Mezz (n=2)
    3 funds closed for around $500M.              Buyout
    Over $1.5B (13 Funds) approved or             (n=3)
                                                         by $
   in advanced stages of due diligence.
    Anticipate 15-20 funds,                              (n=9)
         at least 120 companies.

All funds seeking to invest in underserved geographies
        % Investing In Minority-
        Or Woman-owned (by $)                % Focused on LMI Areas (by $)

                            These 12 funds
                             are also                            29%
                             minority- or                       (n=6)
                    69%      woman-
                   (n=12)   managed

Benchmarking Project Principles
                    Simplicity in Data Collection
                      • For accuracy & full participation

            What We’re Tracking                        How/How Often
            Basic funding information/profile          Investor Reports/At funding

        {   Summary financial data
            Owner/CEO gender/ethnicity
            Jobs: #, gender/ethnicity, $ payroll
                                                       Investor Reports/Annually

                                                       Special Report/Annually
            # jobs with benefits

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

                          Confidentiality Rules
 • No identification of individual firms: data presented in aggregation
                        •Review of publications
        •Subject to all confidentiality requirements of investor
            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
   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
   Are We at or Near Point at Which Too Many Dollars Chasing Too
    Few Good Deals in Underserved Market Space?

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