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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
.2%
$1-5 M in Receipts
14%
<$1 M in Receipts
81%
2
Underserved Markets: Defining the Space
Firm-based Customer-based
Majority/Male Owned Majority
Minority/ Ethnic and
WomenOwned Racial
Small Firms Minorities
Urban
Rural Ethnic/Racial
Minorities
Low-Income
Suburban Majority
Geography-based Employee-based
Adapted From: In Your Own Backyard, Gregory B. Fairchild, Council of Urban Investors Institute
3
Firm-Based Strategy
Majority/Male Owned
Business-focused
Women-Owned
Minority-Owned
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.
4
The Potential of Parity
Majority/Male Owned
Business-focused
Minority-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
5
The Potential of Parity
Majority/Male Owned
Business-focused
Narrowing the Gap – 1987 - 1997:
Minority Owned 16.8%
6x Annual
Growth Rate
in Number of Minority
Minority
Businesses 2.7%
All
All
34.3%
2.6x Annual
Growth Rate in 13.3% Minority
Receipts
All
Achieving Parity By 20XX would mean…
More than double # of MBEs,
$8.1 Trillion more in sales,
35,000,000 new jobs.
6
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
7
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,
$17M average annual sales,
37,000 new jobs,
32% minority owned.
Rural
• 19% of all businesses
Urban Inner City •< 2% of Venture Capital Racial/Ethnic
Rural Minorities
Low income
Suburban Majority
8
Underserved Markets: Venture Perspective
Firms Customers
Potential
√ (Growth)
Opportunity
√ (Need/Gap)
Proven DBL
? Results
Geography Employees
9
How Much Capital is Chasing DBL Deals?
(really hard to tell)
Type Capital # funds Avg. fund Avg. Underserved
($B) ($MM) trans
($MM)
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)
EDM
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…
11
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”.
12
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
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?
13
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.
Growth
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
14
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
Company
{ 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
disadvantaged)
Confidentiality Rules
• No identification of individual firms: data presented in aggregation
•Review of publications
•Subject to all confidentiality requirements of investor
15
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?
16
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
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