An inconvenient truth is limiting the impact of the rising numbers of business conversions to employee ownership: “There is often a trade-off between the percent of employee ownership and the return to investors,” according to a new report from Ownership Capital Lab and Transform Finance.
Financing is plentiful for more diluted shared-ownership strategies (see, “As private equity firms start to share the wealth, low-income workers get just a little bit”).
“Meanwhile, the field’s impact leaders – funds that prioritize Black, Brown and low- and medium-income workers, utilize durable employee ownership forms and integrate worker voice and/or governance – do not have the capital they need behind them,” concludes the report, “Capitalizing the employee ownership opportunity.”
That presents an opportunity for catalytic and other impact-first investors: The report identifies nearly two-dozen funds raising a collective $670 million that finance transition to at least 30% employee-ownership, a threshold set by CertifiedEO.
Range of returns
Return expectations vary widely among the funds currently raising capital. Eight closed-end funds, raising a collective $350 million, are seeking at- or near-market rates of returns of more than 15%.
Another four funds, raising a total of $290 million, offer returns of between 5% and 15%. Nine funds, mostly evergreen funds through community development financial institutions, seeks returns below 5%.
Authors Alison Lingane and Julie Menter said such CDFI funds are critical in filling the “senior debt gap” left by most banks’ unwillingness to lend to groups of employees because of the lack of a personal guarantee.
Rather than reducing workers’ shares, the authors say investors’ returns can be improved by boosting businesses’ underlying revenues, securing catalytic capital and adjusting performance benchmarks to account for misperceptions of risk.
In the market
An appendix to the report identified 22 funds currently raising capital, including familiar employee-ownership focused managers such as Apis & Heritage and Mosaic Capital Partners.
It also surfaced funds such as the Cannabis Employee Ownership Fund, “financing the development of an inclusive and democratic cannabis market,” along with managers like Denver-based Ownershift, Allivate Impact Capital in Philadelphia and Arctaris Impact Investors in Wellesley, MA.
Chicago-based Essential Owners Fund is focused on businesses with large numbers of frontline workers in food, care and transportation.
Evergreen funds that are financing ownership conversions include innovative models like the worker-owned ‘conglomerate‘ Obran, and Kachuwa, a cooperative impact fund (see, “Making co-ops work for investors, too”).
ImpactAlpha’s searchable “Ownership Economy” database includes 68 funds, not all of which are currently raising capital.
