ImpactAlpha, December 18 — If the redistribution of wealth pits the haves and have-nots against each other, the predistribution of ownership may put them on the same side.
Instead of redressing unfair market outcomes through taxes and transfers, says Yale’s Jacob Hacker, who coined the term more than a decade ago, predistribution engineers markets to create fairer outcomes from the get-go. Ownership of homes, businesses and commercial properties along with the increasingly common ownership by employees of the companies they work for, buys broader swaths of society into the increased wealth generated by such assets.
As Dorian Burton and Napoleon Wallace of the Southern Reconstruction Fund say, “Ownership confers the ability to generate wealth that allows you to invest in things that matter, build things that last, and transfer assets across generations.”
ImpactAlpha has complemented this year’s coverage of the “ownership economy” with practical guidance for investors seeking alpha in inclusion, especially in the challenging legal and political environment following the Supreme Court’s rejection of affirmative action in college admissions.
In Indian Country, a new crop of Native-led lenders are capitalizing Native-led businesses delivering specialty foods, renewable energy and community services. Some private equity investors are finding that creating ‘quality jobs’ delivers more value than cost-cutting and layoffs. And cities and other issuers are finding increased investor interest in municipal bonds that demonstrably drive equitable and resilient development.
What to watch for in the coming year:
Incentivizing conversions to employee ownership
Countries are making pathways for worker ownership a component of strategies to foster economic growth, preserve jobs and mitigate income inequality. In Canada, a new legislation set to go into effect in the new year creates a framework for “employee ownership trusts” and provides incentives for companies to transfer ownership to workers. The UK has seen a surge in employee-ownership conversions since the government introduced employee ownership trusts in 2014. In the US, the Employee Equity Investment Act, introduced by Democratic Sen. Chris Van Hollen and Republican Sen. Marco Rubio, would enable the creation of Employee Equity Investment Companies to finance conversions via employee stock ownership plans, or ESOPs.
“From a conservative standpoint, this is not redistribution. This is a voluntary market exchange that is preserving capital often in rural areas that might otherwise lose it,” Lafayette Square Foundation’s Jack Moriarty said on ImpactAlpha’s Impact Briefing podcast. “And on the more progressive side of the house, this is an opportunity to broadly economically enfranchise workers and to close wealth gaps and really be a source of agency and opportunity and mobility for low and moderate income workers, including workers of color.”
Specialized private fund managers are financing conversions using ESOPs and other structures such as co-ops and ownership trusts. HB Capital, a $10 million fund anchored by Social Capital Partners’ Ownership Fund, acquires small specialty-contracting businesses in the US in order to selling them to employees through ESOPs in three to five years. HB Capital was set up by HB Global, a Pennsylvania-based specialty contractor owned entirely by its roughly 2,000 employees. “One of the best ways to be able to move a company to employee-owned is to actually own the company,” HB Global’s Bob Whalen told ImpactAlpha.
Purpose trusts are emerging as a cost-effective and flexible structure for business owners in search of succession plans. The Research Cluster on Employee Ownership and Workplace Democracy, in partnership with Everett Interests, Purpose Owned, and Project Equity are launching a new database of US service providers familiar with purpose trusts.
- “Multiplying transitions to employee ownership with private capital and public policy”
- “Financing transitions to employee ownership delivers wins for workers – and investors”
- “A Utah auto shop demonstrates a pathway to worker ownership”
- “Move over, private equity. Here comes worker ownership”
Expanding equitable homeownership to build intergenerational wealth
“When you buy real estate, as long as it’s increasing in value and you’re paying down the debt on that property, you’re creating equity,” says Talib Graves-Manns of North Carolina’s Partners In Equity, which helps primarily Black business owners buy the commercial properties in which they operate. “You can sell it and get cash windfall or you can use it as leverage to acquire other properties. That’s one of the biggest benefits of being an owner in real estate.”
A new set of models are using ownership of residential and commercial properties to promote Black wealth creation and counter dislocation in communities that have often been ill-served by real estate development (see, “Paths to inclusive wealth run through residential and commercial real estate”). In Denver, the Dearfield Fund for Black Wealth is providing down-payment assistance for first-time Black homebuyers. The Blackstar Stability Distressed Debt Fund, based in Washington DC, is deploying a $100 million fund to purchase single-family homes encumbered by predatory loans, such as contracts for deeds. The fund refinances the homes with traditional mortgages that offer largely low-income and minority homebuyers lower interest rates, lower monthly payments and the ability to build equity over time.
LocalCode Kansas City buys old and blighted buildings for building mixed-use commercial real estate projects that offer majority ownership to local residents. Lyneir Richardson, through his fund Trend Real Estate, acquires and revitalizes shopping centers in majority-Black neighborhoods. Richarson co-invests with community investment vehicles that allow residents to pool funds to purchase and own neighborhood real estate assets.
- “Paths to inclusive wealth run through residential and commercial real estate”
- “Building an ownership movement to close racial wealth gaps”
- “Turning local community ownership projects into a national movement”
Capitalizing Native lenders to fund Native businesses
Indigenous founders and fund managers need catalytic capital tailored to their needs, according to “Indigenizing Catalytic Capital,” a report from First Peoples Worldwide. “Deploying catalytic capital will not work if the process of delivery mirrors traditional forms of capital delivery,” the report says. Grants, for example, are an essential form of catalytic capital that help Native businesses and funds build capacity, set up business infrastructure, onboard staff and support day-to-day operations.
Native-led fund managers, entrepreneurship incubators and technical assistance providers are working to reverse a decades-long decline in funding for Indigenous communities. Native Women Lead, part of a growing ecosystem of Native-led community lenders and nonprofits, is addressing lack of access to growth capital and resources for Native women-led businesses, which generate roughly $12 billion in revenue and employ about 65,000 people. Skoden Ventures, one of the first venture funds led by Native women (see, “The Liist”), is raising a $10 million equity fund to invest in diverse-led creative enterprises that “authentically reflect and express” Native, Black, Brown and other underrepresented consumers in the US. Less than 1% each of venture and philanthropic funding go to Native-led organizations.
- “In Indian Country, Wolakota Buffalo Range provides lessons for indigenizing catalytic capital”
- “To finance Indigenous communities, capitalize Native-led investment funds and nonprofits”
- “Native-led Navajo Power leans into the just transition with community benefits and local jobs“
Creating quality jobs to give companies and funds a market edge
The Great Resignation turned out to be instead The Great Reshuffling. And as workers shuffled back, they looked for a quality of jobs they actually want. Employers that offer respect and advancement opportunities, along with smarter benefits, wellness support and, yes, higher pay, have discovered a competitive edge in recruiting and retaining talent key to business success. The workplace disruption has given rise to private-equity and private-debt strategies that aim to deliver “worker solutions” and “workforce impact.” Some investors are betting that rising expectations among workers will require employers to continue to woo and try to keep them with what are variously call “good,” “quality” or gainful jobs.
“We thought by taking a workforce-focused strategy, and trying to drive good jobs as our impact strategy, we could build a better private equity investment business to drive alpha,” Warren Valdmanis of Two Sigma Impact told ImpactAlpha. JFF Ventures (formerly ETF@JFFLabs), one of the most active venture investors in “inclusive workforce” from its position within Jobs for the Future, is spinning out of the nonprofit and raising a $50 million second fund, with a $15 million first close for the equity fund expected in January.
Investors that view dignified jobs as an indicator of long-term business success want to make sure investments in ‘good jobs’ meet the needs of jobholders. Upaya Social Ventures and a half dozen other investors are benchmarking the quality of jobs created by India-based companies in their portfolios. As investors, Upaya’s Kate Cochran told ImpactAlpha, “We need to take responsibility that the jobs we trumpet in our impact reports are decent jobs.”
- “In a strong labor market, investors look to outcompete through quality jobs”
- “Quality jobs’ takes hold as an investment strategy”
Investing for equity and inclusion in a post-affirmative action economy
The Supreme Court’s last summer ruling that struck down the use of race in college admissions opened the floodgates to challenges to race-based remedies for race-based harms.
A lawsuit by the American Alliance for Equal Rights alleging anti-white bias by Atlanta-based Fearless Fund had the paradoxical effect of highlighting the industry’s real problem with racial equity – implicit bias against founders of color. The Fearless Fund lawsuit presented an opportunity for investors to reaffirm their commitments to building a more equitable society. “It’s disappointing, but we’re right back at work,” said Illumen Capital’s Daryn Dodson, who advised investors to “keep the eyes on the prize and keep the focus on ways markets can drive positive change.”
“Diversity, equity and inclusion programs were legal both before and after the Supreme Court’s decision striking down affirmative action in higher education,” said civil rights attorney Farhana Khera in a Q&A with CapEQ’s Tynesia Boyea-Robinson. She urges investors to make clear that racial equity investing “is necessary for the growth and strength of our nation’s economy; and that you don’t want roadblocks placed in the way.” PolicyLink’s Investor Blueprint for Racial Equity outlines steps investors can take, including investing in fund managers of color.
ICYMI: On ImpactAlpha’s ‘Plugged In’ series, host Sherrell Dorsey is engaging innovators building a more resilient and inclusive economy, including VertueLab’s Aina Abiodun and Black Farmer Fund’s Olivia Watkins.
- “Racial equity investors lean in, not out, after Supreme Court ruling on affirmative action”
- “Investing for a post-affirmative action economy”
Finding mispriced risk and hidden impact in municipal bonds
A multi-pronged effort is underway to nudge the $4 trillion municipal bond markets to address racial inequities and other system risks. From asset owners to issuers, ImpactAlpha’s ‘Muni Impact’ coverage is navigating that shift, with support from the Robert Wood Johnson Foundation,
Driving the realignment: Investors seeking high-impact strategies in municipal bonds.
“We’re really seeing demand spike,” said Preeti Bhattacharji of J.P. Morgan Private Bank on ImpactAlpha’s Agents of Impact Call No. 51. “I’m worried we will miss the moment if we aren’t able to figure out how to build the infrastructure to connect the supply and the demand.” To meet such demand, municipal-bond issuers and other agencies are beefing up their capacities to drive more equitable and resilient development.
One of the underlying challenges is mispriced risk. In muni markets, some real risks are left unpriced (climate), while others are given disproportionate weight (race). Mispriced risk also presents an opportunity for impact – and alpha – for Investors able to spot it. “Investors that are smart, that really want to beat the market, that want to see opportunities and not be beholden to past thoughts on race, are beginning to see the opportunity,” says Activest’s Homero Radway The investment research firm is launching its “fiscal justice” fund strategy with early commitments next month.
- “How racial equity audits of underwriters could mitigate risks in municipal bond markets”
- “Engaging racial-equity risks and opportunities in municipal finance (video)”
- “Muni investors see through mispriced risks to find alpha and impact”
