Private equity and venture capital firms can drive positive impact by addressing the US Black-White wealth divide, says Sandra Moore, Chief Impact Officer at Advantage Capital.
Private equity is the originator of impact investing.
According to the Global Impact Investing Network (GIIN): “Impact funds invest mostly in the early stage, expansion and growth stages of companies. Through private equity, impact investors can shape portfolio companies’ strategies and work directly with companies to help them meet the intended impact.”
According to the American Investment Council in 2020, private equity investments in solar energy totalled a record US$5.5 billion, and investment in wind energy rose to US$13.4 billion; surpassing the entire amount committed during the previous decade.
Yet, according to Sandra Moore, Chief Impact Officer at venture capital and impact investing firm Advantage Capital, the sector’s laudable support for environmental projects needs to be complemented by a commitment to supporting businesses that traditionally lack access to investment capital.
“We believe investors have an opportunity and obligation to support profitability and prosperity for all. We continue to shape the impact investing industry to ensure equity and empowerment for all entrepreneurs and business owners,” Moore says.
Specifically, Advantage Capital focuses on minority-owned enterprises in deprived areas of the US.
A McKinsey study makes clear the economic imperative for closing the Black-White wealth gap in the US, which the consultant predicts will cost the economy US$1 trillion to US$1.5 trillion every year by 2028.
The study says: “Entrepreneurship and business ownership – particularly of community-based businesses – are crucial ways to develop community wealth, for both business owners and the people they employ. Healthy Black-owned businesses could be a critical component for closing the US Black-White wealth gap.”
McKinsey says Black Americans have “never had an equal ability to reap the benefits of business ownership”. While about 15% of white Americans hold some business equity, the same is true for just 5% of Black Americans.
Among those with business equity, the average Black American’s business equity is worth about half that of the average American’s, and a third of the average white American’s.
This staggering disparity contributes to an overall lower level of prosperity for Black families.
McKinsey reports that the median white family’s wealth is more than ten times the wealth of the median Black family, which in addition to being unjust, represents a lost opportunity for the US economy.
If existing Black-owned businesses reached the same average revenue as their white-owned industry counterparts – excluding publicly held companies- the result would be an additional US$200 billion in recurring direct revenues, which could equal about US$190 billion in additional GDP, or a 1% increase on the US’ 2017 GDP.
This, Moore says, is why Advantage Capital has spent the last 30 years directing US$3.8 billion to small businesses in “capital starved” communities across the US. The money has been put to work in more than 800 companies, of which 10% are owned by minorities and women.
This year, Advantage Capital announced further ambitions to support disadvantaged business owners through the Empower the Change fund (see boxout).
“We are a for-profit company that recognised there was the opportunity to drive capital into places where it wouldn’t otherwise go,” she says.
Since inception in 1992, Advantage Capital has expanded its core strategy of supporting small business to include finance for affordable housing and renewable energy solutions. The firm has also evolved its approach to ensure that businesses do not just offer a living wage, but that salaries do not stagnate, and employees receive benefits and long-term career prospects.
“We create jobs in places that would not otherwise have them, but over the years, we have honed that to creating high wage, high benefit jobs. We came to realise that a job itself was not the key, but rather a quality job.”
This is particularly important since Advantage Capital is in receipt of tax credits through the US Treasury’s New Market Tax Credit (NMTC) programme.
The NMTC “attracts private capital into low-income communities by permitting individual and corporate investors to receive a tax credit against their federal income tax in exchange for making equity investments in specialised financial intermediaries called Community Development Entities”.
The credit totals 39% of the original investment amount and is claimed over a period of seven years.
Moore says: “If you take public money, you need to be able to give some benefit back into local communities. I know what makes a difference on the ground because I’ve worked in some of the most distressed communities in America. I know what it takes for families to thrive and for communities to grow for businesses in tough places.”
Advantage Capital measures its impact based on key metrics, including average wage, health and wellness programmes, wealth accumulation opportunities, job accessibility, minority and women ownership, and targeted hiring programmes.
Advantage measures its portfolio companies twice yearly and, in 2021, 96% reported offering employees health benefits; 96% offer jobs to applicants without a college degree; and 95% give access to wealth creation opportunities.
Moore says: “It takes a lot of time and discipline to hone metrics, but we are comfortable when something is a challenge.”
She continues: “When we invest in social housing, we look at developers that are not only able to build what we want but that are going to create jobs and pay [employees] well, and we measure the impact they have.”
While Moore says her focus as a social scientist is on the impact her firm’s investments have, the rest of the business comprises individuals seeking competitive returns.
“For 30 years, we have been making money and paying reasonably placed market returns across both debt and equity,” Moore says.
However, she notes that institutional investors that centre their fiduciary duty on delivering the highest returns to members at the expense of all else should probably look for a different manager.
“If you are and all-in investor with complete focus on your fiduciary duty to give the highest return to your investors, we’re not coming to you,” Moore says.
“We’ve got nine Limited Partners and seven of them are banks. They say they are willing to have some flex on the return in order to achieve the right impact. They also know these businesses are going to grow and that they will need more banking resources, so it creates more opportunities for them, too.”
Moore adds that while some of North America’s public pension funds are “softening” to the idea of marginally lower returns in favour of positive social impact, that change is “glacially slow”.
She says: “I recently asked the head of a major pension fund when they last asked their members what they want, and whether they would take a 15% return instead of a 22% return, if we can promise them that that 7% is going to go toward creating jobs for people. He hadn’t asked them.”
Moore adds: “We are beginning to see some softening around the way [large public pension funds] talk about this, and they are asking can we do more with alternative funds.”
Looking to the future, Moore says she would like to see a bigger pipeline of start-ups that will eventually present investment opportunities for Advantage Capital.
“We invest in operating businesses that have been up and running for a while, but that have hit a wall with finances. The worry is how to feed the pipeline. What is going to happen to the start-ups; where is the next Black Amazon or Asian Google going to come from?”
Empower the Change
On 25 May 2020, a Minneapolis police officer pinned Black American George Floyd to the ground and kneeled on his neck for eight minutes and 15 seconds, which resulted in his death.
On 26 May, a summer of demonstrations and protests began in all 50 States of the US, reaching a total of 7,750 by 22 August.
Responding to this civil unrest, Advantage Capital created the Empower the Change fund, which launched in 2022 and is committed to supporting minority-owned business.
Sandra Moore, Chief Impact Officer at private equity firm Advantage Capital, says: “Ten percent of our regular funds have gone to supporting minority business enterprises, and women owned business enterprises. We want to make that investment bigger and say to veterans, the disabled and other marginalised groups that through the Empower Fund there are opportunities to build a successful business.”