"Minority businesses continue to face systemic barriers to accessing capital markets," according to a 2004 report from the Minority Business Development Agency (MBDA). This capital blockage stems partly from a lack of information about minority companies, especially the companies large enough to interest investment bankers or venture capitalists.
The scarcity of data, and the lack of a historical track record of successful investing in Hispanic companies, creates a heightened sense of risk for financiers. A 2000 policy proposal by the California State Treasurer's office blames the capital gap on "persistent, negative stereotypes about the risks of investing in underserved communities" and "a lack of information as to the opportunities for capital to be successfully invested in communities historically by passed by institutional capital sources."
Despite the obstacles, institutional investors and pension funds now realize the growth potential of minority economies, says Betsy Zeidman, director of the Center for Emerging Domestic Markets at the Milken Institute. "This is coming from the demographic bulge and how it plays out in business ownership. So you're seeing many new funds targeting Latinos or minority entrepreneurs generally," she says.
In trying to establish a track record for the U.S. Hispanic economy, investors and government agencies have developed various models of capitalization. They include:
■ Regular private equity funds,
■ So-called "double bottom line" funds, and
■ The federal government's Small Business Investment Company (SBIC) program.
The Wall Street Solution
The Wall Street Solution Traditional private equity funds invest to make small businesses large enough for either a strategic sale or a public offering.
These funds usually expect a full return on their investment in five to seven years, with an annualized return of 20 to 30 percent, according to Luis Nogales, CEO of the Los Angeles based private-equity fund Nogales Investors.
Currently, 13 private-equity funds target the U.S.Hispanic economy. All these funds have started since 2003, making it difficult to assess their track record.
Marcos Rodriguez, managing member of Palladium Equity Partners in New York, sees "no unique difficulties or limitations of investing in Hispanic companies," because Hispanic CEOs have the same financial needs as any other entrepreneur. But "the emergence of Hispanic market deals in the middle market is recent, and there are not many private equity investors with extensive knowledge and experience in the market," he says.
Currently, no fund concentrates exclusively on Hispanic entrepreneurs.
Hispania Capital Partners in Chicago channels the Hispanic consumer (see accompanying story, "In Hot Pursuit"), while Palladium looks at specific industries with an added emphasis on Hispanic angles. "Our fund targets small businesses, among them Hispanic-owned businesses, or businesses that cater to the Hispanic consumer," says Mr. Nogales. "So we are not exclusively Latino, but we look for those businesses. The fact that we understand the Hispanic consumer market puts us in a position to invest in that sector."
Both Nogales and Palladium obtain investment capital from public pension funds. In fact, about 90 percent of the money that Mr. Nogales manages comes from public employee retirement accounts. "Public funds have been more ready [than private financial institutions] to look for investor management that can take advantage of the large and growing Hispanic consumer base and employee base," he says.
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