News Column

Bridging the Gap

March 2006, Hispanic Business Magazine

Jesus Arguelles

Money suit

Funding the growth of the Hispanic firm is one of the major challenges facing our business community. It's an issue that has tested the creativity and resourcefulness of government, nonprofit, and private institutions, and the most qualified and influential professionals in industry. Specifically, as equity investment funding has increased in recent years, the proportion of it going to Hispanic entrepreneurs has diminished.

Key reasons for the gap in access to investment capital are that:

• There's a disconnect between the types and amounts of capital that financial institutions typically target, and the capital needs of growing Hispanic firms. My firm's research indicates that roughly 24 percent of the more than 200,000 U.S. Hispanic firms with employees are in need of debt financing ranging from $750,000 to $1.2 million, while investment funds prefer making equity investments of $5 million and up – in Hispanic market-focused, not -owned, companies.

•Even for quality Hispanic companies with suitably large-scale capital needs, it's simply harder for the financial institution to find them.

•Mainstream investment funds typically require annual returns on investment of more than 30 percent, which is appropriate for mainstream equity deals in larger companies. But the equity return expectation may be too high for mezzanine-size, growing Hispanic companies.

• The owners of Hispanic growth companies typically are not familiar with, proficient in, or even ready to do what is required to obtain equity financing. The process calls for "getting married with a stranger" and sharing the ownership of one's company. Beyond that, many times equity investors may desire either financial or effective control of
the company.

Enter the Double Bottom Line (DBL) Investing Model

The double bottom line investment fund model may better match many growing Hispanic firms' needs. DBL funds invest in emerging businesses that also enhance the economic health of their communities.

The success of double bottom line investments is measured in terms of both financial returns and value created in the community.

These funds invest in companies that create jobs, pay better wages, grow family wealth, augment local entrepreneurship, and create other investment opportunities – including low and moderate income housing, and workforce housing in challenged neighborhoods.

There are numerous DBL equity funds in the $50 million to $500 million range, and also lending programs with similar business- and community-building goals.

In California, a DBL initiative led by State Treasurer Phil Angelides has invested $14 billion since 2001, with results including 22.2 percent return on investment on its urban real estate development and 17,000 jobs created.

The $20 million Pacific Community Ventures fund, which focuses on investment in growth companies and includes Hispanic firms in its portfolio, "is in the middle of raising $30 million more," says Managing Director Eduardo Rallo.
But to my knowledge no DBL fund targets Hispanic firms exclusively.

National Summit Needed

To maximize the power of this DBL model, I suggest we need a national summit, including federal, state, regional, and local stakeholders, to develop a Hispanic DBL initiative.

Jesús Argüelles is CEO of Argüelles Capital Access, a Los Angeles-based financing and advisory firm.

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Source: HISPANIC BUSINESS Magazine


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