News Column

Even in a Downturn, Minority-Oriented Private Equity Funds Beat the Curve

Sept. 11, 2008

Jeremy Nisen--HispanicBusiness.com

Even in a Downturn, Minority-Oriented Private Equity Funds Beat the Curve

During the 1990s, minority-oriented equity funds were able to capitalize on the nation's booming economy. According to a new survey from the Ewing Marion Kauffman Foundation, those minority-oriented funds have continued to show better results than the most prominent stock indices, including the NASDAQ and the S&P 500, during the current economic stagnation.

Minority-oriented funds are those that focus their investments on firms predominantly owned by Hispanics, African Americans, and Asians. The study, Venture Capital Funds Investing in Minority-Owned Businesses: Evaluating Performance and Strategy, was released today at the National Association of Seed and Venture Funds 2008 Conference in Detroit, Mich., and analyzes the evolution of these funds' investment strategies in recent years.

According to William Bradford, professor of finance at the University of Washington and one of the study's authors, the success of minority-oriented funds is an important part of the overall economic picture.

"The number of minority-owned businesses is growing at least three times faster than nonminority firms," he told HispanicBusiness.com. "It is important that there is sufficient venture capital financing to support those high-growth firms, particularly if the U.S. is to maximize its economic growth. Past studies have found that minority-owned businesses, particularly black- and Hispanic-owned businesses, have had problems in obtaining capital in financial markets, including venture capital."

The Kauffman Foundation's vice president of research & policy, Robert E. Litan, added that the study's results "bode well for continued venture support of minority-owned firms."

The study shows that minority-oriented funds, especially the newer generation, diversified their investments into technology-oriented and nonminority-owned businesses. The study indicates, however, that the companies that concentrated on minority-owned companies and old-economy industries tended to exhibit better returns.

Professor Bradford explained this outcome, saying, "The market niche for minority-focused VCs is the overlooked minority businesses that are ready for venture capital. When you shift to providing venture capital to non-minority businesses, you are competing with mainstream funds, and competition drives down yields."

The investment choices by the companies surveyed reveal that communications and services (except medical) were the most prevalent, with investments by 20 and 16 funds respectively. These were followed by high tech (15), software and information technology (13), manufacturing (other than electronics and computer-related fields; 11); trade (wholesale and retail; 11); medical (7); and manufacturing (electronics and computer-related fields; 6).

According to Professor Bradford, the short- and medium-term prospects for minority-focused VCs are promising.

"We conclude that these funds can be profitable and make a contribution in funding minority firms that can increase employment and wealth for minorities and non-minorities," he told HispanicBusiness.com


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