News Column

Capital Access

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A growing number of groups – from the U.S. Hispanic Chamber of Commerce and the Latino Business Association to a New York state legislative task force – have begun focusing on programs to maximize Hispanic firms' access to capital markets. The Minority Business Roundtable also created a venture fund to bridge the capital gap with loans to finance the cost of raising capital. But more efforts are needed, roundtable members said.

"We have to change [the rules of the game] so they are more fair to entrepreneurs in the Hispanic community," said Antonio Flores, president and CEO of the Hispanic Association of Colleges and Universities.

Antonio Flores

"I would like to suggest that we need to think bigger about creating a critical mass of entrepreneurial class in our community. Perhaps a secondary school to connect college and beyond," said Antonio Flores, president and CEO, Hispanic Association of Colleges and Universities.

Roundtable members suggested a variety of strategies to help create conditions for a stronger capital-market channel to Hispanic enterprises. They include using growing political power to influence changes in public and regulatory policies, continuing to boost U.S. Hispanic educational levels to foster entrepreneurship and wealth-building, strengthening market networking and information; tapping public pension funds, and introducing financial innovations to allow banks to expand their reach.

Campaigns to boost the flow of information to lenders and Fortune 500 companies about the realities and opportunities for investment in the Hispanic market could be a key to unlocking the capital floodgates, said Winston Smith, director of supplier diversity for Microsoft Corp.

Microsoft, for example, has a program dedicated to providing loans to minority-owned banks. In turn, this allows the commercial lenders to generate more loans. "Get Hispanic CEOs in front of commercial banks, VCs, and sources of capital so equity financiers are aware," he said.

THE MCDONALD'S MODEL
The franchising incubation process fostered by McDonald's Corp. offers a classic paradigm for successful Hispanic entrepreneurial development and insight into the long-term dynamics that boost middle-market growth. As a franchiser, McDonald's Corp. has developed a business ecosystem that supports advancement opportunities for its entire network of U.S. Hispanic employees, owner-operators, and suppliers.

Thirty percent of the company's workers are Hispanic, and Hispanic consumers spend 25 percent more than general-market consumers at the fast-food giant's restaurants, accounting for about 17 percent of the company's $20 billion in cumulative annual sales from its 13,000 restaurants.

Today, 13 percent of the company's officers and top executives in the United States are Hispanic, and McDonald's has 183 Hispanic owner-operators covering 760 restaurants that had cumulative annual sales of $1.3 billion. In addition, McDonald's Corp.'s U.S. purchases from Hispanic suppliers grew more than 20 percent last year, to more than $3 billion, said Ralph Alvarez, chief operations officer, McDonald's USA.

Ralph Alvarez of McDonald's

"Whatever measurement that you take, our Hispanic owner-operators outperform the general market in quality, sales, profitability, involvement. They are truly leaders. That is the key to success in this scenario, is that doors needed to be opened. But today, they perform significantly stronger than the rest of the community," said Ralph Alvarez, chief operations officer, McDonald's USA.

Underlying the numbers is a business model that forms a vast network of support. First, however, owner-operators must undergo a stringent selection process and obtain their own financing for their restaurants.

McDonald's then provides extensive training, including a weeklong class at McDonald's University in Illinois. The company also provides local and national support in operations, training, advertising, marketing, real estate, construction, purchasing and equipment. It also works with key institutions to help successful owner-operators who want to expand find financing at competitive rates, and helps identify and source products and services for franchisees.

One of the premier successes of the McDonald's Corp.'s incubation process is John Lopez, chairman of Lopez Foods, who began with McDonald's as an owner-operator with one location in downtown Los Angeles. Eventually, Mr. Lopez grew his operation to four sites. Recognizing Mr. Lopez' successes, McDonald's facilitated a discussion between Mr. Lopez and one of the company's beef suppliers about a possible acquisition.

Mr. Lopez eventually bought the company and changed its name to Lopez Foods. Today, Mr. Lopez' company has surpassed middle-market status to rank No. 11 on the Hispanic Business 500 directory of largest Hispanic-owned businesses, with revenues of $400 million last year. It supplies hamburger, pork, and Canadian-style bacon for a large part of the McDonald's U.S. restaurant chain.

Mr. Lopez credits McDonald's with being an "angel" investor, providing opportunities for him to gain access to capital with investors that understood the food-supply business.




But even with such increased campaigns, regulatory and public policy rules can inhibit capital access for Hispanic middle-market companies. "It is the policies that are going to break down the barriers," said George Muñoz, co-founder and president of Muñoz Investment Banking Group.

For example, Mr. Muñoz noted that the securitization of the home mortgage industry led to a surge in access to home ownership. "There was a great revolution with the securitization of mortgages. It eased the market for Hispanics because the laws changed," he said, noting that the process could also be applied to business loans. Securitization would allow lenders to pool their small-business loans into a security that could be sold to a third party, reducing banks' credit risk by providing liquidity and freeing them to make additional loans – increasing the size and scope of investment in the U.S. Hispanic market.

Mr. Nogales of Nogales Investments said changing underwriting criteria for some entrepreneurial financing vehicles would help. "If you have a broader criteria and better understanding of Hispanic business, you're more likely to invest in that business," he said.



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