News Column

A Capital Question

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Industry sources say just one tenth of 1 percent of $8.5 trillion in U.S. public pension fund (PPF) assets is managed by Hispanic-owned firms, and an even smaller percentage of this capital is being invested in Hispanic-owned companies.

Most private equity (PE) firms that invest assets from a PPF will tell you their first respon-sibility is to the retirees, and making sure the investment returns are top-notch. Now Hispanic-owned PE firms – with help from their political supporters – are aggressively making the case that they deserve more opportunity to deliver those returns. PE investment involves medium to long-term financing of potentially high-growth unquoted companies in "underfunded markets," in return for an equity stake. The objective is to grow the company's value and eventually sell it with an above average return on investment to account for the risk involved.

Although more pension fund monies are being allocated to Hispanic-owned PE firms with a Hispanic-market investment theme in their acquisition strategy, this does not imply that much-needed capital will finally reach Hispanic-owned companies. That is, PE firms have been investing in companies that focus on the Hispanic market regardless of ownership.

Investments in Hispanic-owned companies could provide the needed capital for growth. They could lead to more retail development, housing projects, and numerous other investments in Hispanic communities nationwide.
Observers describe this as the "last frontier" in the drive for Hispanic access to capital and econ-omic growth. But the challenge is formidable.

n The combination of conservative decision-making styles among PPF trustees and management, and Hispanic PE firms' perceived status as relative newcomers to the industry, have been real obstacles. According to the handful of Hispanic-owned PE firms who've had success raising money from PPFs, it comes down to two things: performance and track record.

n Additionally, in order for more PPF funds to go to Hispanic-owned enterprises and community development, the stipulations for these investments must change. As Hispanic Business research indicates, although more pension fund monies are being allocated to Hispanic-owned PE firms with a Hispanic market investment focus in their acquisition strategy, this does not imply that much needed capital will finally reach Hispanic-owned companies.
Even when Hispanic PE managers are involved, they're not always obligated to focus on Hispanic-owned firms exclusively or even predominantly.

Small Dents for PE Funds

PPF managers "look at what you did in the past and what you want to do in the future," says Guillermo Bron, president of Bastion Capital, a PE fund that has raised money from PPFs dating back to 1995. "If you've delivered the goods and have a good coherent story for the future, it's very simple."

Bastion Capital raised $125 million from pension funds in the mid-1990s to invest in firms that focused on the Hispanic market – though, crucially, not necessarily on Hispanic-owned companies. The lead investors in a group of 13 were the California Public Employees' Retirement System (CalPERS), which allocated $50 million, and the New York City PPFs, which allocated $25.5 million in 1994 and reported receiving $49.4 million back from Bastion in March 2005.

Mr. Bron has said that these investments generated a 25 percent annual rate of return, or an 18.4 percent net internal rate of return on the investments as reported by CalPERS. The investments included companies serving the Hispanic market, such as Telemundo and Impremedia's Spanish-language newspapers El Diario/La Prensa, La Opinion, and La Raza. Of these, La Opinion and La Raza were Hispanic-owned, while El Diario/La Prensa and Telemundo were not, with the exception of the Bastion equity share.

Today Mr. Bron, formerly a senior executive of the now-defunct Drexel Burnham Lambert, reports he is trying to raise $300 million from investors for another round of investments.

Overall, the success of Mr. Bron and other Hispanic-owned PE firms that are positioning themselves to invest public funds in the Hispanic market – such as Nogales Investors and Palladium Equity Partners, which recently secured a commitment from CalPERS for $25 million, and Hispania Capital Partners, a Small Business Investment Company (SBIC)-licensed PE firm – only begin to scratch the surface of the potential investment opportunities.

One entity intent on making this case is the New America Alliance, an organization of Hispanic enterprise leaders. Its pension fund committee manages collaboration with state pension funds and legislators to "encourage and support their investments in PE funds that are controlled by Latino general partners and focus investment in Latino businesses."

Additionally, Hispanic Business's CEO Round-table on Capital Markets – part of our November 2005 EOY (Entrepreneur of the Year) Awards event in Los Angeles – will discuss capital trends and strategies for attracting investment and lending flows to U.S. Hispanic enterprise markets.

When Legislators Talk Tough

Encouraged by state legislators and others who are demanding to know why PPF assets haven't found their way to a more diverse stable of managers, a handful of the country's largest funds are being more aggressive about spreading the wealth. In California and Illinois, lawmakers have bottled up legislation until the pension systems deliver firmer strategies for shoring up minority participation.

The pressure has pushed some pension funds to put more emphasis on strategies aimed at "emerging managers and firms," an industry term used to refer to non-traditional firms. But that's not good enough for Illinois State Senator Iris Martํnez. As chair of the pensions and investments committee of the Illinois General Assembly, she wants PPFs to find more minority- and female-owned firms at all levels. "I don't want minority firms to compete with each other over the little thrown our way," she says.

Her stance regarding legislation sought by pension funds is: "Do the right thing and you'll have me behind you in moving 100 percent of these bills." Or "Disrespect me and this committee, and you won't get anything moved." It's that kind of frank talk that has some fund trustees and others paying attention.
But even in Illinois, with more than $120 billion in PPF assets, the focus so far has been on minimum allocations to Hispanic-owned asset management firms – not to Hispanic PE firms and investments in the growth of Hispanic-owned enterprises.

At the forefront so far are funds in two of the nation's largest states:
n California's CalPERS and California State Teachers' Retirement System (CalSTRS) funds, with $196 billion and $130 billion in assets, respectively; and
n New York City's five major PPFs, with a collective $85 billion in assets.

In California

"We think new ideas and new approaches are always being developed, and they don't always come from main Wall Street firms," observes Fred Buenrostro, CEO of CalPERS. Currently CalPERS has some $22 billion committed to the Alternative Investment Management Program, or PE, asset class; and of this only $50 million is allocated to two Hispanic-owned PE firms. (See table "CalPERS Investment in Hispanic-Owned Alternative Investment Management Programs.")

A pioneer in the effort to achieve diversity in CalPERS pension fund investments was Robert Aguallo, Jr. Named assistant executive officer of CalPERS Investment Operations in 1995, he recently became general manager of the Los Angeles City Employees' Retirement System (LACERS), which has 4 percent of its assets in alternative investments as of June 30. Under his leadership, LACERS backed a $10 million invest-ment with Palladium Equity Partners, which pursues PE investments in companies owned by or serving the fast-growing Hispanic population.
Though at this point Hispanic Business has seen no announcements of Palladium pension fund investments in Hispanic-owned firms, we will monitor this closely over the coming two to three years.

CalSTRS, the largest teachers' retirement fund in the U. S., has $6.3 billion in its PE portfolio, more than $2.5 billion managed by 19 minority firms in its domestic stock portfolio, and $35 million in its alternative investment portfolio.

In New York

New York City Comptroller William Thompson named Deborah Gallegos as the city's chief investment manager in January 2004, responsible for overseeing about $85 billion in assets with five major pension funds. With her at the helm, the New York PPFs are embarking on an ambitious program to place $2 billion with emerging managers and firms. In December 2004, for example, the New York State Common Retirement Fund reported committing $25 million to Palladium Equity Partners.

Previously, as deputy state investment officer for the New Mexico State Investment Council, Ms. Gallegos had participated in development of a plan that led to 10 percent of that state's investable assets going to New Mexico firms. This was in line with Governor Bill Richardson's plan to "invest New Mexico money in New Mexico business," which began with the state's multi-year, $1.6 billion transportation infrastructure improvement partnership. The result was scores of city, county, and business group-funded projects involving more than 100 contracts with local construction companies across this 44 percent-Hispanic state.

"It really is dependent on leadership," Ms. Gallegos says. "In New Mexico, we had the governor. Here [in New York] we have the comptroller and a lot of trustees who are supportive."

A Case Example

Luis Nogales, managing partner of Nogales Investors Fund LLC, received a $20 million investment from CalPERS eight years ago. Nogales Investors is a Los Angeles-based PE firm. After achieving a 29 percent yearly rate of return in a previous investment, Mr. Nogales had the track record for CalPERS to invest another $25 million two years ago. Now he's seeking his third round of investments, and the amount he is seeking is more than double the previous commitment.

But Nogales has made relatively few inroads into Hispanic company investments, notably including a five-year investment – rather than an equity position – in John Zamora's young Los Angeles-based company, Graphic Press, which with $56 million in revenues ranked 102 on the 2005 Hispanic Business 500ฎ. The goal of the $9 million Nogales investment in Graphic Press is to recapitalize the company's balance sheet and provide working capital to position the company for future growth.

SBICs: A Different Route

Another approach to provision of public investment capital for Hispanic-owned enterprises is the Small Business Investment Company, or SBIC. Essentially, SBICs are privately owned and managed investment firms, chartered by the Small Business Administration (SBA), that provide government-sponsored debt and equity capital and guidance to new, small independent businesses.

Hispania Capital Partners is an example of the result. It is a $130 million PE fund launched in 2003 by the U.S. Hispanic Chamber of Commerce. The USHCC raised capital from institutional and individual investors, with matching funds from the SBA, to create a licensed SBIC.

Hispania is the first national PE fund focused solely on Hispanic-owned businesses. Its mission is to provide Hispanic entrepreneurs with annual revenues of between $10 million and $100 million with capital needed for growth and expansion. Its PE investments draw on a combination of SBIC funds, corporate funds, and assets from three Illinois public pension funds.

Hispania's investments in Hispanic-owned companies include Samy Cos., a Miami-based hair-care products company co-founded by Hispanic celebrity stylist Samy Suarez and ranking number 320 on the 2005 Hispanic Business 500 list; CSA Group in Miami Lakes, Florida, the largest Hispanic-owned engineering services firm in the United States and number 112 on the Hispanic Business 500; and Rossi Publications, publisher of Chicago's La Raza newspaper.

Other Sources of PE Funds

Of course, some PE funds are investing assets other than public pension capital. One Hispanic-owned example is Pinto America Growth Fund LP, a PE fund formed by the multicultural Pinto Partners group, which is affiliated with Cockrell Interests Inc. The fund, which focuses on companies serving the needs of the U.S. Hispanic population, in line with Cockrell's philanthropic interests, recently teamed with a group of other investors to invest $18 million in the continued growth of San Antonio-based Meximerica Media – the Hispanic-owned publisher of a chain of local daily Spanish-language papers in Texas.

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