A Second Bottom Line
An innovative approach to the risk calculation for Hispanic economic development involves "double bottom line" (DBL) funds, which attempt to measure the value of results in terms of both financial return on investment and
In 2000, California Treasurer Phil Angelides launched a massive DBL program that mostly focused on heavily Hispanic inner-city real estate. In an October 2005 report, the California Public Employee Retirement System cited an impressive 22.2 percent return on its DBL urban real estate partnerships.
However, measurement of the second bottom line remains a challenge. The Roberts Enterprise Development Fund – a philanthropy that "provides guidance, leadership, and investment to a portfolio of nonprofit social enterprises" –has developed a complex formula for calculating socioeconomic results, but the DBL industry lacks an accepted method for judging success. A report from Social Enterprise Associates, a consulting firm, found that "since few [organizations] have yet found affordable or standardized answers, the classic qualitative client success story prevails as the proxy for social return."
Eduardo Rallo, managing director of California-based DBL fund Pacific Community Ventures, measures his fund's social component in job creation, specifically seeking companies that will hire low- to moderate-income employees as they grow. "We that will hire low- to moderate-income employees look [for returns] in the mid- to high teens," Mr. Rallo says. The fund's only exit has been Timbuk2 Designs, a manufacturer of custom messenger bags. The investment yielded four times the fund's target return and more than $1 million in a special "wealth creation plan" using stock options, Mr. Rallo reports. (For more information on DBL funds, see accompanying article "Bridging the Gap.")
SBICs: "Turbo-Charged" Returns
Historically, the federal government's main program for equity finance has been Small Business Investment Companies. However, in2004 the Small Business Administration (SBA),which supervises SBICs, suspended the equity portion of the program. "We are not proposing to reinstate the Participating Securities Program at this time," SBA Administrator Hector Barreto told a congressional hearing in February 2005.
However, those SBICs previously licensed continue to operate in the private equity markets. Hispania Capital Partners was one of the last to obtain a license, and remains the only SBIC with a Hispanic focus.
Hispania currently has $125 million to invest, of which about $52 million comes from firms such as Verizon, Chase, Washington Mutual, Wells Fargo, Citibank, and LaSalle Bank. The rest of the money comes from the SBA.
"The SBA in that regard operates as a preferred limited partner; they get their money before the other investors," says Hispania partner Victor Maruri. "The good news is their return is capped. So if you can exceed a 13 or 14 percent return, you turbo charge the returns for the other investors."
However, Mr. Nogales says other investors object to the SBA's preferential treatment. "A lot of public pension funds want no partnership with an SBIC," he says. "If one investor asks for a special deal, the others want the same deal."
The Future of Money
The different financing models provide the power of choice for Hispanic entrepreneurs. "There are a variety of approaches, but a number of investors are realizing the opportunity," says Ms. Zeidman.
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