Interest in investments that foster worker and community ownership is accelerating with the wave of business ownership transitions as Baby Boomers retire.
Private equity players like KKR, Blackstone, Goldman Sachs and TPG, all members of the Ownership Works initiative, point to evidence of improvements in financial performance and worker retention in companies that share a cut of their payouts with employees.
Dozens of emerging fund managers are proving out investable and diverse opportunities in the ownership economy. Some of the smaller funds are incorporating decision making power as well as economic benefit from assets.
“These models – and the specific businesses and projects that deploy them – serve a greater purpose,” says Transform Finance’s Curt Lyon. “They are an organizing concept for a new economy.”
Together, Transform Finance and ImpactAlpha have profiled more than 60 investment funds that are delivering returns to investors by sharing and growing wealth for workers, families and communities. More are entering the market. Since relaunching The Liist of actively raising funds early this month, we’ve identified multiple new funds with ownership economy themes.
New York-based Seed Commons has since 2011 directed $70 million to worker-owned cooperatives through a network of nearly two dozen community lenders in the US and Canada. It’s in the market with its first fund to ramp up its revenue- and profit-based lending.
“Our approach has demonstrated that investing in worker cooperatives is both impactful and financially viable,” the Seed Commons team says.
In Canada, Regenerative Capital Group is helping diverse entrepreneurs build equity in small businesses in need of a succession plan or exit strategy. The firm provides technical assistance and capacity support to a cohort of five entrepreneurs as they identify and diligence promising local businesses to acquire. Deals that advance will be acquired by Regenerative Capital Group’s first fund; equity will be vested back to the cohort entrepreneurs as they achieve both impact and financial growth targets.
https://stg.impactalpha.com/the-liist-fund-managers-line-up-strategies-for-shared-ownership-and-community-resilience
The real estate group of Rethink Capital Partners, an impact-driven venture capital firm, is raising a $25 million fund to develop and acquire workforce housing. In Maryland, for example, Rethink is partnering with Morgan State University, a historically Black university, to build off-campus student housing for purchase or rent. Candide Group is in the market with its $65 million Afterglow Climate Justice Fund, which will make debt investments to community-centered clean energy developers.
Ownership fund landscape
Non-profits. For-profits. Large firms and small. Debt, equity and everything in between. A landscape survey from Ownership Capital Lab and Transform Finance finds that models are evolving to address financing gaps for companies that are owned by their workers or transitioning ownership.
The majority of fund managers surveyed by Transform Finance are still developing their funds, working on proof of concept, or beginning to raise capital, pointing to the nascency of ownership-centered investing. Nine funds — a third of those surveyed — are collectively raising just $30 million.
Just a handful of managers are in the market with second funds.
“Notably, the employee-ownership space does not yet have any Fund III’s, putting the space out of reach for many larger allocators,” Transform Finance writes. But, the team says, “we are also seeing larger funds in the pre-development stage than we have seen in the past.”
A measure of that ambition: Eight of the funds in the market are raising a combined $350 million and offering returns that are closer to market rate.
Ownership Works for now may have the greatest heft in moving capital into the ownership economy. The nonprofit founded by KKR’s Pete Stavros in 2021 has signed up nearly three dozen private equity firms with over $1 trillion in assets under management to commit to creating $20 billion in working-class wealth by 2030. So far workers in companies owned by the private equity firms have received about $570 million, or 5% of the enterprise value of the companies they work for. The lion’s share is going to the fund managers and their investors.
For large institutional investors, investing in established private equity firms may be the cleanest path into an ownership-focused investment strategy. Others with more flexible and patient capital, like Sorenson Impact Foundation and Gary Community Ventures, are buying into newer, smaller and often more innovative funds.
Small efforts can add up quickly. Frontline workers given an opportunity to own a stake in the companies they work for can earn tens of thousands of dollars in additional income in their first years of ownership. That can yield hundreds of thousands of dollars over a person’s career. With half of private businesses in the US owned by someone nearing retirement age, there is “a huge opportunity for employee ownership to grow,” writes Transform Finance.
Catalyzing the ownership economy
Ownership strategies are also graduating from debt-based models into more creative financing. Seed Commons, for example, pegs loan repayment to companies’ profits, giving the businesses flexibility to repay more when they’re earning more, and less when they’re earning less.
Regenerative Capital Group is among a growing number of fund managers experimenting with ways to help diverse entrepreneurs who are underrepresented in business ownership acquire equity without having to take on heavy debt burdens.
Such fund managers are doing the hard work of designing new ownership strategies and building a pipeline of opportunities. Investors need to step up with larger amounts of flexible financing to ensure promising models can successfully scale, argues the Transform Finance team.
Grants can support fund development and capacity building for emerging fund managers. Program-related investments from foundations, guarantees and other forms of catalytic capital can anchor new funds and derisk the strategies for other investors. Moving managers from program-related investment portfolios for their first funds to mission-related and market-based investment pools for the second funds signals to other investors that managers’ strategies are financially viable.
“Perhaps most importantly, these investors can bring others to the table,” writes Transform Finance. “By offering to share due diligence, inviting their colleagues to invest alongside, or socializing and introducing funds to new investor audiences, they play critical roles in growing the employee ownership capital marketplace.”
