New private equity fund founded to close the racial wealth gap through creation of employee-owned businesses, announced a first close on Wednesday with the backing of investments from major foundations including Ford, Rockefeller and Skoll .
Apis & Heritage Capital Partners (A&H), a Washington, DC-based company run primarily by Black, Indigenous, and Colored (BIPOC) professionals, has closed $ 30 million in investment capital for Legacy Fund I, its vehicle flagship intended to reach around $ 50 million.
The fund plans to use this capital to facilitate employee buyouts of business owners of essential services – such as landscapers, restaurant workers, commercial cleaners, health care agencies and electricians – who are looking to retire or just move on, and have a workforce of 40 or more of which at least a third are people of color.
These buyouts will lead to the creation of employee-owned businesses where workers can increase their wealth over time through an employee share ownership plan, or ESOP.
ESOPs work the same way as 401 (k) pension plans (they were developed from the same federal legislation in 1974), but instead of tax-deferred investing in stocks or funds, ESOPs invest only in the employer’s shares.
Over time, workers invest “their share of the property,” says Todd Leverette, senior co-founder at A&H. “As the business grows and gains in value, the value of [each] the worker’s account grows and appreciates in value.
ESOPs “have been creating wealth for workers for over 40 years,” Leverette adds. But, above all, this is mainly true for white workers. “We take something old and direct it to where it has never been deployed before, but where there is the greatest opportunity and the greatest need.”
According to A&H, 60% of black workers and 65% of Latinx workers have no savings set aside for retirement. The company’s goal is that every worker in the companies taken over with the help of A&H will save $ 70,000 to $ 120,000.
The fund plans to buy at least eight private companies from retiring owners and is in the process of identifying candidates. All target companies will have at least US $ 1 million in earnings before interest, taxes, depreciation and amortization (EBITDA).
A&H seeks out essential service companies because these companies tend to employ people of color, and as profitable, recession-resistant, long-standing companies many are “just good investments.” says Philip Reeves, co-founder of A&H, who has known Leverette since they were classmates in the business program at Morehouse College in Atlanta.
These types of businesses have current revenues, little capital expenditure, and they did not fall off a cliff during the pandemic, Reeves says.
The legal and tax structure of the employee shareholding model is based on the ESOP, which in itself brings advantages. Companies that are 100% owned by their employees pay no federal taxes, and according to A&H, they also do not pay state taxes in 44 of the 50 states.
But A&H also plans to bring elements of the cooperative business owner model to its businesses to make sure workers act and feel like owners. It does this with the help of the Democracy at Work Institute (DAWI), where Leverette worked when he first thought of the idea of a fund as a way to raise capital for the types of businesses that A&H is targeting now.
DAWI is a national group based in Oakland, Calif. Focused on worker-owned businesses that can help develop a culture of ownership that includes, in some cases, a worker representative on the board, management at open book and “human-centered human resources.
“Without that stuff you have a good retirement account through ESOP, but with it you actually have better businesses,” Leverette said. “It’s a shift in the whole paradigm of what it means to be a worker and what it means to be a worker-owner. ”
Although the fund’s investment objective is unique in that it focuses on bridging the racial wealth gap through employee ownership, it is structured like a typical private equity fund, with a investment period of five years and a lifespan of 10 years.
The fund’s capital will also come from a strategic partnership with the New Markets Support Co. (NMSC) of the Chicago-based Local Initiatives Support Coalition. LISC is a national financial institution for community development. NMSC will provide the senior debt portion of employee buybacks.
Initial investors in Legacy Fund I include philanthropic funders and impact investors including the Ford Foundation and Rockefeller’s Zero Gap Fund, an impact investing vehicle launched in partnership with the John D. and Catherine T Foundation. MacArthur through the Catalytic Capital Consortium.
Other investors include the Skoll Foundation and its advisor, Capricorn Investments (a mission aligned company), in Palo Alto, California; Gary Community Investments in Denver, Colorado; and Ascension Investment Management of St. Louis, Missouri, which invests for faith-based organizations.
While foundations and impact investors are behind this initial deal, Leverette hopes that a state employee pension fund will see a model like theirs as an opportunity to bolster the economies of their local communities. .
“As we are doing well in this fund, the next round of investors should be investors who see the alignment in how we anchor jobs, in how we bridge the racial wealth gap through the model. , how we anchor and strengthen businesses, deliver competitive returns to the market, ”he says.
Reeves agrees, saying the hope is that great institutional capital will recognize “that there is a way to put capital to work that generates appropriate risks and returns, but more importantly, generates results. impact for their communities. This is the marriage that many investors are looking for and we hope we can make it happen.