Summary:Emerging domestic markets — the people, places or enterprises in the U.S. with low income and high potential for growth, but without access to needed capital -are a tremendous opportunity for investors and businesses. They include ethnic- and women-owned firms, urban and rural communities, companies serving low- to moderate-income populations, and other small- and medium-sized businesses. They represent the fastest-growing segment of the U.S. economy and population.
This demographic reality, coupled with low returns in public equity markets, has led more private capital firms to explore these markets. What are the opportunities? How can financial innovations enable capital to enter emerging domestic markets and mitigate risk? How can government, business and community organizations leverage their resources and expertise? What is the best role for institutional capital?
Emerging domestic markets (EDM) have historically been overlooked by mainstream investors. Betsy Zeidman led this panel of investors who find innovative ways to place capital and resources with people, places, and enterprises that are not only able to provide market and above-market returns for their investors, but are also seen as major drivers in the resurgence of the economy.
The panel opened with a pointed review by Zeidman of statistics showing the stark level of under-investment in emerging domestic markets relative to so-called "mainstream" investments, the inherent opportunity that exists in investing in EDM, and successful investment in this market.
This introduction was followed by Nancy Pfund′s overview of the JPMorganChase-managed Bay Area Equity fund that closed its $45 million dollar fund in January 2003, utilizing private equity institutional and foundation capital to gain market venture capital returns with social and environmental goals. Pfund pointed out that her fund also provides resources to entrepreneurs through partnerships, educating low-income individuals in the use of public job training and educational programs that are currently in use by large institutions such as JPMorganChase, but are not familiar to low-income entrepreneurs, to whom these programs are often targeted. Pfund emphasizes that this fund is not interested strictly in creating any new jobs, but quality jobs for low-income people in the Bay Area, and eventually other parts of the nation.
John Given of the CIM Group presented the audience another type of investment in EDM — real estate investment. CIM Group is a full-service real estate investment and development firm that acquires, invests in, and operates mixed use properties located in urban cores and rural regions in California. It utilizes equity investment in joint venture structures to facilitate other comparable investments. Given believes that CIM is bringing market returns to social investment and is optimistic that his fund will be able to expand to $400 million dollars and begin to invest nationwide.
Todd Cohen of CRAFund Advisors is a portfolio manager who oversees CRA qualified investments into emerging domestic markets. Cohen, too, echoed other panelists, stating that community development investment is a sound and secure financial investment, often with above-market returns. Cohen supports his assertion with examples of his firm′s investments, including targeted mortgage-backed securities that have produced returns on AAA-rated bonds that range from 6-6.6 percent.
Commenting on the people side of EDM investors, John Rogers of Ariel Capital Management, Inc. addressed the African American entrepreneurial perspective, particularly in Chicago which is well-regarded as a "beacon for creating black entrepreneurs." Despite this, Chicago still has a dearth of successful African American businesses. Citing Crain′s 2003 book of lists, Rogers noted that none of the 169 top public companies were African American-owned and only 1.6 percent of the 315 private companies listed were African American-owned; these were mostly entertainment-based. As he displayed a slide showing Ariel Capital Management′s three-year return of 18.9 percent, Rogers strongly urged investors to place capital into minority firms for their mutual benefit.
Luther Ragin of the Heron Foundation followed in this vein by explaining the unique model that his foundation took in allocating their endowment. While most foundations generally allocate only 5 percent of their endowment, Heron invests a larger portion of its endowment, gaining returns of up to 15.5 percent through EDM-based mission related investing. Ragin stressed that investors should know that huge growth and returns are available through EDM investing, particularly in this economy.
Zeidman posed a series of questions to the panelists that followed up on their claims of success in emerging domestic markets, pointedly asking, "Why isn′t everyone doing it?"
The answer overwhelmingly pointed to investors′ misconceptions, unaware that social returns can be correlated with financial returns. This situation makes branding a necessity, creating a reputation for this type of investment that is associated with social and financial profitability. Positive branding, the panelists offered, can be hastened through partnerships with currently successful community development programs, mainstream institutions, and developing programs of scale. Scale was mentioned as an important factor because of the added profitability inherent in larger investments and the importance of supporting potentially large-growth EDM firms.
The panel was concluded with a positive outlook for the near future. Though their outlooks on the overall economy varied, the panelists were optimistic that the next three to five years would be full of opportunity and growth for EDM. As Pfund stated, "This is a great opportunity for a new fund; there are no shortages of good managers and companies," adding that people are more level-headed than they were in the "go-go years."
