Will Impact Investors Embrace Employee-Owned Companies?

For social entrepreneurs concerned about growing income inequality in the U.S. and around the world, one way to spread the wealth is through employee ownership. With that in mind, you’d think impact investors would be clamoring to invest in such companies.

Not so much. Still, according to a new report, while impact investors have yet to embrace the field wholeheartedly, there’s at least some interest in the area.

That’s according to Impact Investing and Employee Ownership, a report by Mary Ann Beyster, president of the Foundation for Enterprise Development and published by Fifty by Fifty, an initiative of the Democracy Collaborative.

According to Beyster, there are compelling reasons for impact investors to focus on employee-owned businesses. “Companies with meaningful ownership and participation by employees tend to be more competitive, more resilient during economic downturns and less likely to move out of their communities,” says Beyster.

There are primarily two types of employee ownership. Through Employee stock ownership plans (ESOPs), entrepreneurs sell ownership in their company to their employees. ESOP shares are held in trust, and the number of shares can vary among employees. Companies can be partially or completely employee owned. With worker cooperatives, ownership is in employees’ hands–one member, one share, one vote.

So where’s the main investing action happening? The report found activity in the following areas:

Community development financial institutions. A handful of CDFIs focus on financing employee ownership—specifically, 6 of the 800 CDFIs in existence. For example, The Working World, with $5 million in assets under management, was established in 2004, started investing in the U.S. in 2012 and was granted CDFI status in 2016. It makes direct loans and profit-sharing arrangements with cooperatives using a floating rate of return. Other CDFIs have been at it for a longer time. For example, Capital Impact Partners was an early investor in worker cooperatives and has deployed over $2 billion over a period of 30 years.

Private equity. The report found two private equity firms focusing on financing employee-owned companies with revenues of $15 million to $350 million. Example: Long Point Capital, which provides capital to buy companies through ESOP buyouts and supports existing ESOP companies. Also, there’s a new Chicago-based fund in formation by American Working Capital.

Bank. That’s correct—bank, not banks. National Cooperative Bank is dedicated to supporting cooperatives of all kinds.

Why the underwhelming interest? Another Fifty by Fifty reportThe Role of Impact Investors in Taking Employee Ownership to Scale, says there are a great many reasons, ranging from a lack of knowledge and a perception of sub par returns, to a lack of infrastructure for impact investors. Some solutions: Combining qualitative–i.e., personal stories–and quantitative tools to communicate the value of employee ownership, creating a national employee buyout bank and developing a more-accessible employee ownership investment vehicle as an educational tool.

Source: Will Impact Investors Embrace Employee-Owned Companies?

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2017-07-05T12:12:25+00:00