Investing in Alternative Ownership Enterprise Funds: Insights from Investors
On April 3rd 2024, we hosted a lively conversation about investing in Alternative Ownership Enterprise Funds with Demetric Duckett, Managing Partner at Known; Humaira Faiz, Mission Investment Officer at W.K. Kellogg Foundation; Thomas Knowles, Managing Partner of Gratitude Railroad; and Ishita Shah, Director of Catalytic Capital at Align Impact.
Transform Finance Program Director, Julie Menter, introduced the conversation by sharing some key insights about the funding landscape. Transform Finance has found 47 lenders and funds with $3.7 billion in potential financing in the US and Canada (excluding banks). Financing for conversions is generally led by banks, CDFIs, and dedicated lenders and funds. 18 of these funds, with $1 billion in potential financing, invest only in employee-owned businesses. These dedicated funds tend to be small (median size: $50 million). Conversions to ESOPs and Worker Cooperatives are the typical focus (EOTs are still rare).
Funds are diverse with different types of fund structures, capital needs, and return expectations. In addition to the typical GP/LP funds (e.g. Apis & Heritage), there are evergreen loan funds managed by non-profit entities (e.g. Local Enterprise Assistance Fund, Project Equity) and funds operated by cooperative conglomerates which use the capital to buy new businesses and grow (e.g. Obran and Evergreen Cooperatives). Innovative models also exist where community members or external experts make investment decisions, not the management team (e.g. Boston Ujima Project).
The 4 panelists then shared their reasons for investing in Alternative Ownership Enterprise funds. In general, the core motivation was reducing the wealth gap and building economic security, in particular for people of color. In addition, Thomas Knowles shared that they see these funds as an opportunity to invest in businesses that don’t typically seek venture capital or private equity funding, and thus diversify their investment portfolio.
The conversation then explored how each investor thinks about risk and returns. Demetric Duckett reminded us that all investments have an impact, whether positive or negative. While AOE funds may seem risky, “we should be the ones that are actually willing to stand on the thinner ice and prove that it can hold us.” Because AOEs are unfamiliar to many investors, these investments can seem risky, but it’s important to recognize that these structures have existed in the US and abroad for decades. Ishita Shah encouraged investors to “just choose one investment to start with” as a strategy to learn.
On the topic of returns, some investors seek risk-adjusted returns in their portfolio, while others provide catalytic capital. This portion of the discussion prompted a lively discussion in the webinar chat: some participants challenged whether it’s possible to truly shift our economic system without investors accepting lower returns on their investments, while others argued that meeting investor benchmarks will grow the pool of capital available.
Finally, we explored some of the challenges investors face when seeking to invest in AOE funds. One of the common themes was the perceived complexity of AOEs, making it hard for investors and business owners to participate easily. In addition, Humaira Faiz highlighted the lack of a shared impact framework as a limiting factor for the growth of this field with impact investors.
While the investors on the webinar might be investing in AOEs for different reasons, and seeking different returns, they all share an excitement for this field and its potential for growth. Thanks again to Demetric, Humaira, Ishita, and Thomas for sharing their time and expertise with us and to the 150+ participants for their active participation!
Looking for more information about AOE funds? Check-out our database of investment funds and vehicles.
