Innovative new ideas using ESOPs to close the wealth gap
Inspiring quote from fellow impact entrepreneur/investor, Reeves, founder of Apis & Heritage:
there is a way to put capital to work that generates proper risk and returns, but more importantly, generates impact outcomes for their communities
A new private equity fund founded to close the racial wealth gap through the creation of employee-owned businesses, announced a first close on Wednesday with the investment backing of major foundations, including Ford, Rockefeller, and Skoll.
Apis & Heritage Capital Partners (A&H), a Washington, D.C.-based firm led mostly by Black, indigenous and people of color (BIPOC) professionals, closed on US$30 million of investment capital for Legacy Fund I, its flagship vehicle targeted to reach about US$50 million.
The fund plans to use that capital to facilitate employee-led buyouts of owners of essential-service businesses—such as landscapers, food service workers, commercial cleaners, healthcare agencies, and electricians—who are looking to retire, or simply move on, and have workforces of 40 or more where at least one-third are people of color.
These buyouts will lead to the establishment of employee-owned companies where workers will be able to grow their wealth over time through an Employee Stock Ownership Plan, or ESOP.
ESOPs function similarly to 401(k) retirement plans (they were developed out of the same federal legislation in 1974), but instead of tax-deferred investing in stocks or funds, ESOPs invest solely in the stock of the employer.
Over time, workers vest into “their piece of ownership,” says Todd Leverette, co-founding principal at A&H. “As the company grows and increases in value, the value of [each] worker’s account grows and increases in value.”
ESOPs have “been building wealth for workers for over 40 years,” Leverette adds. But, crucially, that’s true mainly for white workers. “We’re taking something old and directing it where it hasn’t been deployed before, but where there is the greatest opportunity and the greatest need.”
According to A&H, 60% of Black and 65% of Latinx workers have zero savings set aside for retirement. The firm’s goal is for every worker in companies bought out with A&H’s assistance to accrue savings of US$70,000 to US$120,000.
The fund plans to buy at least eight closely held companies from owners who are retiring, 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 is seeking essential-service businesses because these companies tend to employ people of color, and as profitable, recession-resistant, long-standing operating businesses, many are “just good investments,” says Philip Reeves, A&H co-founder, who has known Leverette since they were classmates in the business program at Morehouse College in Atlanta.
These kinds of businesses have current revenues, few capital expenditures, and they didn’t fall off a cliff during the pandemic, Reeves says.
read at barrons.com
