New Frontiers in Employee Ownership Finance

good morning everyone uh great to see you again my name is Jack morard with ruter and the laad square Institute and it's my pleasure to introduce our next panel discussion New Frontiers in employee ownership Finance um access to Capital is a central theme that we heard throughout the day on Capitol Hill yesterday we heard it from Senator van Holland and the bipartisan legislation that he's leading folks if we could move our way here in the back good excellent start over Okay well good morning everyone Jack morard Ruckers La Square Institute um it's my pleasure to introduce our next panel New Frontiers employee ownership Finance um as we heard yesterday on the hill access to Capital is a central theme in the employee ownership field we heard it from Senator van Holland and the bipartisan work he's leading in this area we heard it from Jim bonam of the ESOP Association that access to Capital is a key element of a broader ESOP advocacy agenda and today we have the privilege of hearing it directly from leading investors and practitioners uh across the employee ownership field that are either deploying raising or allocating Capital to grow employee ownership um a few years ago an analysis by American working capital showed that uh employee ownership is currently only 3/10 of 1% of all us m&a activity as Chris Mackin likes to say we are a spot on the Sun a drop within a drop in the bucket this status quo is both an investment decision decision and a policy choice and we can choose differently to bring the full weight of capital markets to Bear to grow employee ownership and enable workers and families to build wealth and economic security the five members of our next panel are all Pioneers in this field and they've chosen differently to create innovative ways to finance the growth of employee ownership and with it a more Dynamic resilient and just American capitalism I'd like to introduce uh very briefly uh our moderator Melissa Hoover who senior fellow at the Ruckers Institute and special projects at the Democracy at work Institute uh we also have uh Amy Breakman with us co-founder of the unlock ownership fund Zoe schlog managing partner and founder of common trust Phil Reeves co-founding partner of abis and Heritage Capital partners and Jim Sorenson the founder of Sorenson impact group uh and with that I will hand it over to my colleague Melissa thanks Jack um so I'm thrilled to be here today to talk with these Giants of uh Innovation and capital for employee ownership to get to get started why don't we just do an introduction so introduce yourselves your organization and kind of where you sit in the world of Finance um and tell us a little bit about what brought you to employee ownership Jim do you want to start yeah great to be here um as was mentioned my name is Jim Sorenson um I'm I'm founder of the soron impact Group which is really a multidisiplinary uh collaborative that is really focused on uh really building the ecosystem for impact investing and uh my journey here really is in in recognizing um the tremendous uh need and impacts u in society around ownership and of course employee ownership is is key to that as as I've looked at my life and the sucess the success that I've been able have in Building Wealth uh in large part has come through employee ownership so um very interested in supporting uh uh employee ownership and really ownership uh and and passive ownership U of of other dimensions to help those that um that don't have the opportunity to be able to build wealth and uh really impact future Generations uh that U is going to be essential for us to thrive in this country sure so Philip Reeves with abis inher Capital Partners we are an investment firm that's focused on using employee ownership to close a racial wealth Gap and so we find great small businesses all around the country that have workers of color and convert them from being founder own or family owned to being now employee owned um and when we say employee ownership we use the ESOP um structure and so far we've done four transactions have around 400 workers of owners in those uh companies and are really excited for today's conversation so thanks for having us and and what was it that brought you to employee ownership oh um I mean my my background I I have people in my family that own small businesses um I spent a lot of time in the DC uh area and got to see the power of ownership in the black community and I think for me it was watching those owners build these great businesses they were able to put their lives their children their Generations onto this great path and it was really understanding that those entrepreneurs that got all the success had beat a ton of odds and most people aren't going to get that opportunity but employee ownership was a way to give people that chance without them having to mortgage their own start a business and just you know surmount these massive things and so we we The Firm our whole idea is if we can spread opportunity and spread wealth particularly in communities of color we can really take this racial wealth Gap that is actually a Chasm and start to narrow it just a little bit hi everyone I'm Zoe schlog I'm a co-founder and managing partner at common trust um it's really nice to be here Phil and I were actually joking at the beginning of this usually we are the only ones in the room who are working on employee ownership or may even know about it and I feel like this room everyone is working on it so it's it's nice to be among familiar faces um uh my firm common trust supports businesses to exit through employee ownership trusts uh we do that through two ways one we have an advisory side of our business which is supporting businesses to design a customize employee ownership trust uh the other side of things is we have a fund that provides the capital for those buyouts um and what brought me to this space um candidly was uh disillusionment and an existential dilemma um I'm now working on the buyout side of things but five six years ago I was an early stage investor we were investing in mission-driven companies that were building Tech Pro products to uh solve social and environmental problems and you know as I was investing in these companies I had this question in the back of my mind which is like Okay so let's say we succeed in scaling these companies and products to impact people's lives particularly with those products that were designed around addressing questions of wealth inequality when those companies go on to exit given who sits on the cap table net net are we making wealth inequality Better or Worse um so this is something that really got me to start to think about ownership as a theory of change um and and that's really what led me to get getting to work on these employee ownership buyouts okay I'll just Echo all what they said except my name is different my name is Amy Breakman um I climbed I was able to have access to the ladders of success in our culture education employment making enough money that I could start being a philan giving away philanthropy too and at some point I looked around and said you have these Awakening moments that you know the system is really driven so that people like me will succeed and it worked for me and then I noticed how many people the bulk of Americans are left behind and don't get the opportunities I get so what can I do to shift that um and so I started having the Good Fortune of probably things that Jim seated being an impact investor started seeing still that even in Impact investing a lot of the money is still going to prioritize market rate returns for investors like me even though they're we are also trying to drive sustainability and better um better distribution of the um of the economic system so my wakeup call in employee ownership was that when I met Phil and Zoe and other a few others unfortunately there aren't that many to invest in but cdfis have been doing this work for a long time um I said oh my God here it is because I was already aligned as a racial wealth Gap investor and um so I have moved very rapidly a lot of people who know me say I move faster than most other investors I'm in 17 Equitable asset ownership Investments and now I'm using my voice as well as my money um to try to see if we can build more of an ecosystem of investors moving rapidly into these models that thanks to the researchers out there you have proven and to the practitioners who have led these business you have proven this is better better for workers better for the companies and better for local communities so let's do it all right let's do it so uh we have a really cool panel um and I would invite us to have a discussion um as much as sort of question and answer presentations so feel free to respond to each other tack on um as we go but I'll I'll start us off with some questions so Phil let's start with you um can we talk a little bit can you speak to investors perceptions of employee ownership and maybe some of the myths around return uh that pose obstacles and what you're seeing get traction with investors sure so um we raised our first Fund in 2021 and I think that you know it's the stage is great employee ownership as a asset class is just super new particularly for a lot of allocators and you have new teams doing new models that aren't taught in Business School Aron in law school and that's just hard for a lot of investors to get their arms around never mind that you know LPS have boxes like credit and equity and employee ownership does not fit super well into those boxes is and so for a lot of investors employee ownership is an easy no like it doesn't fit in my boxes and everyone's super new and no one has track record I'll just pass what we found was when we spent time within investors and they really put in the Cycles I think what LPS appreciated was you can do both you can have great returns and have these sustainable outcomes for communities of color but it just takes getting over those hurdles and so our our LP base is what has been phenomenal in that they actually took the time to understand the model to appreciate how it works and I mean a huge credit to the senson team I mean Sorenson was our first institutional check and that that was huge for us and so now you're seeing other teams get funded and hopefully what this does is it lets it lets the field realiz when I say the field I mean the investor Community realize that these models do work they generate great returns and I think the the LPS that have taken the lead are doing a phenomenal part of getting us to the next level um in terms of myths I think the the the greatest myth that there's a lot out there I think the that still persists today is all around Pipeline and opportunity and how many deals are there you I think there's a perception that employee ownership has to be a small company like it's a it's the co-op grocery store the or the the coffee shop or the book shop and I think yesterday's panel was a great Showcase of just how large some of these things are even some launch m a day and that that story has to get told the other one is and actually actually happened yesterday quietly is um that employee ownership is a buyer of Last Resort and you hear that sometimes but the the challenge is that what that means to investors is it must not be that great of a company but that couldn't be further from the truth and I think it takes models like what we're doing to to break that Paradigm I mean MOA was a great example for those that don't know our our latest transaction sky blue Builders we were not the only buyer there we in fact were not the first buyer there but we were able to win that transaction in a competitive process and we think that that means we can get great assets and deliver great returns for our investors and deliver great impact for those employees thank you oh wow an Applause line so uh Amy and Jim let me turn to you to build on Phil's remarks why do you think so much capital is staying on Sidelines um when it comes to employee ownership and for the capital that's moving wide is it moving do you want to go first um well we're going to try to experiment with that at unlock ownership because because of what Phil described um not not many investors are in this room right now like how many of you are asset allocators I mean okay great yeah yeah I know both of you great you're involved you're on the investment committee that's excellent um but um it's just a it is a a new space that it's not new space sorry it's aace space that people haven't invested in and so there's a lot of learning to do and part of what we're trying to do is make it easier for others to invest in this we are now a fund unlock ownership fund with four co-founders who are doing the initial um Investments through decisions led by an experienced investment committee and we think that might help remove some of the barriers for people getting involved it is catalytic Capital um so it will be our first funding is from daff funds Donor advised funds and Foundation funding is also welcome PRI funds so that um we can just make it easier for others who can't build the capacity I have three investment advisers only one no two of the three one's actually very very good and I'm surprised they're not here very involved but um the others just are not in the space and they don't have enough clients that are interested in it to make it work for their business model so I'll stop there yeah I I would uh Echo I think both what Amy and Phil have said uh it's new um I think there's also U kind of a notion that it's concessionary that um you know you're not going to make U market rate returns I I think that that's quite often the case whenever you're dealing with something that um you know has I think a real social good aspect to it um and part of the things that the the thing that we're trying to do in building the brto E ecosystem with our foundation is essentially to show that um there's a spectrum and that you can make market rate returns with impact Investments and in fact our decision around uh apis and Heritage um was to put it in our MRI portfolio as opposed to our PRI portfolio and it very well could have been you know but we really felt that it sent a strong signal and we felt that it met What U our requirements were to be able to underwrite and and I think we're off to a very good start so um I think over time um and as there's more uh experience more success um you know this will change and and that that is what we want to see uh in this space and I I think there's also great opportunity for um ways to blend in market rate investors by utilizing tools like grants and uh program related Investments to uh help in drisking these Investments so there's I think some Financial Innovation that can also come to play that's that's an important part that we didn't talk about I mean part of these are emerging funds right and we all know there are real challenges in barriers to emerging funds especially if you're um anyway so yeah that is the role that catalytic Capital can play coming in to drisking the launch so that that's the way we see our role in the ecosystem at unlock ownership fund that we can drisk um you know making it easier for Phil and Zoey and others to demonstrate that they have a model that then can attract the more mainstream investors after they've gotten the ability to demonstrate several deals or transactions so to build on a couple things that Phil said um the first piece is the buyer of Last Resort um employee ownership this one is actually really interesting to me because uh I I wish I knew the specific percentage here but if I were to look at the businesses in our Pipeline and the deals that we're working on a large majority of them have turned down other offers from other buyers they have turned down private Equity they are trying to get bought out of private Equity they trying to pull out of an existing hold Co and it's because the capital structure doesn't support the way that they want to run their business um so I think that's something that's actually really interesting because most of when we talk about employee ownership it is the silver tsunami and these uh baby boomers who are ready to retire but there's actually a huge amount of opportunity with businesses that are looking to get out of capital structures that don't necessarily support their long-term goals um the second piece that I wanted to touch on uh relates to LPS getting into the space which is um I I don't think that LPS really understand easy comparables when they're looking at an employee ownership fund um that's particularly true with Equity also with debt I think one of the things that's really important is with an employee ownership deal um you know as you said Jim a lot of investors think that it view it as concessionary uh the the point I would make is that you're not necessarily trading away return with no commensurate adjustment in Risk I think employee ownership is actually a really strong way to manage risk in these businesses over the long term um and then sorry I'm going on a a bit of a ramble here the last point I wanted to make is just around how do we get more Capital off the sidelines and you know I think we talk a lot about how do we build Market education among selling owners the same is true with banks so when we're bringing senior debt into deals it is uh it is not an easy button to bring them into deals there's a huge amount of Education that has to go on with these senior lenders to help help them understand how do I evaluate this how do I present this to my credit committee how do I get comfortable given this that this looks a little bit different than most of the deals that that come across my desk just a follow up on the drisking so um full disclosure I work with A&H I'm pretty familiar with the model um your capital is in concessionary it does particularly from your philanthropic investors it is accompanied by grant funding to invest in the building of ownership culture and I think it's an important part of the model um because we know that that's what drives value in employee owned companies so can you speak to that a little bit I I think you hit it I mean I think one of the big takeaways from this conference particularly yesterday was around this idea of ownership culture I think what I hope everyone took away was that it is a very intentional thing that takes real time real effort and real money to do and so I think we were fortunate Amy to your point because we have a blend of capital we're able to you know use our more return focused capital for actually doing the Investments and then we have gr dollars to support this training that goes on in the companies but without that training we say all the time like an ESOP without the training is just like a retirement account like it's it's cool but it's not going to do anything what we want is employees that will stay longer that will um go the extra mile that understand their role in the p&l and that just takes a significant amount of time energy and capital and we're fortunate enough to have and so that's why I was super interested in the last panel like Workforce dollars is a way to offset that we're following up on that like that's immediate significant time in capital and yet relatively a pretty small fraction of the total raise for a really outsized uh return in terms of it yeah I mean in ter like scale of a deal you're talking you know a sixf fig amount of capital over a few years is going to deliver it's going to deliver meaningful in our experience meaningful outcomes from a p&l perspective rather that's retention you know eida whatever it is great yeah so we're already sort of getting into it but let's dive into your models a little bit um more deeply so Zoe can you talk to us about eot sort of break it down employee ownership trust um and how you think about their value and Niche in this space and maybe give an example of a firm or two that you've helped convert yeah so employee ownership trusts are relatively new on the scene here in the United States as a mechanism for employee ownership um it is a trust that holds a company on behalf of of the employee um so when you think about an employee ownership trust the mechanism of uh economic gain for employees tends to be through profit sharing um so the other pieces that employee ownership trusts are a long-term ownership structure for um a a business so when you sell into I can briefly explain the capital structure when you sell into an employee ownership trust typically you're bringing together some amount of senior debt from a bank we have a mezine debt fund and then seller financing that capitalizes a transaction to buy out the shares from the selling owner to move those into the trust and then lenders are paid back through company cash flow over the long term what that means in practice is that bit the business uh exists into that in that trust for the long term it's a kind of a Perpetual ownership structure um the piece that I think is really interesting about this legal structure here in the US right now and what we're seeing in a lot of our deals is that um employee ownership trusts allow you to uh encode specific company values or missions or purposes and I'll give you guys a couple examples um we're working with a manufacturing business right now that has been on a net zero emissions pathway for the last couple years um they actually have turned down several PE offers because they are nervous that if they sell to the private Equity Firm that net zero emissions strategy that they've work been working on might be erased um another example is a business that has a uh Workforce Development program where they've partnered with a nonprofit to provide uh quality jobs to disabled adults um and that's something that's really important to this business its culture its founder and so that's an area where you can code those types of things directly into the trust and protect those over the long term um uh and an example uh so I'll give you one example of a business we financed about a year and a half ago CLE AO they're based out of Provo Utah this is a group of four auto shops originally owned by Two Brothers quite close to you um uh when they were ready to exit Kevin the CEO he actually had known he'd wanted to exit through employee ownership for quite some time um since he he and his brother started the business 20 years ago so we financed the transaction with debt and seller financing um you know this was a year and a half ago and uh the results in in their first year and a half have been extremely impressive uh you know this is a steadily growing business in their first year since transacting they've been able to double their profits um uh I'm I'm not going to lean entirely into my confirmation bias I think there were many things that went on Beyond employee ownership but I think that's an important piece of of the picture um they've also been able to distribute record profit sharing to their employees and meaningfully have had their highest uh customer satisfaction ratings in 20 years of company history so um I I think it's a really double profit yeah yeah I I think it's a really powerful example of of the model and and its potential well thank you so um Phil ANH has also been ramping up uh work can you catch us up to speed on your latest deals and what you're learning from those sure so um we we've announced we did two deals in a couple years ago and then two more recent ones the the first was blooming Nursery out of Oregon and it a few things one it was our first rural deal this is two hours outside of Portland and we had never sort of been in that environment before particularly in the a space but it's a it's a plant nursery that specializes in like when you go to Like Home Depot they don't sell there they sell to like the specialty Garden Center in like the cool neighborhoods and so but what makes it so special is that they they've actually branded their plants and so now cut this is like the point around it was a great business with a great brand I mean they they've given plants to the Smithsonian to the National armorum because they're that high quality and so Grace Dale the owner owner has had this family farm for 41 years and was trying to figure out what to do private Equity has has has not done well in this space probably for obvious reasons the idea of employee ownership she didn't even she didn't know it was possible but when she heard it she Lally broke down in tears like that it meant that much to her that her family farm would stay in her family business with her employees and what animated Us in it was obviously the investment thesis but from an impact standpoint about a third of their workers are women and it was our first time having such a high number of women in our portfolio so we're super excited about that from a lessons learn standpoint you know when we do these announcements of like your company's not employee own I think people have this myth that it's like people jump up and down like oh my God I'm employee that's not how it happens at all like it is people are terrified like you just told them the the woman that has run this business for 40 years is leaving and these guys we don't wear suits but these guys in like these button Downs come in and so a lot of our work is around building trust and this time because we had a portfolio we bought one of the senior leaders from one of our other companies to the business and this Workforce Works entirely in Spanish so we have live interpretation all of our materials are in Spanish and English because we were able to bring someone that had been with A&H as a worker to speak in Spanish to a set of new workers that's how you build trust it's not me telling you that this is going to be great and you're gonna have this great retirement account it's Adrien saying I've worked with these guys for a year and look at what's happened to our shop and it just I think for us that that that was the biggest lesson is it's never I think it's never going to be on us to tell a story workers are always the best advocates for these stories fantastic thanks so Amy tell us more about the unlock ownership fund where the work's at where it's headed where you hope to be a year from now thanks and thanks to Rudy who wrote up an article about us in Impact Alpha last week thank you so much um we came together as a collective of investors who are working toward reducing household wealth with with a particular Focus toward reducing the racial wealth Gap and our two specific lever because of research again that show that these are really big levers in building um asset ownership for lowincome Black and Hispanic families I'll use that word because that those words because that's what the Federal Reserve uses I know there's lots of different language to use um so uh we are investing in emerging funds uh that will be driving those two thesis so it's a little bit weird I haven't yet found the conference that has looks at home ownership and employee ownership but we think both are very important levers um and there's some good investable options like Gary Community Ventures over there piloting the shepherding the Deerfield fund for black wealth um and other funds in the home ownership space um I think the value ad is what I've already said it's we're trying to leverage this ecosystem to help make it easier for other investors to participate and not sit on the sidelines so we will see how that goes we're just launching exciting so on the other end of the spectrum Jim you've been doing this for a while um can you talk to us about your experiences and successes investing in this space and um in particular what you think might be helpful to other investors H well um again I I think some of the principles that I talked about uh early on about uh catalytic Capital um you know utilizing all tools in the toolbox uh to leverage capital in that that's very much um uh in the headlines these days along with the ownership economy um I think clearly um the successful uh uh use cases that are being developed by apis in Heritage and others are going to be really important in that and then I think en enabling legislation that is you know really in the works um and we've been a little bit behind that with with with Jack and and others here um I think that wherever we can collaborate and bring in ideas I mean I I think of uh of Pete stavos and and the the great work that he's done and and um uh what KKR has been able to do in terms of their funds there's some great examples there and if if we can build a bigger tent uh I think that it's going to help everybody and can we stick with policy for a second and um can you say a little bit more about the policies or lack thereof that you think um need to be addressed to Marshall more private sector resources toward ownership well I think there's a real great opportunity because um my experience with policy as it relates to impact invest investing in this space has been uh really encouraging I mean you look uh today in Washington and it's so divided so polarized and U so politicized um that um it's hard to have any kind of Faith or uh encouragement about getting things done um now to counter that you know in in The Limited experience that I've had as it relates to policy when you can show um both sides of the house that you can address a social problem utilizing free markets and capitalism in a good way it tends to bring everybody on board and I think that that's really the basics behind uh the legislation that uh we're crafting here uh and I think that is the recipe for success uccessful policy as it relates to Bringing both sides together right anybody else want to speak to policy before we move to sort of bigger Visions it's critical and thanks to Jack and others and many of you here who working on that lever great so yeah before we move to audience Q&A um I'd like to ask each of you to share some final thoughts on something we haven't discussed yet or um something you think is important as we think about scaling finance and moving towards some of these market-based Solutions um and I can have I have some prompts but feel free to to riff um so Amy and Jim let's start with you uh I know both of you have a much wider framing uh around this issue so let's end on that bigger picture Vision um and I I'll start with you Jim you bet well I think that employee ownership is really important and I really support it and 100% there I would ALS also say that there are other facets of ownership that shouldn't be overlooked I'm very fortunate in my life that uh I was able to participate in a company sponsored uh you know 401K um and I think that um so many people are left out particularly gig workers in being able to participate in owning stocks and and appreciating assets through a 401k I think I'm encouraged with legislation uh the American uh uh excuse me the retirement savings for American act which really utilizes the Federal Savings and Thrift plan to enable gig workers to um again own U have stock ownership I think employee ownership through asops uh is critical I I think that home ownership is um really at a critical stage where so many are left out of the American dream um and we see uh really appreciation being used to the detriment of homeowners with private Equity firms basically buying up homes and then turning them into rentals and we need to turn that around uh you know and i' I've been really investing and and looking at models that would unlock home Equity to the use of uh those that either want to get into a home or those that own a home and Amy will have to talk to you about some of these interesting ideas uh I think uh you have to go where people are so I I'm interested in in new models of you know T tenant Equity vehicles for um uh those that that live in apartments to be able to share in in uh ownership appreciation and also Community models so there's a lot that's developing and happening in this space and it's all for the good and I think where uh we can utilize um our uh you know Innovation and and looking at ways to orient um you know free enterprise and capitalism to benefit people to include people to build onramp for them uh you know that's what I'm interested in as it relates to policy and and and this area okay I'll pick up on that last phrase the on-ramps because that's what I started my comments about is that I realized I had on-ramps and others didn't and I became more aware those are systemic um a lot of federal policies that blocked people of color in particular from Gaining um housing Workforce benefits all sorts of things so it is systemic I mean I mean these problems are systemic so all of you working at the poverty at the policy level that is probably the biggest lever Finance is a huge lever right we know what drives our economy so we have a role to play too my wish list would be you know I came out of just being an individual investor with my own little decision process I would love to see us come together more as a collective as on the finance investor side understanding what different roles we can play who's you know we work a lot with Smitha at World education like she's thinking a lot about this what are the ways we can come together more um Katherine toner's back there also from Gary working the policy and finance lens but we can think you know Ford Foundation mentioned you know Margo's working really at um uh supporting convenings like this it's incredibly important but if we really had a better understanding Zoe mentioned the banks like if we had a better understanding of who is in each ecosystem whether it's in finance whether it's employee ownership or home ownership or some other equitable asset broader asset redistribution model um then we could work better together instead of you know we meet here and that's great but if we had a the old McKenzie and consultant had in me is like picturing some little chart that moves from left to right like who's helping build the ecosystem who's helping build the emerging funds who which banks do we need to have then in this thing and then who are the quote institutional investors that are going to come in and so I would love if coming out of this we could start somebody wants to start working on that so it's not we're not working in silos anymore we won't get there yeah so I'm hearing themes about broad-based ownership across the board um and also see Amy at lunch if you want to work together um so Zoe can you tell us a little bit about um like eots employee ownership trusts are relatively small part of the picture what do you think we can learn from them that'll support growth more broadly yeah I think in in that case it's actually really interesting to look at what's happening in the UK uh like I mentioned eots are relatively new here in the US but in the UK we've actually seen significant growth of eots um I think the recent stat I saw is they have grown to one in every 20 Private Sales over an eight-year period which is insane and we should all be asking ourselves how can we Rec uh replicate that pace of growth here in the United States um a big piece of that is going to be policy uh the second thing that I think about is Market education and I think I think the thing that I have been thinking about recently relative to Market education is um what level of Market education needs to be mimetic and what level needs to be technical uh the banks need the technical information and anyone who is in these deals really need a deep technical understanding of how to structure and capitalize these employee ownership buyouts but there's also a huge amount of mimic education that I think needs to happen which is every single person in this country should know that if I go to sell my business employee ownership is an option um and I'm sure you guys experience this all the time but you know I'll talk to business owners who I'll tell them what we do and they're like I wish I'd met you five years ago I already sold my business and I didn't even know this was possible so I think there's work to be done with the folks in this room because we are all working on different models and different angles how can we come together on the mic side to really ensure that everyone knows that employee ownership is an option and speaking of Education what does nedic mean mic yeah so the way that I'm thinking about this is like the meme employee ownership buyouts so there's a private Equity buyout but it's like uh it encapsulates the entire concept and is has carrying capacity across Society so people understand that as a concept and idea they don't necessarily need to understand how the transaction is structured for an eot how the repurchase obligation works for an ESOP but they do understand that an exit option is employee ownership and can pass that along to their mom their dad their aunt their Uncle their friends thank you thank you good question I'm so glad I can be part of the generational shift towards memes of employee ownership fantastic okay so Phil um the A&H Apison Heritage takes a particular approach with a really clear lens on racial Equity um how is that shifting the conversation in the space and and what changed do you hope it catalyzes yeah I mean I think um we we're upfront about that um and I think that that's important to us and because you'll hear these stories of employee ownership but you don't hear them in communities of color like the 38 years of a history the like the manufacturing firm in Iowa you just don't hear it and so we're we're bringing that message there and in doing that it's really I mean on the on one side there's there's a lot of push back against that concept but we can't solve inequality if we can't solve inequality for everybody and so for us it's and it's also just a good investment thesis like the the industries that over index for communities of color Health Care Landscaping commercial cleaning General Contracting these are not businesses that AI is going to take in fact we believe that the the labor shortage is going to be exacerbated so today if you wanted a PL for every plumber that retires that comes into the industry three retire pretty soon is for every plumber that retires 10 are going to retire and so just put your investor hat on if if it's that hard to get a plumber then the only plumbers plumbers only going to work at places where they can own The Firm we believe that we're trying to be the firm where all them plumbers come honestly so we can raise the prices and get margin but it's going to be great for us the workers our LPS but broadly that's what we think the the the service economy can and should look like and so it's it's Paramount for us um and hopefully something that I think and and the last piece is just around the communication to to zo's point the communication around employee ownership when you talk like employee to employee or like the work that's done to create ownership culture it is often not done in low and moderate income communities or like blue collar workers or workers that speak a second language and so the the last panel having three languages that have you know materials in that's huge I mean we're we're dealing with this every day like how do we explain vesting to someone who's never heard that concept before we're open to ideas right now I think a Kit Kat is a great example because you get you have a Kit Kat and you get one quarter every day or every year the firm doesn't like it I like it so but we need more and more things like that so that we can get people to get it and that I mean for us that that's the biggest thing is getting getting this two low-income Industries getting this two low-income workers in their language and honoring their culture is huge for us great yeah thank you I told you it was the coolest panel um so I think we're ready for questions from the audience now okay okay wow lot of hands um I think what I might do is start with the do we want to start with the folks um online yeah let's start on online since they had some uh disadvantages yesterday um I'll go with a couple questions and then I know Jason has a question a number of questions in the room uh but first question uh from Matt crop out from the Vermont Center of employee ownership um could you speak to the limiting role that uh of seller financing and how new approaches are changing that kind calculus one question and then one more online from Joe rinos that he submitted yesterday that I wanted to Circle back around to uh Lewis Kelo advocated using the rediscount window of the Federal Reserve to offer low Capital Credit through private Banks to finance New Capital Growth of ESOP companies what do people think of that and I would say whoever answers that question please explain what the red rediscount window is as well let's start with the first one the seller financing question folks have creative ways can sorry can you repeat the Matt can you repeat that question for us on seller finance uh just talking about the the challenges and limitations of seller financing and how people are thinking about newo approaches to kind of address that situation in calculus so I'm I'm probably an outlier in my perspective on seller financing in this room which is I see it um less as a barrier and more of an opportunity um specifically we're seeing a huge amount of seller financing in the deals that we do in fact the last two deals that we did at common trust were 100% seller financed um which is like blows people's minds in finance because structurally that can't happen if you are in finance but I think the really interesting thing there is that there is appetite from sellers to participate at this level and I think the really interesting thing to me about seller financing is it comes with less constraints than Capital Vehicles it doesn't have a fund life they can be more flexible to the business and their needs there can be it's easier to do Curative processes with the former owner of of the business than otherwise so I'm actually really interested in how we look at seller financing not as a barrier but as an opportunity to provide more aligned uh financing for these deals you want do you want to say anything about how you approach I mean we seller I'm actually now I'm going to take Zoe like back to our next deals so we um to date have have used a lower amount of sell financing and so in the the traditional ESOP deal it was a senior lender and these really large sellers notes and we always viewed that as um a barrier for a lot of sellers particularly sellers of color because if you're if you're trying to retire you're trying to move on from your business and someone says okay great but you have to put this 10-year note forward there's just not many people who can do that like their life isn't set up like they don't have a separate 401K they've been a business owner their whole life they put their money back in the business and so um we think however that that seller was that was good paper like the the traditional sellers notes out there by all the esops they have really like the default rate on an ESOP NCO did a study it was 0.2% no yeah 0.2 so not two 0.2% and so we we think there's a lot of room around trying to reduce those sellers noes and the other thing we do to to again bring more people to the space is setting up ESOP is just super expensive and complicated and needs a lot of inputs and one thing that we do for sellers is we actually pay for the cost of setting up the ESOP and so again we're trying to say to a seller selling to your employees can be as for you as simple and frictionless as selling to private Equity or a competitor great and then there was a second question um that I might need a little help remembering um uh bit complicated yeah I'm not going to be able to I'm gonna have to read that one um leis Kelo advocated using the rediscount window of the Federal Reserve to offer low Capital Credit through private Banks to finance New Capital Growth of ESOP companies what do people think of that idea we can also pause friend what's that phone a friend phone a friend I'm like I'm like there's a lot of the we'll leave that one for the audience to chew over um uh why don't we take a batch of questions we've got Jason Daniel and I'm I'm and Leslie uh and then I'll do a second batch but go ahead Jason uh thank you all this has been a really uh it's lived up to the hype uh this panel thank you my question is about what you have considered if at all giving uh the employees of the companies you've invested in or acquired giving them exposure at the fund level to further um kind of enrich and and create circularity in the economics of the ecosystem that you're building okay and before we answer that I'm just gonna Bunch them up so if you want to go ahead and ask yours yeah sure um so you talked about the Spectrum from Grants to uh catalytic Investments to Market return Investments but nobody said any numbers so from an LP perspective am I investing in Evergreen fund is there a time Horizon is it fixed income Equity what kind of return and then from the company perspective what am I paying because I once as Co and president of the ESOP talked with a very well-known fund and they came back with really expensive mzet which I quite frankly there's no way I could pay so I'd just love to get some numbers from both the lp side and from the company side I can just quickly say like when I invest in some low income you know from one end it's grants and I've made several grants in the space no return from a financial perspective hopefully big return from an impact perspective you always have to be talking about both returns um note I've done some notes in cdfis that could be like 3% threeyear notes um investing in cooperatives uh by and large and then these guys can can speak more to their return profile I'll hand it to them but those are market rate funds you I'll just give you and of course it this really depends on the asset class where you're investing but an example um you know in our impact real estate uh we really have two classes of inv vors uh CRA banks are willing to take a a haircut so to speak a seven to 8% return uh and they help leverage in market rate investors that are looking at 10 to 12 and of course for c banks it's critical that they meet their their requirements so you know this all structured when when all is said and done um I would say on average we're looking at about a a 25 to 30% concessionary versus market rate um you know there are other examples out there again different uh you know types of funds debt or Equity where um you know foundations have come in with first loss capital or G loan guarantees uh to help drisk the transaction to bring in really even a a second concessionary which is a little less concession you know and then ultimately leverage in market rate investors there's a lot that can be done that um uh in this space if you're really creative yeah senior note senior note subordinated note get different rates and take different and the cost of capital to the company what on average are they to to pay back these Investments it it really depends on the deal to be honest um I think uh as an operator the thing that I would have in mind if you are looking at structuring an employee ownership deal is uh looking at the return to the investor and looking at the return to your employees and looking at those two numbers in in parallel so the the business's ability to pay different um different notes or or different structures will depend on on the business the growth profile the risk profile and otherwise so it's hard to answer that specifically um but I don't know if you want to add anything no I mean I think it it comes down to good underwriting um we we we take very seriously the fact that we're we're talking about employees livelihoods and so the the rates we're putting forward to the company are you know probably lower from the from a traditional me standpoint um to you know Zoe's earlier point the risk profile does demand a a higher rate than you're seeing in like a bank loan um but then it's really about the flexibility of the capital it's hey I shouldn't say this a bunch of LPS around but we're not going to take a company to receivership um we're going to try and do what we can and so the fact that we can be flexible that we're not regulated that we're not you know we don't have amortization that we don't have prepayment penalty that we don't have closing costs all of those things we think combined with just really conservative underwriting we think makes for really safe Investments the the worst thing that could happen in any of these deals is it gets flipped upside down that's just a not starter let's tackle Jason's question and then we'll do the next cluster um so Jason's question was about um exposure at the fund level do do you all remember the question yeah do you want to address it we we don't I think that'd be awesome like I would love for you know anh4 to have taken a a we I mean a selling shareholder to come back into the fund I think that would be great on the employee side I think it's you know again accrediting investor rules and SEC regulations that are way above my pay grate but it's a phenomenal opportunity yeah I would add to that in theory yes absolutely that would be amazing to bring the same level of shared ownership that we're seeing in businesses to the fund level um and pragmatically I think um uh I think all of us are just focused on getting deals done one by one here to build build the space and hopefully we can build to a future like that Leslie thank you um so I love what Phil said about no one understand esops and so they can't check their boxes right to make it work so um in our case and many the businesses that you're trying to support um we have Hispanic craft workers who are our majority owners but we can't get mwbe treated be treatment because we can't check the box and so working you know if we had that for our customers who want who craving that kind of community impact spend but we can't qualify so do you have any thoughts on how we can work together to get that recognition for what we're doing to uplift these families we think about this all the time um and so to recap for folks the the idea is I mean yesterday got mentioned the idea of having minority certified companies or a woman certified company that but when you make an employee ownership transaction now you have this weird thing like this trustee is that the person there's the employees but they don't really own it they are beneficiaries of the trust and this is very convoluted system and so what we found is we are very interested in this happening um in some broad form whether it be at nmsdc whether it be at the federal level I think the I think the near-term opportunity is at the city and state level where you can say to a city or say to a state hey we're a local business we have you know X number of our employees or X number of our ownership is women or people of color I think have I think that would be a a more beneficial conversation and then I think that will roll into um the idea of a national certification I mean the and this is the reason why why we're big on this is because there's a lot of minority-owned firms that can't transact for this exact reason they're like hey I I I need part of my value proposition is I I'm a tier one supplier in the auto services they're you need that certification but your employees would qualify and so again this is another one where I think the large corporations the billion dollar the billion dollar Roundtable that all of that can drive this I I I 100% agree 100% agree we have the same issue and it's something we'd love to work on together with folks and I'll say I think there's something particularly exciting about this moment in time where these kinds of questions are now front and center because of the racial Equity lens in investing um other questions or comments from the audience I saw a bunch of hands earlier oh okay hi I I used to work at the Global Investors for sustainable development at the United Nations and the UN Global Compact and they do a damn good job of branding of both from the Institutional Investor and the companies from a in in the case of the UN the sdg movement sustainable development goals employee ownership is is an S is a sustainable development goal here and I'm just wondering as I watch this and maybe you guys can talk about branding a bit from both the Institutional Investor side and from the company side itself why aren't the big people like in in in my situation I was dealing with City Bank or UBS or uh Pimco and things like that why are they not involved in this movement might have to ask them uh do you all have thoughts about that well I think it goes back to the earlier questions around um you know making this uh more of a movement and more in the top uh of consciousness of people and and I think it comes down to convenience like this it comes down to Publications it comes down to uh success um it comes down to policy and it comes down to you know us reaching out in our networks to engage and and bring these people on board I mean the only example I know Joseph Katan attended this last year from obron a Cooperative holding company he is actually working in the health health companies large Health companies and advocating getting them on board to using supply chain that are employee owned companies so I think you know taking Public Market companies they're not going to really shift to employee owner generally but maybe advocating that their supply chain is employee owned might be one other way to get to M Medics and um you know get the word out but um you know I think it's sort of like what Corey Rosen said in the prior panel it's like it's frustrating to all of us that it's there's not wide more widespread adoption but maybe it is to Zoe's Point like we really need to figure out how do we it's not just convenings and academic Publications like how are we making this getting this message into everyone's homes great uh yeah ruple yeah I just just to note on that it seems to me the block there is around the SBA process so if like a lot of these banks are doing SBA administration loans and that's where they hit the class of workers and assets that we're talking about the small and medium businesses and it's like if the SBA isn't 7A program isn't acknowledging esops then I think it makes it really hard for the banks to come in so to me it's like the policy game is really important um in in getting these institutions to move um but just wanted to add to that yeah well why don't we bring it back to the mode did I see your hand up yeah great let's uh let's do I we've got we've got one here and then so Mo first and then uh our friend in the back there I think that to that end other than a forum like this kind of panel I'm curious how much folks like you collaborate on that like bigger messaging because it's like one thing to have you know like any individual one of you like make the case for work ownership but it's different when all the investment Community are Banning together and telling that story together about that like um really high return rate and like all the successes I'm curious how much talk there is together within the community um to to actually like synthesize that for like the wider audience to pitch to these bigger more anchor institutions I think it's an opportunity but I'm thinking of Evan is that you back there from Project Equity yeah maybe you could hand the mic to him because he's actually driving a PR campaign right now that is going to get the word out to business owners um that EO is a great option thank you Amy and I didn't walk over here so I was in your sight line so you would pick me out for that um yeah we actually have uh a few things that we're doing in this regard um uh with Amy's support uh we are presenting the first employee ownership inspiration award at our upcoming employee ownership Equity Summit in May uh this is to a business owner that was uh identified uh by Partners in in the field uh we took nominations as uh someone who is has has had the foresight in terms of implementing employee ownership uh not just as their own succession strategy but really embodied the values that we uh that we all hold for employee ownership and we project Equity feel like it's really important to elevate folks like these in these messages so that other business owners can see themselves in the work and understand where they might be like-minded and we're also doing other storytelling around you don't have to be Mission driven like for instance our uh our our winner this year you can have other objectives but employee ownership can can still fit for you so thank you again Amy for that support and noting that I was here I'll also point out that in during the Big Ideas segment later today I'm going to be addressing Corey Jim Zoe Amy your comments in regard to how it is that we Elevate the message because we really do need to bring forward into Consciousness employee ownership normalize it bring it into the mainstream so I'll talk about that later great and and I heard I want to make sure we sort of pull forward the Strand that Mo brought out which is that there is a specific need for investors to speak with a unified voice to the investment community and so I I've heard that hasn't happened yet so let's think about what that looks like um and then did I see one more hand here yeah yeah I just want to say um we talk a lot about Banks and I think we was talking Corey mentioned talking about small companies versus large um I'm with JB Morgan we've got a dedicated team that's been doing this for 17 years and so there is an understanding on the financing side of it I think it's depending on the size of the company and where you structure those deals but um there's certainly it's getting to the right institution that understands how to underwrite these transactions and you know gwenneth on our team over with GL Global philanthropy will say and we're making it part of our whole ecosystem and going down through every level and every size of company and connecting those dots so um 7A yes I understand there's you know efforts underway with with the program and that's going to be helpful at the at the smaller end of the market but I think the argument is we're trying to go up market and really drive the larger companies and and show that this is a viable structure for any size company great okay parting shots last words anything you didn't get to say that you'd like to leave the audience with have a great lunch yeah we cover