Sunday, May 03, 2009
Mission: Re-inventing Investment With a Local Focus
We invest in local ideas and enterprises that provide well-paying jobs, enhance community and environmental integrity, and offer reasonable financial returns. We use roll-up-your-sleeves leadership, community involvement, and investment to realize our vision.
It is our desire to lure people away from investing outside their locality and to build out the commons we desire through local 3BL investing. In our case we view investing as more than money as people are capable of offering ideas, skills, networking and commitments. Philanthropic gifts or investments can play a key role as well. We hope to offer:
Community Investment Notes akin to The Calvert Foundation. We hope to place those investment notes into local banks, credit unions, CDFI’s that are open to 3BL requirements and we will support the lenders and their customers. Our members can play a roll here as well both as investors, borrowers, supporters and service providers.
Direct lending and guarantees as traditional lenders do not cover all. In our case building local 3BL jobs and building local prosperity is our priority so we have different goals and a membership invested in each others success.
Equity and Equity/lending Equity-revenue relationships. So this is the territory that is the new ground so to speak at least from my research. Our membership will have investment teams looking at each opportunity from a perspective of how can we help and what is needed here and how can combine things to close natures loops in the enterprises. We will also start new ventures that flow from formative conversations around our mutual desires. They will require us working out equity liquidity.
Lending/Equity and local Exchanges
I am interested in the entrex concept and look forward to learning from them, thanks Hazel. I would like to hear more from people who are thinking about and working on local exchanges that would support equity revenue relationships. I am very interested to learn more I have been taking in Chris Cooks thinking around this topic. http://www.opencapital.net/co-ownership.htm
Chris who is based out of England talks about the co-ownership model where all parties interest are represented in a LLC or in England LLP. It seems to allow say an occupant of a property to pay the “rent” rate or interest only and they can choose at any time to pay over the rent and gain equity or set money in a holiday fund to cover times well like we are in right now, to cover the payments. What I like about this as long as the investment is indexed for inflation there is no particular need to address equity as long as the revenues cover the investors expected returns. It does however bring up the liquidity issue which I am wondering if we work within:
A membership where we are not advertising to the public a specific opportunity rather it is just members buying and selling equity interest from each other and the risks are fully disclosed and
The member is required to sell the equity at the same value that they purchased it plus pre-established inflation indexing.
Would these two conditions allow for SEC exemption in a member exchange assuming the membership rules are clear such as in Islamic finance? The Ameen Housing Coop.
http://www.ameenhousing.com/homefinance/hbbenefits.html seems to operate this way however I do not see an exchange, the members just withdrawl their funds.
I am seeking examples or clarity in how to operate a legal member exchange of equity. As I see it, this would promise to handle many community based equity revenue sharing relationships. Examples out there???
I would also like to have a means for venture investments to be converted to safer equity investments within the membership when the venture investments are ready for growth or exits. I am wondering if the equity revenue sharing parties could buy out the venture equity folks by establishing a pre-determined return for the venture group to be made available to the lower risk investors when deemed appropriate on this member exchange.
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Yes, we see a financing gap that is similar to what Michael described –small businesses that don’t meet the credit standards of a bank, yet they have a strong team/product/market and have a good growth proposition. They are also not interested in or appropriate for equity. We have built a program to provide mezzanine or royalty financing up to $500k to this group of businesses in NH. It is called Vested for Growth (www.vestedforgrowth.com) The deal structure may also resolve the equity liquidity issue that Chuck raised…
We recognize that while equity can be a useful tool, not every business is interested in being sold in the short term or wanting to dilute their ownership. Others don’t have a large enough market opportunity to motivate the equity investor. Here in NH, the backbone of our economy is built on companies with sales of $2-$10 million who have been around for 2-25+ yrs. They can’t always get everything they need from the bank – particularly after this recession many will have had a “hiccup” with sales or have insufficient collateral to take on any additional bank debt. Yet the best of these companies have learned lessons from the recession and may need additional capital to become more “value added” for their customers. This may require an acquisition or new product. To get this financed will require risk tolerant capital.
The traditional alternative has been equity. But some companies need a non-dilutive way to raise capital that does not require them giving up control or being in a position to create an “exit” event in 3-5 yrs. The owners may want to build their company long term and need relatively patient capital. This is when it would be helpful for investors and companies alike to consider bringing mezzanine financing down market to these small businesses.
Vested for Growth has just completed a PILOT of 8 investments. We believe that this market holds promise and are beginning to attract Angels as co-investors in our royalty deals. This offers Angels a “high touch” investment relationship, a similar net return but a more income-oriented investment structure. Instead of getting nothing for while and then an eventual pay day, royalty offers a return starting the very next month. This payment stream provides a “natural exit” so the requirement that the company prove that there is an “exit” is eliminated. Instead, they have to prove that their sales pipeline and gross profit margins are sufficient to support the royalty payments (based on a % of future gross revenue). Thus this is not a good match for start up or even early stage businesses. It is a good match for development and later stage businesses.
The deal structures can vary. If the risk profile of a company prospect requires a 20% return, 10% may come from debt and 10% may come from additional royalty payments. The debt piece can be repaid without penalty but the royalty must stay in for a minimum period to be negotiated. Otherwise the portfolio is simply made up of “the dead” and the “living dead”…Another deal structure is to have no debt and the entire return built upon a royalty payment. This is based on negotiating out the overall return multiple (1-4 X return) and the % of gross sales that will be paid monthly. When the aggregate payments total the overall multiple return, the royalty payments stop. If the company outperforms the projections, the Internal Rate of Return (IRR) goes up. If it underperforms, the investor eventually gets paid but the IRR goes down. That is the risk.
I meet quarterly with a group of community development entities throughout New England (MA, Vt, NH, CT) that are at various stages of learning and beginning to add royalty investing to their offerings. This is a great forum to share lessons learned and spread best practices around this type of financing. It is much more akin to venture investing than banking. It involves in depth due diligence, and “roll up your sleeve” partnering so this should not be done with systems that are built for retail volume lending. For example, staff are likely to be on site on a monthly basis. If people in New England area are interested, just email me and I can provide you with the logistics for our upcoming meeting.
