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.
The legal and tax structure of the employee-ownership model relies on the ESOP, which in itself brings benefits. Companies that are 100% employee-owned don’t pay any federal taxes, and according to A&H, they don’t pay state taxes either in 44 of 50 states.
But A&H also plans to bring elements of the cooperative business-owner model to its companies to ensure workers act and feel like owners. It is doing this with the assistance of the Democracy at Work Institute (DAWI), where Leverette worked when he first thought of the idea of a fund as a means of raising capital for the kinds of business A&H is now targeting.
DAWI is a national group based in Oakland, Calif., focused on worker-owned businesses, that can assist in developing an ownership culture that includes, in some cases, a worker representative on the board of directors, open-book management, and “human-centered” human resources.
“Without this stuff you have a good retirement account through the ESOP, but with it, you actually have better companies,” Leverette says. “It’s a shift in the whole paradigm of what it means to be a worker and what it means to be a worker-owner.”
Although the fund’s investing purpose is unique for its focus on closing the racial wealth gap through employee-ownership, it is structured as a typical private equity fund, with an investment period of five years and a 10-year lifespan.
Capital for the fund will also come from a strategic partnership with the Local Initiatives Support Coalition’s New Markets Support Co. (NMSC), based in Chicago. LISC is a national community development financial institution. NMSC will provide the senior debt tranche of the employee-led buyouts.
The initial investors in Legacy Fund I include philanthropic funders and impact investors, including the Ford Foundation and Rockefeller’s Zero Gap Fund, an impact-investing vehicle launched in partnership with the John D. and Catherine T. MacArthur Foundation through the Catalytic Capital Consortium.
Other investors include the Skoll Foundation and its advisor, Capricorn Investments (a mission-aligned firm), in Palo Alto, Calif.; Gary Community Investments in Denver, Colo.; and Ascension Investment Management of St. Louis, Mo., which invests for faith-based organizations.
While foundations and impact investors are driving this initial deal, Leverette’s hope is that a state employees pension fund will look at a model such as theirs as an opportunity to strengthen the economies of their local communities.
“As we do well in this fund, the next round of investors should be those investors who see the alignment in how we anchor jobs, in how we address the racial wealth gap through the model, how we anchor companies and strengthen companies, and also provide returns that are competitive in the market,” he says.
Reeves agrees, saying that the hope is large institutional capital will recognize “there is a way to put capital to work that generates proper risk and returns, but more importantly, generates impact outcomes for their communities. That’s the marriage a lot of investors are seeking and we hope we can deliver.”