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Expanding Investment Opportunities Through Diversity

Expanding Investment Opportunities Through Diversity. Manjari Raman mraman@icic.org April 25 th , 2006. DOMESTIC EMERGING MARKETS = AMERICA’S INNER CITIES. DILBERT: “What was that popping sound?’’ DOGBERT: “A paradigm shifting without a clutch”. Theory or Data?.

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Expanding Investment Opportunities Through Diversity

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  1. Expanding Investment Opportunities Through Diversity Manjari Raman mraman@icic.org April 25th, 2006

  2. DOMESTIC EMERGING MARKETS = AMERICA’S INNER CITIES DILBERT: “What was that popping sound?’’ DOGBERT: “A paradigm shifting without a clutch”

  3. Theory or Data? When you attempt to do something that has not been done before—or when the future is going to be different from the past—the paradigm breaks down. Data is only available about the past. Clayton Christensen, Seeing What’s Next

  4. Making Money from Paradigm Shifts: Get Ahead of the Curve How can you predict a paradigm is shifting—and make money from it?* • Pioneers emerge: People begin messing with the rules • Problems emerge: Something everyone wants to solve—and no one has a clue as to how to do it • Catalysts emerge: ‘Outsiders’ who are not from the field begin to challenge the fundamentals • Resistance emerges: “If you were in this field as long as I was, you’d know what you are suggesting is absolutely absurd” • Results emerge: The pioneers begin to profit • Too late: The Paradigm has ALREADY Shifted * Joel Barker, Paradigms: The Business of Discovering the Future

  5. SIZING THE MARKET FOR INNER CITY DEALS “Where are the wild ducks when we need them?’’

  6. 100 Inner Cities’ EconomyKey Figures • 8% of U.S. private employment (8.3 million jobs) • 813,000 establishments Inner cities in the 100 largest cities are a substantial part of the U.S. economy: Source: State of the Inner City Economies, ICIC

  7. Minorities comprise over 80% of inner city residents Inner City Population: 21M Inner City Minority Population: 17M Source: State of the Inner City Economies, ICIC

  8. Inner City % Minority % Black % Hispanic % Asian Santa Ana 95% 1% 89% 4% Newark 94% 60% 30% 1% Washington 94% 84% 7% 1% Manhattan - Bronx 93% 29% 55% 6% Miami 92% 27% 62% 1% Atlanta 92% 86% 4% 1% Los Angeles 92% 15% 66% 8% Oakland 91% 41% 29% 17% Chicago 91% 59% 28% 2% El Paso 91% 2% 87% 1% MSA Average 38% 14% 16% 5% 100 IC Average 81% 40% 33% 5% The most diverse inner cities are more than 90% minority Source: State of the Inner City Economies, ICIC

  9. Eight Years of the ICIC - Inc. Magazine Inner City 100 The Inner City 100 is an annual list of 100 of the fastest-growing companies in America’s inner cities. The program is a partnership between the Initiative for a Competitive Inner City (ICIC) and Inc. Magazine to spotlight and support growing companies in urban areas and to highlight the importance of a healthy economy in developing healthy urban communities. Since the list’s inception 445 companies have made the list (1999- 2006) • Average 54% CAGR over five years • Created over 53,000 new jobs since 1994 • Employed at least 34,500 inner-city residents • Average revenues of $20 million • Responsible for more than $9 billion in total sales • Pay an average of over $14.5/hour and $41,000/year to salaried employees • Less than 3% have gone out of business

  10. Inner City 100 Minority Owned Companies • Since the list’s inception 153 minority companies made the list (1999 - 2006) • Responsible for almost $2.88 billionin total sales. • Average revenues of $ 18.8 million. * Data included in this analysis is based on information collected by the Inner City 100 for the period 1999-2005.

  11. Inner City 100 Minority Owned CompaniesGeographic Distribution • Inner City 100 minority-owned companies are distributed across 27 States and come from over 60 cities in the U.S. Cities with three or more minority companies * Data included in this analysis is based on information collected by the Inner City 100 for the period 1999-2005.

  12. SCOPING THE MARKET FOR INNER CITY DEALS “I’ll see it when I believe it”

  13. Inner City Companies: Small is Beautiful Inner City Companies: Profitability, Companies with $5-20M Annual Sales Median Operating Income Median After Tax Profit $153,649 $132,304 "This research uses data from the Kauffman Financial and Business Research Database.  This database is assembled by the Ewing Marion Kauffman Foundation and is specifically conditioned to meet high research standards. The longitudinal database includes financial and demographic data for U.S. companies and is made available to researchers for academic purposes." Note: *The data represents a random sample of companies, IC n=37,108, U.S. n=207,696 ; Fintel Inc.; Kauffman Foundation

  14. Inner City Companies: Bigger is Better Inner City Companies: Profitability, Companies with $20-100M Annual Sales Median Operating Income Median After Tax Profit $602,448 $482,355 "This research uses data from the Kauffman Financial and Business Research Database.  This database is assembled by the Ewing Marion Kauffman Foundation and is specifically conditioned to meet high research standards. The longitudinal database includes financial and demographic data for U.S. companies and is made available to researchers for academic purposes." Note: *The data represents a random sample of companies, IC n=37,108, U.S. n=207,696 ; Fintel Inc.; Kauffman Foundation

  15. Potential for Profitability In Inner City Deals: Low Valuations, High ROI Inner City Companies: Comparable Returns Median Return on Investment Median Sales $4,750,000 $623,000 "This research uses data from the Kauffman Financial and Business Research Database.  This database is assembled by the Ewing Marion Kauffman Foundation and is specifically conditioned to meet high research standards. The longitudinal database includes financial and demographic data for U.S. companies and is made available to researchers for academic purposes." Note: *The data represents a random sample of companies, IC n=37,108, U.S. n=207,696 ; Fintel Inc.; Kauffman Foundation

  16. Industry* IC ROI U.S. ROI IC ROI – U.S. ROI Waste Management and Remediation Services 23.1% 14.0% 9.1% Personal and Laundry Services 14.6% 6.0% 8.6% Truck Transportation 16.7% 9.0% 7.7% Internet Service Providers, Web Search Portals, and Data Processing Services 20.0% 13.0% 7.0% Clothing and Clothing Accessories Stores 15.5% 9.0% 6.5% Miscellaneous Store Retailers 14.2% 9.0% 5.2% Nonstore Retailers 14.0% 9.0% 5.0% Repair and Maintenance 19.0% 14.0% 5.0% Merchant Wholesalers, Nondurable Goods 13.7% 9.0% 4.7% Sporting Goods, Hobby, Book, and Music Stores 12.6% 8.0% 4.6% Inner City Investments: Emerging Sectors of Growth Inner City Companies: Taking the Lead Note: *Based on 3-digit NAICS code Source: Fintel Inc.; Kauffman Foundation

  17. Inner City Companies: Low Debt, Very Low Equity Inner City Companies: Debt Debt-to-Equity Ratio Long-term Debt $53,773 $2,373 "This research uses data from the Kauffman Financial and Business Research Database.  This database is assembled by the Ewing Marion Kauffman Foundation and is specifically conditioned to meet high research standards. The longitudinal database includes financial and demographic data for U.S. companies and is made available to researchers for academic purposes." Note: *The data represents a random sample of companies, IC n=37,108, U.S. n=207,696 ; Fintel Inc.; Kauffman Foundation

  18. Entry to Exit: Buoyant Market for Inner City Investments Private Equity: Investment Amount by Outcome (2001-2005) 2% 2% Other 3% Bankrupt or Defunct 5% 11% Merger or Acquisition 14% 12% LBO 6% 16% 20% Went Public Active Investment 56% 53% Note: From Jan. 2001 to Aug. 2005, we were able to match addresses of 5,379 ($208.1 B in known investments) US companies from Thomson Financial, of which 517($19.5 B in known investments) qualified as inner-city companies.

  19. Inner City Investments: Staged for Growth Private Equity: Investment Amount by Stage (2001-2005) Other Other Later Stage LBO Acquisition or Expansion Third Stage Second Stage First Stage Early Stage Source: Thomson Financial (from Jan. 2001 to Aug. 2005), ICIC analysis

  20. SHAPING THE MARKET FOR INNER CITY DEALS “Those who say it cannot be done should get out of the way of those who are doing it’’

  21. Inner City 100Start Up Capital - Survey Results • Primary sources of start-up capital • Personal assets of the founder(s) 87% • Assets of the founder’s family and friends 20% • Commercial bank loan or line of credit 19% * Data included in this analysis is from a sample of 218 Inner City 100 companies collected through the Inner City 100 survey for the years 2002,2003, and 2004. Assertions should be viewed as observations about a group of growth companies in America’s inner cities.

  22. Inner City 100Growth Capital - Survey Results • Primary sources of growth capital: Commercial bank debt dominates • Commercial bank loan or line of credit 61% • Personal assets of the entrepreneur 37% • Assets of family and friends 21% * Data included in this analysis is from a sample of 218 Inner City 100 companies collected through the Inner City 100 survey for the years 2002,2003, and 2004. Assertions should be viewed as observations about a group of growth companies in America’s inner cities.

  23. ICCC: Shaping the Market for Inner City Investments Inner City Capital ConnectionsDesigning ICCC 2005 Focus group of inner city companies Focus group of private equity funds Research and benchmarking against other networking, private equity events

  24. ICCC: Shaping the Market for Inner City Investments Inner City Capital ConnectionsSelection Criteria for Companies Geographic focus California-based inner city companies Size focus Companies with revenues above $2 million Diversity in businesses Deal-ready companies

  25. ICCC: Shaping the Market for Inner City Investments Inner City Capital ConnectionsOctober 6th, 2005 Building a capital network: 44 attendees from 25 private equity funds 43 attendees from 25 California-based inner city companies 30 other attendees includes PPF representatives from CalPERS, CalSTRS, and LA Police and Fire. Profile of the 25 California-based inner city companies: Diverse range of industries, such as food processing, media, manufacturing, healthcare, transportation and logistics. Average annual revenues of $ 7 million. Average annualrevenue growth rate of 22 percent. Employ more than 1,000 workers, predominantly from the inner city.

  26. ICCC: Shaping the Market for Inner City Investments

  27. ICCC: Shaping the Market for Inner City Investments

  28. ICCC: Shaping the Market for Inner City Investments

  29. ICCC: Shaping the Market for Inner City Investments

  30. SHIFTING THE PARADIGM “The best way to be opportunistic is to be strategic” Michael E. Porter

  31. Expanding Investment Opportunities Through Diversity Manjari Raman mraman@icic.org April 25th, 2006

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