Trends Watch: PE Impact Investing in Underrepresented Entrepreneurs

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.   

This week, Elana talks with Havell Rodrigues, Founding Partner, New Majority Capital.  

What is your outlook for PE impact investing in underrepresented entrepreneurs? 

Historically the impact focus has been on VC impact investing in underrepresented entrepreneurs, but this is about to change. From an impact perspective, PE impact investing can generate similar returns but with higher impact outcomes, in terms of the number of successful entrepreneurs backed (instead of unicorns), as wealth generation impact on entrepreneurs and their employees through profit-sharing models and in terms of scale since more entrepreneurs can be backed especially for small business buyouts.  We see the asset class of buyouts of small business by underrepresented entrepreneurs as a unique impact alpha generation opportunity. 

Where do you see the greatest opportunities and why? 

Investing in buyouts resulting from the silver tsunami of retiring business owners is the largest and most attractive opportunity right now. More than 10 million small business owners are retiring in the next 10-15 years, many without succession plans in place. We believe steady-cash-flow-generating profitable businesses in the $500,000-to-$2 million range which trade for a 2.5-4.5X multiple but below the thresholds of traditional PE firms offer very attractive risk adjusted returns. As more institutional investors start looking at historic returns in the self-funded and traditional search space, more are going to be attracted to this asset class. 

What are the greatest challenges you face and why? 

Over the past year or so, like any new emerging fund manager, we faced headwinds of track record, fund size, etc. We were also faced with the typical challenges of LPs over-allocated to PE or less capital available due to the diminished distributions flowing back to LPs. The high interest rates were another negative factor in getting deals done. However, all that seems like it is changing. After building our track record working as an independent sponsor and proving our ability to build and execute on deal flow and finishing our first close with the backing of institutional investors, we are optimistic that all this hard work helps us overcome these challenges and positions us for greater success going forward. 

What keeps you up at night? 

The interest in entrepreneurship through acquisition(ETA) is growing, in terms of 1) entrepreneurs wanting to buy then build small businesses (as evidenced by the growth of ETA programs in business schools), 2) supply of quality capital in terms of pooled fund vehicles and SBA 7(a) lending through banks, and 3) supply of businesses coming up for sale. These trends are creating opportunities but also competition for the best deals. What keeps me up is thinking about how we maintain and grow our edge in this space -- in terms of an ecosystem of seasoned operators to advise and mentor entrepreneurs in our portfolio as well as creating competitive offers to appeal to sellers who want to feel proud of their legacy. 

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.