An inconvenient truth emerges when observing the limited impact of the increasing number of business conversions to employee ownership. As per a recent report from Ownership Capital Lab and Transform Finance, there often exists a trade-off between the percentage of employee ownership and the return to investors. This poses a significant challenge in the pursuit of a more inclusive and sustainable business landscape.

Uncovering the Financing Dilemma in Employee Ownership

Financing for Shared-Ownership Strategies

Financing is indeed abundant for more diluted shared-ownership strategies. As seen in "As private equity firms start to share the wealth, low-income workers get just a little bit," there is a notable availability of funds. This provides an opportunity for businesses to explore different ownership models and involve a wider range of stakeholders.However, the field's impact leaders face a different challenge. Funds that prioritize Black, Brown, and low- and medium-income workers, utilize durable employee ownership forms, and integrate worker voice and/or governance do not have the necessary capital. This highlights the need for targeted investment in these impact-driven initiatives.

Varied Return Expectations Among Funds

Return expectations among the funds currently raising capital show a wide range. Eight closed-end funds, raising a collective $350 million, are seeking at- or near-market rates of returns of more than 15%. Another four funds, raising a total of $290 million, offer returns between 5% and 15%. Nine funds, mostly evergreen funds through community development financial institutions, seek returns below 5%.This diversity in return expectations reflects the different risk profiles and investment strategies of these funds. It also presents opportunities for investors to align their portfolios with their specific financial goals and risk appetites.

The Role of CDFI Funds in Filling the Debt Gap

Authors Alison Lingane and Julie Menter emphasize the critical role of CDFI funds in filling the "senior debt gap." Most banks are unwilling to lend to groups of employees due to the lack of a personal guarantee. However, CDFI funds step in to provide the necessary financing and support.Rather than reducing workers' shares, these funds can improve investors' returns by boosting businesses' underlying revenues, securing catalytic capital, and adjusting performance benchmarks. This approach helps to address the misperceptions of risk and create a more sustainable business ecosystem.

Funds in the Market and Their Focus

An appendix to the report identified 22 funds currently raising capital. These include familiar employee-ownership focused managers like Apis & Heritage and Mosaic Capital Partners. Additionally, there are funds such as the Cannabis Employee Ownership Fund, which is financing the development of an inclusive and democratic cannabis market.Managers like Denver-based Ownershift, Allivate Impact Capital in Philadelphia, and Arctaris Impact Investors in Wellesley, MA, are also part of this landscape. Chicago-based Essential Owners Fund focuses on businesses with large numbers of frontline workers in food, care, and transportation.Evergreen funds financing ownership conversions also include innovative models like the worker-owned 'conglomerate' Obran and Kachuwa, a cooperative impact fund. These models demonstrate the potential for diverse and impactful ownership structures.ImpactAlpha's searchable "Ownership Economy" database includes 68 funds, not all of which are currently raising capital. This provides a comprehensive view of the various initiatives and opportunities in the employee ownership space.