New study released by National Association of Investment Companies concludes that growth of emerging domestic markets will drive U.S. economy in years ahead
Washington, DC, July 28, 2009 – Private equity investment can play a critical role in promoting job growth, higher wages, better benefits and overall economic development in the nation’s growing minority communities, according to a new study released today by the National Association of Investment Companies (NAIC). The NAIC represents minority-owned and managed private equity firms and those who invest in ethnically diverse communities.
Conducted for the NAIC by a Boston Consulting Group (BCG) team led by noted minority business expert James Lowry, the study also concludes that because of massive shifts in U.S. demographics, the economic development of the nation’s emerging minority markets will play a crucial role in driving the overall growth of the U.S. economy in the years ahead.
In a first-of-its kind analysis that looked at the economic impact of NAIC member firm investments in seven representative companies from ethnically diverse communities, the BCG team found:
- Average annual job growth after private equity investment was 14 percent, compared to one percent for all U.S. non-farm jobs between 2003 and 2008.
- Two-thirds of the new jobs went to minorities, compared to the overall U.S. minority employment rate of 30 percent.
- Revenue at the emerging market companies receiving private equity investments grew at an average annual rate of 35 percent compared to a 5 percent rate for all U.S. businesses.
- On average, the companies paid wages that were 15 percent higher than the average annual income for full-time civilian workers.
- Nearly 70 percent of the companies’ employees had access to health benefits.
“In the decades ahead, the growth of the nation’s emerging minority communities -- our country’s emerging domestic markets -- will play a critical role in driving the growth of the overall U.S. economy,” said NAIC President Samuel Boyd.
“This new study demonstrates that private capital investments by firms such as those that belong to the NAIC can have an overwhelmingly positive impact on the businesses, minority-owned and otherwise, that operate in that space,” Boyd added.
“Our study makes a strong case that the federal government, private investors, minority businesses, large publicly traded corporations and others need to take bold steps to encourage investment in our emerging domestic markets if we are going to ensure that the United States economy recovers and continues to grow in the years and decades ahead,” said Lowry, a BCG senior adviser.
Specifically, the study called on the Obama Administration to create programs that encourage more private sector investment in emerging domestic markets; ensure that businesses that serve minorities are adequately addressed in future government stimulus programs; and consider the effect that its plan to raise taxes on private equity investment may have on minority businesses, investors and communities.
“The private equity firms that invest in emerging domestic markets would be the ones hardest hit by proposals to significantly raise taxes on private equity investment,” Boyd said.
According to the study, businesses that are part of the emerging domestic market sector are those that are owned by ethnic minorities; those whose customer base primarily comprises ethnic minorities; and those located in inner city or low-to-moderate income neighborhoods.
“The human capital of the future, on which our economy will depend, will be increasingly composed of ethnic minorities,” said Lowry, who noted that by 2023 the majority of children under the age of 18 will be ethnic minorities and by 2039 half the nation’s working-age population will be ethnic minorities.
That growth, combined with improvements in education levels and purchasing power, has produced a surge in attractive investment opportunities in minority communities. Private equity firms are uniquely suited to meet the capital needs of these growing communities that have traditionally been underserved and undercapitalized, the study concluded.
“Despite a track record of success, minority-owned and minority-focused businesses continue to experience limited access to capital and struggle to attract management teams and build the internal capabilities needed to compete effectively,” said Boyd. “Private equity funds have exactly the right set of tools to change the trajectory of EDM businesses. Aside from injecting much needed capital, private equity firms also improve the businesses from the ground up by hiring talent, providing strategic and operational guidance, and leveraging their vast network of business relationships.”
“Given our deep understanding of the EDM marketplace and its customers’ needs, minority fund managers are uniquely positioned to identify and make promising investments in EDM,” said David Perez, Managing Director of NAIC member firm Palladium Equity Partners and vice chairman of NAIC’s Board of Directors.
“Our firms have had a major impact in supporting the growth of a number of sizeable EDM businesses, with great benefits to minorities and the overall U.S. economy from job creation and community development,” Perez added.
“Supporting the growth of EDM is critical for the economic health of the nation’s minority population and for the overall U.S. economy,” said Boyd. “Given the shifts in the nation’s demographics and the rise of a truly global economy, more investments should be made now in the U.S. emerging domestic markets to keep the economy productive and competitive in the global marketplace.”
The companies studied by BCG were:
- CSA Group, a Puerto Rico-based engineering and architectural firm (major investment from Hispania Capital Partners, based in Chicago, Illinois).
- Driftwood Dairy of El Monte, California (major investment from Marwit Capital based in Newport Beach, California).
- Systems Integration Inc., of Landover, Maryland, a provider of publishing systems software (major investments from Opportunity Capital Partners, based in Fremont, California, and Pacesetter Capital, based in Dallas, Texas).
- Tower of Babel, based in Sacramento, California, a local television station with specialized foreign language programming (major investments from Opportunity Capital Partners, based in Fremont, California, and SYNCOM Venture Partners, based in Silver Spring, Maryland).
- Marshall Retail Group of Las Vegas, Nevada (major investment from ICV Capital in New York, New York).
- Samy Company, a manufacturer and distributor of hair-care products (major investment from Hispania Capital Partners in Chicago, Illinois).
- V-me, a New York City-based Spanish language television network (major investment from SYNCOM Venture Partners in Silver Spring, Maryland).
A copy of the study and executive summary can be downloaded here: www.naicvc.com
Founded in 1971, the National Association of Investment Companies (NAIC) is the industry association for private equity firms that are either minority-owned or managed or that have as their primary investment strategy investment in underserved markets commonly known as the Emerging Domestic Market (EDM). NAIC member companies invest in privately held businesses that have a high probability of growth and the ability to generate significant returns for investors and shareholders. Today, NAIC comprises 40 private equity firms that manage more than $14 billion in capital. NAIC has 15 affiliate members who are primarily private equity service providers and thought leaders. NAIC members cover the full spectrum of private equity investment activity including early stage venture, later stage venture, expansion, buyout, mezzanine, secondary fund investments and fund of funds. Visit the NAIC web site at: www.naicvc.com.
The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 66 offices in 38 countries. For more information, please visit www.bcg.com.
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