Fund announces first close at $30 million
by Karen Kahn
“There are two traditional paths to build wealth in America—you can own your home, or you can own your business,” says Phil Reeves, co-founder of Apis & Heritage Capital Partners (A&H). “A&H is focused on the latter, especially for workforces of color, which have been shut out of equity ownership for so long.”
Apis & Heritage, led by Reeves and co-founder Todd Leverette, launched its Legacy Fund I to use employee ownership conversions as a strategy to close the racial wealth gap. Using traditional private equity tools, Reeves and Leverette, both of whom have worked on Wall Street, saw an opportunity to acquire firms from exiting owners and to convert those firms to Employee Stock Ownership Plans (ESOPs).
The fund, which announced its first close at $30 million on June 23, plans to target what we have come to recognize as “essential” services during the COVID era—waste hauling, landscaping, food service, commercial cleaning, health care—all businesses that employ large numbers of black and brown workers.
To raise $30 million, A&H turned to institutional impact investors with a deep interest in using their capital to address the racial wealth gap.
“These essential services are resilient,” says Reeves. “These businesses survived the pandemic, and their employees will be good stewards in perpetuity.”
Incubation at the Democracy at Work Institute
The statistics on the wealth gap are well known: according to the Brookings Institute, the typical white family had a net worth of $171,000, nearly ten times that of a Black family ($17,000) in 2016. The wealth of a typical Latinx family was slightly higher at about $20,000.
In 2018, Leverette went to work for the Democracy at Work Institute (DAWI), where he managed DAWI’s Legacy Business Initiative, a program DAWI developed in 2016 to focus on understanding and addressing the challenges that minority-owned and -operated firms face in sustaining to the next generation. The initiative sought to produce learnings to support the use of employee ownership as a tool for equitable economic development. It focused on reducing the racial wealth gap, particularly within the context of saving legacy businesses and expanding ownership opportunities for workers of color in cities across the country.
To institutionalize its learnings from the Legacy Business Initiative, DAWI incubated Apis & Heritage Capital Partners and the Legacy Fund I. Key learnings included:
- Minority business owners don’t know about employee ownership as an option;
- Minority-owned businesses are particularly vulnerable to rollups, mergers, and/or being sold for parts;
- Minority businesses have enormous growth potential but are generally undercapitalized; and
- Equity capital is needed to preserve these businesses and secure good exits for their owners.
The Fund was born in 2020 out of discussions between DAWI Executive Director Melissa Hoover and Leverette and developed under Leverette’s leadership with support from the Kendeda Fund, Citi Community Development, and the Kellogg Foundation.
Beyond incubation, Apis & Heritage is continuing to work with DAWI to support the transition of the firms it acquires into high-functioning ESOPs that empower workers with democratic governance and participatory practices drawn from the world of cooperatives. “We call this the ‘ESOP-erative’ model,” says Leverette.
“Without these democratic practices, you have a good retirement account through an ESOP,” Leverette continues, “but with them, you have better companies and better jobs. It’s a shift in the whole paradigm of what it means to be a worker and a worker-owner.”
The ELBO Model
The A&H fund works much like a typical private equity fund, except that it is basically financing a deal for the new worker-owners and the transaction is designed to leave behind a firm that will support the financial security of the workers far into the future.
The number of U.S. ESOPs has not grown since the early 2000s. There are multiple barriers to formation, including a lack of awareness among exiting owners and, often, the need for the exiting owner to partially finance the deal. Additionally, it can be financially burdensome to set up the trust, do the necessary valuation, and so on. The business must have the free cash flow to support these upfront costs.
The goal is to turn at least 500 workers into share owners who will retire with between $70,000 and $120,000 in assets.
“The ELBO [Employee-Led Buy Out] approach relieves the owner of all this,” says Leverette. “We aim to make it easy.” A&H essentially finances the buyout for the workers, sets up the ESOP trust structure, and hires the ESOP trustee. From day one, the firm is owned by the ESOP Trust, with the workers as its beneficiaries.
The ten-year fund plans to acquire eight “lower-middle-market” firms over the next five years. The target firms will have $1 million to $5 million in earnings before interest, taxes, depreciation, and amortization (EBITDA). The goal is to turn at least 500 workers into share owners who will retire with between $70,000 and $120,000 in assets.
“This can be life-changing,” says Leverette.
“We believe our model will be an advantage in competing with private equity,” says Reeves. “Owners often don’t know that selling to their employees is an option. But when they hear that we’ll keep the company name, keep the employees, that we’ll steward their legacy, they are excited. They know if they sell to a typical private equity firm, there is a good chance employees will lose their jobs, the firm will be overleveraged, and everything they built will disappear.”
To raise $30 million, A&H turned to institutional impact investors with a deep interest in using their capital to address the racial wealth gap. Leading investors in the fund include the Rockefeller Foundation’s Zero Gap Fund, the Ford Foundation, the Skoll Foundation and its advisor Capricorn Investments, Gary Community Investments, and Ascension Investment Management.
Additionally, A&H is partnering with Local Initiatives Support Coalition’s (LISC’s) New Markets Support Company as its preferred senior lender. The CDFI is mission- and values-aligned with A&H and their goal to bring resources to communities of color that have not traditionally had access to growth financing.
“By helping vital, community-based small businesses transition from one founder to many owners, A&H will safeguard the health of these businesses and the futures of their workforces of color,” says Kevin Boes, president and CEO of NMSC.
Building on the Legacy of Giants
“We stand on the shoulders of giants,” says Leverette. “We weren’t the first to imagine that ESOP conversions could be used as a tool for racial equity. But we are blessed that at this moment in this country, when people’s minds and hearts are open, that there is an opening to raise the kind of capital that can make a difference.”
A&H’s Legacy Fund I is one of a dozen new investment funds targeting employee ownership conversions identified by The Democracy Collaborative in its report, Opportunity Knocking. The report identifies a lack of organized capital ready to compete with traditional private equity and strategic buyers as a major barrier to scaling employee ownership.
Says Leverette, while foundations and impact investors have been vital to the capitalization of the fund, he hopes that other institutional investors will see the opportunity going forward. State employee pension funds, for example, could use this strategy to strengthen economies in their local communities, rather than investing in private equity funds that cannibalize local economies.
Apis & Heritage attracted a team of experienced finance professionals that has inspired confidence among investors. In addition to Reeves and Leverette, the BIPOC-led partnership includes Michael Brownrigg, a founding partner at Middle Bridge Capital, who was an early proponent of the ELBO model; Jason Ollison, an international business executive with 20 years of experience as an award-winning strategy and risk consultant; and Natalie Edwards, who formerly served as managing director at Citigroup Inc. and the head of the corporate M&A legal team.
Says Maria Kozloski, senior vice president of innovative finance at the Rockefeller Foundation, “The A&H team has taken an innovative approach at addressing the racial wealth gap and building a more inclusive economy. Their novel ELBO model solves for many pain points of prior ESOP strategies while layering in a racial equity lens. The Rockefeller Foundation is proud to be a part of these efforts, providing investors with an offering that can deliver clear impact and competitive returns with great potential for scale.”
Karen Kahn is a communications consultant and the editor of Employee Ownership News.