Introducing The Ownership Fund

To combat rising wealth inequality and ownership concentration we need new and innovative tools to create and support new and different owners. The Ownership Fund, a demonstration project by SCP, will seek to support platforms, funds and companies (existing and start-up) that increase the accessibility of ownership, are scalable and ensure that broad ownership can be sustained over the long term. We call this ownership-lens investing.

Two years ago we announced a shift in our strategy at Social Capital Partners (SCP) to something we call our “ownership agenda.” Our post at the time tells the long story, but the short story is that SCP’s overarching objective of increasing economic opportunity for people facing systemic barriers would move from a focus on income, or labour, to a focus on capital, or ownership. First up for us was to increase employee ownership in North America by shifting institutional capital into the sector and by fixing the barriers to employee ownership in Canada.

We’ve had some big wins. We partnered with the Healthcare of Ontario Pension Plan (HOOPP) to finance the sale of 100% of the shares of Taylor Guitars to its 1,200 employees in the first employee ownership transaction ever directly financed by a pension fund. And our advocacy has helped convince the Government of Canada to commit to the introduction of employee ownership trusts, the type of structure that’s led to tremendous growth in employee ownership in the US and the UK. Since the Taylor Guitars transaction, we’ve seen institutional investors’ interest in employee ownership grow substantially and a broad coalition of Canadian leaders have united to fight for more employee ownership in Canada.

In the “ownership agenda” post we also expressed our interest in finding other platforms to broaden ownership opportunities that we could support. SCP has been involved in the impact investing space for a long time, and it’s our view that “ownership-lens” investing could be a thing, with a spectrum of funds investing with the explicit intent of creating enduring asset ownership for people who don’t otherwise have access. We’ve seen enough interesting ideas in the past two years, and seen enough momentum behind the idea of ownership as an impact objective, to be convinced that this thesis is right.

As a result, we’re introducing The Ownership Fund, a project of SCP, to demonstrate what investing with the clear objective of increasing access to ownership could look like.¹ This post will explain the context and philosophy that drives us, the investment criteria we’re going to use, and some of our initial investments. We hope this opens up a conversation about the right way to invest with an ownership-lens, as it’s a nascent but important field and we certainly don’t think we have all the right answers.²

Context

We do this work in the face of a number of trends going in the opposite direction, increasing the concentration of business and property ownership. Some of these trends are well-understood and much publicized, such as private equity funds buying up single-family homes throughout North America ,“winner-take-all” technology platform business models like Uber and Amazon and the merger mania of the last 20 years that have created monopolies and oligopolies in so many markets.

Other trends have flown below the radar. A great example is “search funds”, where a largely homogenous group of young men (white, MBA-trained with private equity or management consulting backgrounds) are being funded by an older group of men with the same backgrounds to buy every-day businesses from retiring business owners. In this way, the “silver tsunami” of retiring baby boomers, one of the biggest opportunities³ we’ve ever had to increase the breadth and inclusivity of ownership, may end up resulting in an even less diverse set of owners with a much worse set of incentives.⁴

These trends toward ownership concentration and consolidation have been driven by many powerful forces in the economy. Since the 1980s, governments have pursued deregulation and paid far less attention to competition policy, allowing many sectors to consolidate power into fewer hands.⁵ The rise in private equity funds has shifted consolidation to our local neighbourhoods through both the roll-up of single family homes as mentioned, and to industries that used to be full of locally-owned independent businesses, like dentists and funeral homes. Since the 2008 Financial Crisis, low interest rates have fueled even greater concentration, as debt for both company acquisitions and real estate speculation has never been as cheap or accessible. While some of these forces may be shifting (i.e. the resurgence in antitrust policy, increased interest rates), there remains an unprecedented amount of capital waiting to buy up even more of the economy.

Many economists have shown how ownership concentration speeds up the growth of wealth inequality, as returns to capital compound to its relatively few owners. But concentrated ownership increases inequality in other ways as well. Larger companies tend to pay executives more while (at best) paying lower-wage employees the same as at smaller companies. Investor ownership of real estate forces more families into rentals, making home ownership, the key pathway to wealth for most people, far less accessible. Concentrated industries squeeze independently-owned companies, making small business ownership, another pathway to wealth, much less viable.

We could go on, but the state of play is clear: many forces in today’s economy drive ownership concentration and ownership concentration drives wealth inequality in ways both obvious and subtle. This basic equation is why we think the ownership-lens needs to become a major impact thesis.

Impact Thesis

An impact thesis is, at its core, an incentives thesis. If current incentives are not appropriately driving investment to a certain area, be it clean technology, female or BIPOC founders, rural communities, etc., impact investors step in. They choose to ignore those incentives in order to either prove that the established view of risk and return in their market is wrong or because they are willing to sacrifice some return, or take a higher risk, to produce a broader economic or societal outcome they think is important. The goal is long term: if incentives can be shifted enough through wide acceptance of either a shift in the risk/return profile or the broader argument, mainstream capital should follow.

We believe that ownership-lens investing satisfies every objective of an impact thesis. There is strong evidence its risk/return profile is mis-priced and that its outcomes are better for the economy more broadly. We also think reversing the trend toward more ownership concentration is a societal imperative. We will discuss each element in turn.

We see many opportunities for investments that demonstrate strong risk-adjusted returns, where the current market often takes a different view. Broadly-held employee-owned companies consistently outperform their peers on both a risk and performance basis, yet attract less, and often higher-priced, capital. The same is true in sectors with a lot of roll-up activity⁶; despite a much higher risk of bankruptcy⁷, roll-ups attract more and cheaper capital than independent owners. We also think there could be a lot more owner-owned cooperatives⁸, as organizations like Home Hardware and CCA Global have shown how independent operators working collectively can compete — and win — against far larger competitors. The ownership-lens investment thesis is that an inclusive approach to ownership aligns incentives and drives long-term thinking in a way that reduces risk and enhances return.

The argument that less concentrated ownership is good for the economy is also strong. More competitive industries are better for consumers, workers and innovation. Home ownership creates a pathway to wealth and security for individuals and families while local housing monopolies make communities less resilient to economic shocks. Employee owned companies lay off fewer people in recessions, and have tremendous wealth outcomes for workers which are even more pronounced for women and people of colour. Local business ownership is a major factor in the success of communities. An economy that is more broadly-held leads to a stronger and more resilient middle class, which leads to better economic outcomes for society as a whole.

Finally, we believe that increasing the accessibility of ownership is a societal imperative. There is a lot of truth to the widespread belief that “the economy is rigged”, as a relatively homogenous group continues to accumulate more ownership of the economy. Ownership, wealth and power are closely related, and it shows up in the polls: as it becomes harder to own a home or have a stake in a business, especially for young people, we’re seeing a loss of faith in capitalism and democracy. People aren’t stupid; it is entirely understandable to stop believing in a system which is only working for the few. We believe the only way to sustain our democracy is by reducing wealth inequality, and there is no viable pathway to a more equal future without a broader distribution of ownership. We think ownership-lens investing can be a powerful ally in this fight.

Investment Approach

In marked contrast to our expansive rhetoric, this will be a relatively small $2M demonstration project to start. We need to be honest about that. For now, we’re only investing on behalf of SCP’s partners (and not taking outside funds).

It’s important for us to control our investment decision making, so we can show what one version of an ownership-lens portfolio could look like. We will be keen to receive responses to our approach and investments from the impact investing community as we see this as the opening of a larger conversation about how asset ownership fits into the impact investing landscape.

We have thought a lot about how to assess investment opportunities with an ownership lens. We want our investees to drive real, broad-based and long-term ownership, and settled on the following criteria: accessibility of ownership, scalability of the model and ensuring ownership opportunities can endure in the face of the trends we described above:

1. Accessibility. We want to increase access to business and property ownership. This means lowering the traditional barriers to ownership: up-front cash, lifestyle demands, financial sophistication, available credit and systemic racism and sexism. These and other issues are often interrelated and cumulative. While each investment won’t reduce every one of these barriers, we will test each potential platform on the breadth of potential owners within its target market, and the ease with which they can take advantage of the ownership opportunity.
2. Scalability or Replicability. We are looking for big ideas with high impact potential, and if an investment is scalable, that’s perfect. We also recognize that some problems require tailor-made solutions which address regional or industry-based nuances. We will invest in businesses, funds, and platforms catering to a specific region or industry if there is potential for similar platforms to be replicated elsewhere.
3. Enduring Ownership. Putting business and property ownership in the hands of more people is great and in our view, keeping it there is even better. We look for enduring solutions and evaluate investment opportunities based on their ability to maintain a broader distribution of ownership over time. This means ensuring the right incentives are in place among the investors in the platform, the founders of the platform and the users of the platform to stay true to its objectives for the long term. This also means we’re open to platforms and businesses that make existing local, independent ownership better able to compete and survive. Enduring doesn’t necessarily mean forever; we are open to investments that may lead to a large windfall for a broad set of owners in a future sale.

Three of the investments we’ve already made illustrate how we think about applying these criteria to opportunities:

• Indiegraf helps make ownership easier for independent local journalists by providing all the necessary technology to start up a local, for-profit newsletter. Its very limited up-front fees make it accessible to aspiring owners, as a tech platform it’s infinitely scalable, and ownership by the journalist themselves is likely to make it enduring over time.
• Apis & Heritage Capital Partners is using employee ownership to attack the racial wealth gap by financing the sale of companies with meaningful BIPOC workforces to Employee Stock Ownership Plans (ESOPs). ESOPs increase access to ownership by distributing free equity to all of a company’s workers, the fund has the scale to create several hundred new ownership opportunities, and ESOPs are designed to keep ownership in the hands of employees for the long-term.
• Blackstar Stability Distressed Debt Fund (“Blackstar”) buys predatory home loans used by people in communities underserved by mortgage lenders, and transitions homeowners to more stable, traditional mortgages. Home ownership is the most enduring and sustainable source of wealth for most families, and Blackstar is making it accessible for communities where it has often been an impossible dream. We believe that not only do they have potential to scale themselves, but to act as a model for others to replicate.

We have used this approach to identify dozens of potential investments, evaluate over 20 opportunities in detail, make 8 investments⁹, and will likely make 5–8 more over the months to come. We have found our three criteria a helpful filter and we think our investments will create the impact we’re hoping for with this demonstration fund. We will be explaining each investment in the weeks and months to come, and invite discussion and debate.

As highlighted by these investments, our investable universe is broad and to build our ideal ownership-lens portfolio we hope to continue investing in a wide range of ideas. While not an exhaustive list, we have detailed specific investment themes that we think meet the fund’s objectives on our website.

Like most impact investors, we will be considering expected returns from our investments given their risks, but are willing to trade off either of these in exchange for outsized broader economic impact potential or a moral outcome we find particularly compelling. SCP is an impact-first organization, and as such we will be willing to take bigger risks if we believe there is the possibility of outsized social return. We are open to both loans and direct equity investments in companies that meet these criteria as well as funds that invest in a way that’s consistent with our thesis and criteria.

Let’s Talk!

Because this fund is a demonstration project, we are keen to connect with people interested in this space. As an investor, we will be quick to make decisions, and can potentially offer support on design or strategy. As a field-builder, we’d love to hear your feedback on our thesis and approach. And as an advocate, we’re open to supporting in areas that do not require investment. We know from our 20 years working on income and wealth inequality that cultural shifts and policy change are often more important levers than investment, and we want to be active in those areas as well.

We can be reached at ownershipfund@socialcapitalpartners.ca.

Taylor Sekhon of Social Capital Partners was the driving force behing the development of the fund, philosophically, conceptually and in securing our current investments. Ian MacDonald has led the investments for the past year with great results. Sara Urbina was critical in the early days of the project’s development, identifying the universe of potential investments.

[1] We also think the process of reviewing ownership-lens investment opportunities may introduce us to a great idea that SCP can work on directly.

[2] ​It’s important up-front to draw a distinction between this demonstration fund and funds that invest in a diverse set of founders, which is a reasonably common impact theme. And, to be clear, we’re very supportive of those funds and have invested in them ourselves. For this fund, we focus less on the founder of the platform than on the ownership opportunities created by the platform. As an example, we have invested in Indiegraf, a platform that enables local journalists to start their own local newsletter businesses. While Indiegraf happens to be women-owned and led, the key to our investment was providing new and enduring ownership opportunities for local journalists.

[3] This report by The Century Foundation does a great job of identifying both the opportunity and the challenges of capturing it.

[4] Our concept paper on Inclusive Search Funds outlines the incentives that concern us with this model, such as the pressure to resell businesses in short periods of time.

[5] The forces driving consolidation go a lot further than just the macroeconomic environment. Mergers produce incredible amounts of money for a wide swath of human beings, and they can’t be expected to ignore those incentives. Investment bankers spend all their time developing “ideas” for companies, most of which involve buying other companies or selling to other companies. Management consultants do the same, seeing fat contracts for “synergy” analysis and post-merger integration work. Many of the highest paid lawyers work exclusively on mergers and acquisitions. Bankers who can move up from lending to small businesses to lending to private equity companies get to wear much fancier suits and sit on a higher floor. Executives, both of the acquiring company and the acquired, get big bonuses for completing transactions, whatever the eventual outcome for their companies. In contrast, it is very difficult to build a lucrative career counselling CEOs that organic growth is the way to go.

[6] A “roll-up” is an investment strategy in which many similar businesses are purchased and “rolled” into one company. These are often significantly funded by debt, and rely on finding synergies between the businesses to succeed. A discussion of this strategy, and its risks to the economy, co-authored by SCP’s Taylor Sekhon, can be found here.

[7] So many examples of bankrupt roll-ups: Loewen Group (funeral homes), ABC Learning (childcare), Smiles Inclusive (dental), Encompass Services (electrical contracting), generalRoofing (roofing).

[8] An owner-owned cooperative is when a number of independent business owners in the same sector establish a company that they all own collectively to provide services to all of the owners. This often starts as a buying group, which allows independent operators to get the same volume discounts from suppliers as larger competitors, and can add marketing and branding functions over time. The key is that local ownership is retained, and is able to remain competitive in the face of consolidation.

[9] These investments have been made either directly by The Ownership Fund, by our partners directly, or by affiliates such as the Bealight Foundation.