Big-Time Investments Aim at Backing Minority Firms
There’s been some complaining that Washington is getting ready to throw billions of dollars at the reconstruction of postwar Iraq, leaving this country’s inner cities, as always, waiting and wanting.
The hand-wringers are missing a basic truth, though: There is money pouring into America’s urban core. It’s not just coming from Uncle Sam, but also from entrepreneurs who trust the marketplace to do what it does best.
Consider Daniel L. Villanueva. The 44-year-old of Pasadena is forming a private equity fund aimed at one of the hottest fields in big-time institutional investing today: companies led by minority entrepreneurs, and businesses in the inner city.
“We can put together $35 million to $55 million from our own investors,” says Villanueva, who has worked with his father, Daniel D. “Danny” Villanueva, in Bastion Capital, a $125-million venture fund that grew out of money earned pioneering Spanish-language broadcasting in Southern California and throughout the country.
The new fund, Fontis Ventures, plans to invest in batches of $3 million to $7 million, mainly in companies owned by Latinos in Southern California, Arizona, New Mexico and Texas.
The federal government might play a minor role: Fontis Ventures is applying next week for a license from the Small Business Investment Co., or SBIC, that will allow it to use government-backed credit to lever up its equity to a fund of $100 million to $150 million.
“We’ll be in manufacturing and business services,” says Villanueva, “and we’ll invest in media because we know it so well.”
He says he’s looking at putting money into Border Media Partners, which has radio stations in Brownsville, Harlingen and Laredo in the Rio Grande Valley of Texas.
The Texans will be lucky if they’re as successful as the Villanuevas.
The younger Villanueva has been in the media business since high school, when he worked summers at KMEX-TV in Los Angeles, one of the original Spanish-language stations. His father -- once a star place-kicker with the Dallas Cowboys and Los Angeles Rams -- was part owner of KMEX parent Spanish International Communications Corp., a forerunner of today’s Univision Communications Inc.
After the elder Villanueva and his partners sold their interest in Univision, they invested in Telemundo, the other Spanish-language network, and made a further gain last year when Telemundo was sold to General Electric Corp.’s NBC.
With all that money, the Bastion venture fund grew. But the investments made by the fund, in the $10-million to $20-million range, were too much for most urban entrepreneurs to digest.
“Business owners would ask us to invest in their companies or their TV stations, but they were too small,” says the younger Villanueva.
So the idea for Fontis was born.
Most family-owned companies “in our community have not been able to use the capital markets,” Villanueva says. “It is an underserved community, getting only a small fraction of the private equity capital that is out there.”
Villanueva isn’t alone in that judgment, nor in wanting to remedy the shortfall.
Merrill Lynch & Co. Chief Executive Stanley O’Neal is coming to Los Angeles this week to announce a major expansion of the firm’s 5-year-old, $77-million program that channels cash, loans and counseling to minority-owned businesses.
The kind of counseling Merrill provides is a plus for people still learning the minuet of contacts and savvy that makes markets hum.
It all adds up to “more capital on the table for minority entrepreneurs,” notes Brian Argrett, head of Fulcrum Capital Group, a Culver City firm that is a Merrill Lynch partner in the program, “and a greater openness to lending to urban area businesses.”
They need it. According to a study just published by the Ford Foundation and prepared by the Milken Institute in Santa Monica, although minorities comprise 28% of the population, “minority-owned companies get only 4% of the dollars” generated by the SBIC.
That’s despite the fact that so-called emerging domestic markets are in many ways less risky than developing countries.
“In U.S. inner cities you face no risk of expropriation, or that your contract won’t be judged impartially in a court of law,” points out Betsy Zeidman of the Milken Institute.
What’s more, the returns on investment in urban America can be just as good or better, say investment managers familiar with the inner city.
Gabrielle Greene, a Harvard-trained lawyer and a partner in Fontis Ventures, has worked for 13 years investing in mainly African American communities on the East Coast.
“I’ve seen the environment shift from one dependent on philanthropy -- grants to minorities and that kind of stuff -- to real business investments,” Greene says. “You need that to create something sustainable.”
And investors need to see profits. Villanueva says Fontis Ventures will aim for “returns of 18% to 20% a year compounded over five years, from a combination of equity investments and long-term loans to these companies.”
Can that really happen? In fast-growing minority communities they can, he says.
“Many of these family-owned firms, serving ethnic markets with Mexican foods, say, can grow by branching out in the mainstream community,” he points out.
Examples of two such firms are Lulu’s Dessert Factory Inc. of Huntington Beach, a maker of Mexican gelatins that is finding customers in many states, and Tapatio Hot Sauce Co. of Vernon, whose Guadalajara-inspired picante sauce is winning broader appeal.
The numbers foretell the future, Villanueva says.
“Some 25% of the small businesses in the country are in the Southwest,” he says. “Yet only 3% of the private equity capital funds are in this area.
“It reminds me of when we had only five Spanish-language stations among 71 radio stations in Los Angeles -- but we reached 33% of the population,” he adds with a smile. “I like the odds.”
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James Flanigan can be reached at jim.flanigan @latimes.com.
