Riot Aid Hopes Collide With Economic Reality : Recovery: Promised investments are mostly ‘ghost funds.’ Too many groups are chasing too few dollars.

After the spring fires died out in South-Central Los Angeles, hope surged that a stream of investment money would finally begin to flow into the inner city to nurture a renaissance of businesses and jobs.

Indeed, it seemed as if news conferences were being held weekly by groups of well-tailored executives, black and white, announcing the creation of this fund or that program to come up with millions of dollars in new capital.

Six months later, there is no new money, few new businesses and no upsurge of new jobs.

What happened to all those funds, those promised millions?

“What I call them is ghost funds, because they’re supposed to be there, but nobody’s seen them,” said Lynne Joy Rogers, newly appointed executive director of the Crenshaw Area Neighborhood Opportunity Center, a federally funded center for business and economic development.

Good intentions, it turns out, collided with harsh economic realities after the riots. Well-meaning reformers have come face to face with the same difficulties that have hampered economic development since long before flames first seared South-Central Los Angeles in 1965.

“There’s not many private capital sources out there,” said Los Angeles Deputy Mayor Linda Griego. “And money’s tough, period.”

Notwithstanding the calls from ethnic leaders for more community ownership, it also is becoming clear that the magnitude of economic problems in the inner city far outstrip the reach of the investment funds contemplated--no matter how successful they prove.

A consultant to Rebuild L.A. has estimated that it will take an investment of $6 billion and the creation of 75,000 to 94,000 jobs to revitalize depressed and riot-affected parts of Greater Los Angeles. No one has a good measure of how much new capital is available, but most observers agree that it will fall far short of what is required, even if all the proposed funds reach their stated goals.

Instead, community leaders say, only significant government help can provide the needed boost to economic development--help that has not materialized.

Last spring, community and business leaders were calling for massive investments in the inner city in the form of equity and new loans. The call was intended to address one of the area’s most nagging problems--the lack of capital and traditional bank financing for minority entrepreneurs.

Several groups came forward with grand plans for multimillion-dollar capital funds, public and private. Separately, corporations pledged millions of dollars to help rebuild the city--money intended for a variety of relief, job training, construction, social services and other uses.

So far, the investment funds are a long way from achieving their goals:

* John Bryant, a black financial consultant and erstwhile TV actor, announced creation of Operation Hope, which is to include a community bank and a multimillion-dollar equity fund. Bryant said he has seeded the program with $40,000 of his money and has commitments of about $200,000 for the equity fund. His main achievement to date: arranging a $370,000 loan package among a consortium of local banks to help a local pharmacist rebuild his burned-out store.

* A group led by the black-owned investment firm Pine Cobble Partners of Covina created the Community Development Fund, a venture capital vehicle with a goal of raising $25 million to $50 million to invest in minority businesses. The fund was seeded with $100,000 from a black entrepreneur. Donald L. Perry II, managing general partner of Pine Cobble, would not say how far the fund has come since its creation in June, but said that it soon will close its first transaction with a local business. “We have achieved certain objectives and are in the process of translating those commitments into hard cash,” he said.

* The African-American Entertainment Coalition of professional groups formed in the wake of the riots has yet to realize its goal: raising $500,000 by asking each of its 2,500 members to donate $200. The group had its first full membership meeting last month. Helen Sugland, a personal manager in the entertainment industry and interim president of the coalition, would not disclose how much the group has collected, saying only that it is “quite a bit.”

* A group of black athletes and entertainers headed by businessman and former Los Angeles Rams wide receiver Ron Brown has set a goal of raising $300 million. Brown says the group has raised a few million dollars, but would not say how much. The group will try to tap corporate sources and pension funds for more money.

* John Rooney, director of the Valley Economic Development Center, a private, nonprofit group in Van Nuys, is just starting work toward his goal of raising $40 million in a venture capital fund for businesses in South-Central Los Angeles, depressed parts of the San Fernando Valley and elsewhere. Rooney wants to get the California Public Employees Retirement System as an investor, but acknowledges that he will first have to figure out a way around requirements that the pension fund put money only in investments that promise a good return.

* J. (Jerry) Tilford Kemp III, another Valley businessman, has announced plans to raise $100 million for the Renaissance Fund, a venture capital fund that will invest in businesses owned by minorities or women. Kemp said that he has come up with $71,000 since July. Nevertheless, he said, “we feel we can probably reach our goal of $30 million by August of 1993 without too much problem. The response is really great.”

Critics argue that much of this initial flurry of announcements was hype. And they worry that some capital funds, even if they raise money, may choose to sink it into businesses outside the riot-affected areas to bolster their return to investors.

“Our read of the market for minority ventures is that it is confused, and there’s a little too much fund raising going on,” said investment adviser James Zukin of Houlihan Lokey Howard & Zukin, an investment banking firm.

Part of the problem is that no one has inventoried the various programs in a way that might be useful to aspiring entrepreneurs. Compiling such a list and a referral service is a goal of Rebuild L.A., said Kathleen Connell, a Los Angeles real estate investment banker who chairs the group’s business investment committee.

Questions of hype aside, there are very real problems finding investors.

“There have been three major problems,” Bryant said. “One has been raising money to operate these programs. Two has been raising money to invest equity into the community. Three has been getting support on the federal level to enhance the private investments with public sector support.”

The most obvious problem is the lingering recession that has depressed virtually all economic activity in California since well before the not guilty verdicts in the Rodney G. King case gave focus to the frustrations of inner-city residents.

People trying to raise capital may also be asking potential investors to take on too much risk--to invest mainly in one-person “microbusinesses” operated by novice entrepreneurs.

Traditionally, venture capital funds buy into cutting-edge companies with the potential for strong growth and a handsome return. But for all the ambitions of community builders, there are few such prospects in inner-city Los Angeles. And for some potential investors--such as CalPERS and other pension funds--the odds are simply too long.

“Frankly, few of (the investments) have been of the types of proposals we could seriously entertain,” said DeWitt Bowman, chief investment officer for CalPERS, a $69-billion pension fund, the state’s largest.

CalPERS has made it a priority to find ways to spur new business in riot areas. But, Bowman said, “we have a fiduciary responsibility to invest at market rates of return, and at a return appropriate for the level of risk we assume,” he said.

Zukin added that state law would have to be changed to loosen private charitable groups’ purse strings.

“There exists significant sentiment on the part of foundation trustees to make limited funding available,” said the investment adviser, who also runs Funding Your Dream, a charitable educational group aimed at developing minority entrepreneurs. “(But) there will not exist significant funds from the private sector to support new minority enterprise in California unless the foundations’ rules are liberalized” to allow them to invest in risky ventures.

Some of the most ambitious capital programs are in formative stages, and they too face major obstacles.

Late last month, a consortium of California banks announced the creation of a $10-million community development corporation to make small business loans in South-Central Los Angeles. The new corporation, spearheaded by First Interstate Bank, will open early next year. But a First Interstate executive was reluctant to say how much money participating banks have committed. In any case, the banks need regulatory approval before they can take part.

Separately, Rebuild L.A. officials say that they are developing two programs to provide equity and loan capital to new and expanding businesses in impoverished areas of the entire region.

One is a commercial venture capital fund that would use investors’ money to provide expansion financing to businesses that offer jobs, goods and services to depressed communities.

The second program would be a community development bank, modeled on the successful South Shore Bank of Chicago. Such a bank would provide loans, investment capital and advice to businesses in depressed areas that might not qualify for traditional bank loans.

Neither program will seek capital until next year, said Rebuild L.A. project manager Rena Wheaton.

“I think it’s difficult to find investors across the board, but I still think there’s money available, particularly from the pension funds, which have set aside a portion of their portfolios to go with emerging, growth-type investments,” Wheaton said.

“What we’re focusing on is that these are investments, not donations,” she added. “That increases the amount of capital available, if an investor gets a return on their money. Certainly the need is there.”

At this point, however, there seem to be too many capital-raising efforts and too little coordination, critics say. “The efforts are very dispersed,” said Rogers, who is also a consultant with the federal Minority Business Development Center in Los Angeles.

CalPERS’ Bowman said there is no “unified voice as to where money should be invested that would be of most benefit to the community.”

Some efforts are already being sifted out.

Gene Hale, chairman of the Greater Los Angeles African-American Chamber of Commerce, said his business group abandoned its plans to create an investment fund when it became clear that too many people were chasing too little money.

“We were all looking at the same people to get involved in this thing,” said Hale, who is also president of G & C Equipment Corp., a construction equipment company in Gardena. “At some point, someone has to pull back.”