When Daniel Coleman walked into the offices of Job Link Inc. two years ago, he stepped back 30 years to a time when he was a teenager growing up in Tampa, Fla. The minority-owned employment agency reminded him of the many out-reach programs located in the poor neighborhoods of his youth, and now it was time for Mr. Coleman to reinvest his expertise and skills in a community similar to the one in which he was raised.
As the director of private equity investing at BankBoston Development Co., L.L.C. (BBDC), Mr. Coleman deals with the underserved communities of New England on a daily basis. And BBDC’s $500,000 direct financing of Job Link is one of the many examples of how Mr. Coleman has been making a profit while doing some good.
Mr. Coleman describes BBDC as a “unique animal,” in that it is the first bank-owned investment bank operating under a specific mandate: to make private equity investments through funds or direct financings in low- to moderate-income urban areas or woman- or minority-owned businesses.
Created in 1997 under the Community Reinvestment Act – which encourages banks to invest in the communities in which they operate – BBDC has been carrying out its mission at a rapid pace. So much so, that Vice President Al Gore in March awarded the Ron Brown Award for Corporate Leadership to BankBoston’s Chairman and Chief Executive, Charles Gifford, for the bank’s efforts to revitalize inner-city communities through BBDC.
With roughly $40 million under management from parent BankBoston – and $60 million more slated for the coming months – BBDC already has invested $21 million. Most recently, Mr. Coleman and his four-member staff approved a $250,000 investment in New Hampshire Business Development Corp., which focuses on early-stage companies. Last year, the investment bank provided $500,000 to Women’s Growth Capital, $250,000 to Rhode Island-based Minority Investment Development Corp., $250,000 to Boston Community Venture Fund and $500,000 to Berkshires Capital Investors. The investment bank is so new to this field that it has yet to create private equity target allocations and therefore has no specific breakdowns of its venture capital, buyout, special situation and roll-up investments.
BBDC’s financings may seem like small change when compared with the multi-million dollar investments made by more traditional venture firms, but Director George Hibbard argues that the goals remain the same.
“We are very much for-profit,” he says. “We’re looking to employ traditional venture capital techniques, and we’re seeking traditional venture capital-type returns.”
Although statistics are still premature, the investment bank is aiming for 20% to 25% in returns from its venture funds and is hoping to make profits four-to-five times larger than its direct investments in five years. “We are looking at situations that are much more toward the bootstrapped phenomenon, where four out of five of the deals do well, therefore we are able to give a decent return to our investor,” Mr. Coleman says. He estimates that BBDC’s failure rate will be 10% or less of all its investments. Mr. Coleman and his team currently have a few investments in the pipeline, but prefer to remain silent about them for the moment.
Staying off the Bandwagon
At a time when Internet deals are en vogue, BBDC’s strategy of avoiding high-tech and biotech investments seems terribly out of fashion. Unlike most limited partners, the investment bank primarily backs low-tech, light manufacturing, retail and services industries in urban centers throughout New England, as well as in New York and Washington, D.C. BBDC, however, has made several investments in Internet companies through partnerships with Women’s Growth Capital and Berkshires Capital, an investor in Tripod, which was later purchased by Lycos Inc.
In addition to Job Link, other recent direct investments include $800,000 in Long Bay Builders Inc., a minority-owned construction company that builds affordable housing in Boston’s low- to moderate-income neighborhoods, and $500,000 in Millennium Services Corp., an aggregator of African-American owned funeral homes, based in New York.
“What we are trying to do is spread the expertise of a large, sophisticated financial institution to those companies who are often excluded from that,” Mr. Hibbard says, adding that a member of BBDC’s investment staff always takes a board seat on the businesses they back.
Minimum investments in funds and direct deals stand at $250,000 but can reach as high as $2 million to $5 million, with direct investments averaging in the million dollar plus range, says Jennifer Schmelter, BBDC’s assistant vice president of equity investments. The investment bank plans to extend about 40% of its capital outside the region to places such as Atlanta and other cities in the Eastern United States.
“Traditionally, people have seen that urban America is only an area where charity operates, and what we have said is we believe urban America is a real emerging market,” Mr. Coleman says. “Our mission is to become the leading urban investment bank in the United States.”
Apart from its mission to invest in urban low- to moderate-income areas or in women or minority-owned businesses, BBDC’s investment team looks at the following criteria when choosing partnerships: a venture firm’s investment philosophy and deal flow; the experience of its principals; the types of companies targeted; and the exit strategies, Mr. Coleman says.
Working with Big Brother
BBDC works closely with the bank’s venture arm, BankBoston Capital, which has about $1.7 billion under management and mainly backs leading edge high-tech late-stage funds, including those involved in special situations, roll-ups and acquisitions. The president and managing director of BankBoston Capital, Frederick Fritz, is a member of BBDC’s board of directors and chairs its investment committee. The two divisions also work closely on due diligence, structuring deals and valuing companies, and, because of their vastly different investment sizes and industry focus, consider themselves partners rather than competitors. All of BBDC’s investment decisions are made in-house, and there are no advisory relationships, apart from its cooperation with BankBoston Capital.
BBDC is not alone when it comes to the type of investments it makes – there is Stamford, Conn.-based TSG Capital Group L.L.C. (story page 49), a $740 million venture firm that invests in the communications and consumer industry; Silver Spring, Md.-based Syncom Capital Corp., a $300 million firm that backs communications companies and the $90 million Black Enterprise/Greenwich Street Corporate Growth Partners L.P. based in New York. Mr. Hibbard points out that BBDC’s investments are like focusing on an “emerging market in our own backyard,” because the cumulative purchasing power of Americans living in the inner-cities is about $85 billion, representing an economy larger than Mexico’s.
Although the above firms compete for similar investments, Mr. Coleman says he’s not concerned because the demand for funding of inner city or minority-owned businesses exceeds the supply of capital. “There’s a tremendous amount of purchasing power and a tremendous amount of entrepreneurs who are looking for the capital needed to realize their dreams,” he says. “There’s a lot that’s going on in Urban America … and we’re enjoying that niche.”
While the investment bank has no immediate plans to invest internationally, BankBoston has an $8 billion operation in Argentina and a huge presence in Brazil.
Apart from private equity investments, BBDC also invests in low-income housing and tax credit limited partnerships and provides non-traditional subordinated debt such as term loans and commercial mortgages to underserved communities.
Headed by Mr. Coleman, a 25-year veteran of BankBoston, BBDC’s investment team includes Mr. Hibbard, Ms. Schmelter, Assistant Vice President Francisco De Jesus and Business Manager Jennifer Quinlan.