Research Report

Democratizing Capital for

Emerging Domestic Markets

SEPTEMBER 25, 2000

THE MINORITY

BUSINESS CHALLENGE
Norman Y. Mineta

Secretary of Commerce

To sustain the unprecedented growth of the American economy, minority businesses must have access to the debt and equity capital that can fuel their

development. Minority business enterprises (MBEs) are an increasingly

important sector of American businesses, growing at a much more rapid rate

than U.S. companies overall. Asian American/Pacific Islanders, Native

American, Latino, and African American businesses are growing at a rate of 17

percent per year, six times the growth rate of U.S. businesses. Their revenues

are increasing 34 percent per year, three times the revenue growth rate of

domestic companies. However, this growth cannot continue without increasing the amount of capital flowing to the minority business community,

through investment in and lending to the MBE market. In addition, new and

creative financial strategies must be developed. Through this report, we hope to focus the capital markets on

the opportunities presented by minority businesses and ignite innovative thought on ways to access this critical new market. 

Robert L. Mallett

Deputy Secretary of Commerce

Minority businesses are one of the primary engines driving the growth of the

American economy. Empowering minority-owned businesses by increasing

their access to technology, ensuring that MBEs have access to growth capital,

and opening new and lucrative markets are integral to maintaining the

lifestyle that we Americans enjoy at the dawn of the 21st century. Of these,

however, there is no more important goal than increasing financing opportunities for Asian American/Pacific Islanders, Native American, Latino and African

American entrepreneurs – businesses that make up the economic infrastructure 

in manyminority communities and are key employers. Through this report, we 

hope to increase interest and investment by the financial community in this

 vibrant and untapped sector of the economy.

Courtland V. Cox

Director, Minority Business Development Agency

The Minority Business Development Agency (MBDA) has commissioned a

series of reports on minority-owned businesses. The first of these reports,

“Mainstreaming Minority Business: Financing Domestic Emerging Markets,”

arose from recommendations made by the Department of Commerce’s Capital

Access Task Force on increasing minority business access to capital and was

published by the Milken Institute in February 1999. This new study expands

upon the “Mainstreaming Minority Business” report and examines the opportunities presented to MBEs by equity financing. In addition, the Census

Bureau prepared the ”Emerging Minority Marketplace” study in September

1999, which examined minority population growth, and recently completed

“Minority Purchasing Power: 2000 to 2045.” The “Purchasing Power” report

focuses on the growing minority marketplace and the opportunities it presents to minority businesses and

large corporations interested in partnerships with minority businesses.

One of MBDA’s priorities is to disseminate information for and about minority businesses. Visit our website

at www.mbda.gov for more detailed information about these studies and about the minority business community.
Democratizing Capital

for Emerging

Domestic Markets

by Glenn Ya go and Aaron Pankratz

Res ear ch Re port

SEPTEMBER 25, 2000

THE MINORITY

BUSINESS

CHALLENGE
ii

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

ACKNOWLEDGMENTS

We would like to acknowledge and thank the many people who

provided valuable data and constructive insight to this report. They

are California State Treasurer Philip Angelides, Evelyn Alemen,

James Barth, Kathleen Brown, Kwame Brown, Melissa Carrroll,

G e o rge Castro, Anita Cooke Wells, Courtland Cox, Charlene

Davidson, Rebecca Ford, Charlynn Goins, Efrain Gonzalez, Udayan

Gupta, Reverend Jesse Jackson, Nigel Long, Walter Russell Mead,

Laurence C. Morse and Paul Pryde. We would also like to thank our

e d i t o r, Judith Gordon and Marg a ret Wilcox for administrative

support. 

We greatly benefited from your assistance. 

Copyright © 2000 by the Milken Institute.

The Minority Business Development Agency (MBDA) of the United

States Department of Commerce is the only Federal agency

specifically created to encourage the creation, growth, and expansion

of minority-owned businesses in the United States. The Agency was

established in 1969 by Executive Order, and its role was expanded in

1971. Executive Order 11458, signed by then-President Richard M.

Nixon on March 5, 1969, prescribed a national program for minority

business enterprises. MBDA was originally called the Office of

Minority Business Enterprise (OMBE). The name was changed in

1979 to the Minority Business Development Agency.

The Milken Institute is a 501(c)(3) not-for- p rofit, nonpartisan,

nonideological, independent economic think tank founded in 1991.

Based in Santa Monica, California, the Institute is a resource for

economic and public policy research and analysis, and a center for

advancing discussion about economic, financial, social and policy

issues. The Institute’s mission is to explore and explain the dynamics

of world economic performance and growth. The overarching goal is

to provide an understanding of the effects of economic, political,

technological and regulatory changes on the world economy and its

societies as a basis for a better-informed public, more thoughtful

public policies, improved economic outcomes, and better lives for
Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

Minority-owned firms

are surpassing the

growth of all U.S.

businesses, growing

at a rate of 17 percent

per year, six times the

growth rate of all

firms.

■ ■ ■

Economic growth

cannot be sustained

without the inclusion

of minority

businesses and an

infusion of capital

into those businesses. 

■ ■ ■

Absent broad-based

institutional investor

participation in

minority and

immigrant business

communities

continued growth in

the American

economy is

impossible, affecting

not just minority

businesses but

putting the nation’s

macroeconomy at risk.

EXECUTIVE SUMMARY

In February 1999, the Milken Institute and the Minority Business

Development Agency (MBDA) of the U.S. Department of Commerce

and its Capital Access Task Force, began an investigation into the

implications of entrepreneurial finance for minority businesses. The

findings, documented in a study titled “Mainstreaming Minority

Business: Financing Domestic Emerging Markets,” reported that

minority businesses are growing faster than majority firms in number

and revenue yet remain severely constrained by lack of access to

capital.0This report, continues the work of last year’s study, presents

new findings and makes concrete recommendations for sustaining

the business growth cycle. Here are our findings:

I. The United States is facing serious growth gaps in several areas.

We have identified those areas as:

■ the gap between the current rate of growth and the rate

necessary to sustain future long term economic growth; 

■ the gap between labor force growth and labor force participation;

and 

■ the gap between the growth of emerging domestic markets and

current investment rates in those markets.

Addressing these gaps now will forestall an arrest in productivity and

foster greater economic prosperity. Failure to invest in these areas

risks bringing continued growth to a halt.

II. Economic growth cannot be sustained without the inclusion of

minority businesses and an infusion of capital into those

businesses. Absent broad-based institutional investor participation

in minority and immigrant business communities – soon to be the

new majority of businesses – continued growth in the American

economy is impossible, affecting not just minority businesses but

putting the nation’s macroeconomy at risk.

■ Minority-owned firms are surpassing the growth of all U.S.

businesses, growing at a rate of 17 percent per year, six times the

growth rate of all firms. Minority firms’ sales are growing 34

percent per year – more than twice the rate of all firms.

iii
■ Growth among entrepreneurial businesses is high, but

constrained by lack of debt and equity capital. Minority firms

receive just 2 percent of all private equity investments and 3

percent of all Small Business Investment Company (SBIC)

investment dollars. This, in turn, limits employment growth and

new entrants into the labor force. Access to capital for minorityowned firms is vital for the healthy development of this growing

sector of American businesses. 

■ Growth in the U.S. economy has largely been fueled by carving

channels of capital from investors to entrepreneurs, our most

important source of job, income and wealth creation. A

fundamental mismatch between these sources of job creation and

access to capital persists, especially with respect to the minority

business community. Resolving this mismatch — achieving

adequate growth to lower inequality and keep economic

prosperity alive — is the greatest economic policy challenge in

the new century.

■ Current growth, technology driven, is deep, but not broad, and

shared unequally. A broader participation base is mandatory to

sustain growth. African Americans represent 12.5 percent of the

U.S. population and 3.6 percent of firms. Latinos represent 11

percent of the population and 4.5 percent of firms. Asian

Americans represent 4 percent of the population and 3.5 percent

of firms. 

■ The United States macroeconomy faces a labor supply constraint.

The U.S. workforce growth rate has fallen from 2.7 percent in the

1970s, to 1.6 percent in the 1980s, to between 1.0 and 1.5 percent

today. Projections over the next decade predict continued low

growth rates. Within the labor force, 70 percent of the workforce

growth is occurring among minority groups. Without their labor

force participation, labor shortages will become acute, further

limiting productivity and growth. Skilled labor shortages will act

as a brake on overall economic growth.

■ America’s economic future is so inextricably linked with

minority and immigrant groups that investment in these

communities is essential. Demographic trends point to a

disproportionately white retired population, directly or indirectly

dependent upon an economic base whose contributors are

younger members of diverse racial and ethnic makeup. Women

and minorities comprise an increasingly important part of the

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

Growth in the U.S.

economy has largely

been fueled by

carving channels of

capital from investors

to entrepreneurs, our

most important source

of job, income and

wealth creation.

■ ■ ■

A fundamental

mismatch between

these sources of job

creation and access to

capital persists,

especially with

respect to the

minority business

community.

■ ■ ■

Resolving this

mismatch – achieving

adequate growth to

lower inequality and

keep economic

prosperity alive — is

the greatest economic

policy challenge in

the new century.

iv
U.S. economy that continues to rise in all sectors of the labor

market. If pension funds and other institutional investors fail to

invest in these emerging domestic markets they will be unable to

meet the high yield returns on investment necessary to sustain

the aging baby boomer population.

■ Language and culture directly link new global markets to fastgrowing minority groups in the U.S. Financing these minority

business communities will create bridgeheads into global

communities as well.

III. Capital gaps exist at every level for financing the capital

structure of minority businesses: equity, mezzanine and senior

debt.

■ Despite advances in venture capital, mezzanine debt and assetbacked securitization, the vast majority of minority firms do not

have access to financing technologies available to larger

companies.

■ Of the estimated $95 billion in the private equity market in 1999,

only $2 billion is managed by companies whose focus is

supplying capital to entrepreneurs from traditionally

underserved markets.

■ Funds that include gender and ethnic-specific entrepreneurs and

markets remain undercapitalized by the universe of institutional

investors, despite the proliferation of specialty fund strategies.

More targeted investment funds and instruments need to be

designed and built for this new asset class.

■ To expand, it is critical that minority businesses gain access to

the equity markets. The average venture-backed company

employs nearly 100 workers within five years and creates almost

twice as many jobs as their nonventure-backed peers. Venturebacked firms experience at least a 40 percent job growth each

year as compared to a 2.5 percent decline in jobs for Fortune 500

companies.

■ In addition, sales per employee grow twice as quickly for

minority businesses as for Fortune 500 companies, growing at an

average 16.5 percent as opposed to 7.9 percent for the largest

firms. Despite these growth rates, entrepreneurial markets

capture only a tiny portion of venture capital, leaving them

disproportionately underserved.

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

Language and culture

directly link new

global markets to fastgrowing minority

groups in the U.S.

■ ■ ■

Financing these

minority business

communities will

create bridgeheads

into global

communities as well.

■ ■ ■

Funds that include

gender and ethnicspecific entrepreneurs

and markets remain

undercapitalized by

the universe of

institutional investors,

despite the

proliferation of

specialty fund

strategies. More

targeted investment

funds and

instruments need to

be designed and built

for this new asset

class.

v
■ The robust performance of companies from emerging domestic

markets – and the lost opportunity if they remain underfinanced

– sends a clear message. Well funded and managed minority

firms are successful. Job creation parallels wealth creation in

recognizing the imperative of financing emerging domestic

markets as a new asset class. 

■ Financing minority-owned businesses serves a dual purpose. It

provides needed capital to a fast-growing business sector while

creating a vehicle for greater minority participation in the

workforce.

■ Minority businesses are a driving force behind growth and will

be a major segment of the U.S. economy in the 21st century as a

transition to a more diverse demographic majority emerges.

Asset managers need to tap these sources of higher profits and

growth in the minority business sector to sustain yields

necessary to cover longer-term liabilities demographically driven

by the aging majority boomer population increasingly dependent

upon the productivity and growth of an emerging new majority

of firms and entrepreneurs. 

■ Institutional investors, insurance companies, banks, diversified

financial service firms, private equity investors and pension

funds will have to broaden their investment strategy to include

securities and firms in emerging domestic markets as a new asset

class. Diversity in investment targets ought to become a key part

of diversification in portfolio management strategies. 

■ The minority business community is growing, profitable and free

of the risk inherent in more distant markets. Failure to invest in

this business sector will lower productivity and likewise act as a

brake on the economy.

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

Financing minorityowned businesses

serves a dual purpose.

It provides needed

capital to a fastgrowing business

sector while creating a

vehicle for greater

minority participation

in the workforce.

■ ■ ■

Minority businesses

are a driving force

behind growth and

will be a major

segment of the U.S.

economy in the 21st

century as a transition

to a more diverse

demographic majority

emerges. 

■ ■ ■

The minority business

community is growing,

profitable and free of

the risk inherent in

more distant markets.

Failure to invest in this

business sector will

lower productivity and

likewise act as a brake

on the economy.

vi
RECOMMENDATIONS

1. Support more research and development of equity, mezzanine

and debt instruments attractive to institutional investors and use

those innovative financial instruments to expand the pool of

domestic and international capital invested in minority-owned

businesses. Sample innovations that have proven effective are

securitization of small business loans to develop this emerging

asset class and new models of credit scoring that more accurately

assess the risk in lending to diverse groups.

2. Encourage the formation of business incubators that will nurture

and develop minority entrepreneurs and their businesses.

Encourage state and municipal programs to foster minority

entrepreneurship, patterned after the many state-based seed

funds that exist and establish a National Innovation

Development program – patterned after the Small Business

Innovation Research program – directed at minorities to nurture

and finance high-growth ventures.

3. Establish a jointly led Commerce and Treasury Department

interagency council to coalesce and focus investment programs

for minority entrepreneurs.

4. Encourage the formation of training and mentoring programs to

create more professional minority venture capitalists. 

5. Provide greater enforcement of minority procurement programs. 

6. Provide tax and other incentives for investment in minorityowned businesses.

7. Implement the New Markets Initiatives.

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

vii
The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

viii
INTRODUCTION

Minority-owned firms far surpassed the growth of all U.S. businesses,

increasing 17 percent annually in the decade 1987 to 1997.1 This is six

times faster than the annual growth rate of 3 percent for all businesses

during that same decade, up from double the rate of all firms as of

1992 as noted in last year’s report2(see Figure 1). Asian-owned firms

increased in number by 18 percent per year. Latino-owned firms

increased 23 percent per year, and black-owned firms increased 11

percent per year.

If viewed from the vantage point of sales, the results are similar. Sales

across all firms rose 13 percent per year while they rose 34 percent for

minority-owned firms during the same time period – more than twice

the national average. For Asian-owned firms, sales rose 42 percent per

year and for Latino-owned firms, sales rose 46 percent per year. For

black-owned firms, sales rose 11 percent per year.

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

Minority-owned firms

far surpassed the

growth of all U.S.

businesses, increasing

17 percent annually in

the decade 1987 to

1997.

■ ■ ■

This is six times faster

than the annual

growth rate for all

businesses during

that same decade.

■ ■ ■

If viewed from the

vantage point of sales,

the results are similar.

Sales across all firms

rose 13 percent per

year while they rose

34 percent for

minority-owned firms

during the same time

period – more than

twice the national

average.

1

Figure 1

All Firms vs. Minority Firms

Annualized Growth Rates: 1987-1997
Despite this burgeoning growth, minority business owners are still

underrepresented when compared to all businesses. While minority

businesses are growing faster than majority firms in number and

revenue, they remain severely constrained by a lack of access to

capital. The largest disparity occurs in the African A m e r i c a n

population. Blacks comprise 12.5 percent of the U.S. population, but

own just 3.6 percent of all businesses3(see Figure 2). The Latino

ownership is similar, comprising almost 11 percent of the population,

but owning just 4.5 percent of all businesses.4

Federal Reserve Board of Governors Chairman Alan Greenspan says,

“I have no illusions that the task of breaking down barriers that have

produced disparities in income and wealth will be simple. It remains

an important goal because societies cannot thrive if significant

segments perceive their functioning as unjust.”5 California State

Treasurer Philip Angelides concurs, saying that “the very essence of

the American and California dreams has been and remains equality of

opportunity.”6It has become increasingly evident that this is not

simply a minority issue but an american issue. Absent broad-based,

institutional investor participation in the minority and immigrant

business communities – soon to be the new majority of businesses –

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

Despite this

burgeoning growth,

minority business

owners are still

underrepresented

when compared to all

businesses. 

■ ■ ■

While minority

businesses are

growing faster than

majority firms in

number and revenue,

they remain severely

constrained by a lack

of access to capital.

■ ■ ■

It has become

increasingly evident

that this is not simply

a minority issue but

a majority issue.

2

Figure 2

Population vs. Market Share
continued growth in the American economy is impossible, affecting

not just minority businesses, but putting the nation’s macroeconomy

as a whole at risk. Likewise, necessary yields will not be sustainable

to support future pension, health and other liabilities if asset

managers fail to invest in this new asset class.

The difficulty is augmented by federal policy that expects banks to

lend widely while imposing rules that restrict lending to

e n t re p reneurs. Federal subsidies focus on location rather than

business owners. $9 billion per year is targeted at inner-cities, but

only 9 percent of that is directed to capital structure development.7

Clearly work remains to be done in order to create an environment

that promotes economic equality for business ownership in this

country. In our last report, we recommended a strategy for increasing

economic participation in business ownership by increasing the total

amount of credit available to minority businesses and increasing

equity investments for early-stage financing.8 We continue to support

these goals and expand them by calling for: 1) re s e a rch and

modifications of financial technologies that will increase liquidity and

access to capital, and 2) advocacy of private-public venture s

stimulating increased investment in these emerging domestic

markets.

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

Federal policy expects

banks to lend widely

while imposing rules

that restrict lending to

entrepreneurs.

■ ■ ■

Work remains to be

done in order to create

an environment that

promotes economic

equality for business

ownership in this

country.

3
CAPITAL ACCESS AND

MINORITY BUSINESSES

Minority businesses’ contributions to the national economy are large

and growing. As of 1997, four million employees owe their jobs to the

existence of the 3.25 million minority-owned businesses.9 These firms

generate $495 billion in revenue annually. Since 1987, the number of

minority firms has grown by 17 percent per year while the revenues

from these businesses have grown 34 percent annually. Broken down

by ethnic group, revenue grew by an estimated 46 percent annually

for Asian- and Native American-owned businesses, 42 perc e n t

annually for Latino-owned businesses, and 11 percent annually for

black-owned businesses (see Figure 3).

Still, capital access remains a large obstacle for many minorities trying

to either start or grow their businesses. Empirical evidence

demonstrates that there is a disparity in credit accessibility among

certain demographic groups.10 As a result of these difficulties, over

half of all small business owners do not even apply for a loan due to

fear of denial. This is especially true among minority business

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

Empirical evidence

demonstrates that

there is a disparity in

credit accessibility

among certain

demographic groups.

■ ■ ■

4

Figure 3

Annualized Growth Rates 1987-1997
owners. Evidence also shows that minorities are more often denied

credit and pay higher rates for credit than do white business owners.11

As a result, the credit needs of minorities remain substantially greater

than those of non-minority business owners, with African American

and Latino credit needs exceeding those of white-owned firms by 25

to 77 perc e n t .1 2 Whether these lending gaps exist due to

discrimination or lender market structure remains a subject of debate,

but the credit gap remains nonetheless.

A growing body of economic research documents the fundamental

mismatch that persists between the sources of job creation and capital

formation.13 Growth in the economy has been largely fueled by

carving channels of capital from investors to entrepreneurs who are

the most important source of jobs, income, and wealth creation.

Resolving this mismatch – achieving adequate growth to lower

inequality and keep economic prosperity alive – is the greatest

economic policy challenge in the new century.

The existing lack of debt and equity capital creates business demand

constraints. This credit gap limits both businesses’ ability to hire new

minority labor force entrants as well as their growth rates. At the

same time, the United States macro-economy faces a labor supply

constraint. Since the 1970s, the U. S. workforce growth rate has been

declining. In fact, it has fallen from 2.7 percent in the 1970s, to 1.6

percent in the 1980s, to between 1.0 and 1.5 percent today. Projections

over the next decade predict continued low growth rates.

Meanwhile, 56 percent of current workforce growth is occurring

among minorities. This number will grow to between 64 and 70

p e rcent over the next 20 years.1 4 Unless this growing minority

workforce can be tapped, the lack of labor will act as a brake on

overall economic growth. The future of the nation’s economic growth

depends upon the inclusion of minority-owned businesses and the

minority business workforce, and access to capital for minorityowned firms is absolutely essential for the healthy development of

this growing sector of American businesses.

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

The credit needs of

minorities remain

substantially greater

than those of nonminority business

owners

■ ■ ■

Whether these

lending gaps exist due

to discrimination or

lender market

structure remains a

subject of debate, but

the credit gap remains

nonetheless.

■ ■ ■

This credit gap limits

both businesses’

ability to hire new

minority labor force

entrants as well as

their growth rates.

5
OVERVIEW OF THE MINORITY

BUSINESS COMMUNITY

According to the most recent available census data, 1.4 million

Latino-owned businesses, 1.1 million Asian- and Native Americanowned businesses, and 880,000 black-owned enterprises are

operating in the U.S.15 The influx of Latino and Asian immigrants into

the U.S. has helped bolster these numbers. Many arriving immigrants

start new businesses here. Since 1987, the Latino and Asian/Native

American-owned annual business growth rates have been 23 percent

and 18 percent, respectively. Black-owned firms also saw an 11

percent annual increase.

These results are supported by the percentage of minority business

owners born outside the United States. In 1992, 48 percent of the

Latino business owners and 68 percent of the Asian business owners

were immigrants, while less than one-tenth of African American

owners were born on foreign soil.16 As the number of minority

workers continues to grow, a sizable recruiting ground is forming for

future business owners. The growth potential of this business sector

is enormous and largely untapped. 

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

As the number of

minority workers

continues to grow, a

sizable recruiting

ground is forming for

future business

owners.

■ ■ ■

The growth potential

of this business sector

is enormous and

largely untapped.

6

Figure 4

Minority Firms as a Percent of All Minority Firms
Interestingly, there is a sizeable disparity in revenue earned per

business among the differing ethnic groups (see Figure 5). Asian and

Native American business owners on the whole are the most

financially successful with average revenues of $250,000 per business,

followed by revenues of $130,000 for Latino-owned businesses and

$70,000 for black-owned businesses. From 1987 to 1997, Asian and

Native American-owned firms’ average revenue per business more

than doubled. Latino performance was also favorable as their

revenues nearly doubled as well. African American firms, with a

more modest growth rate, had revenues per business similar to 1987.

A c c o rding to MBDA and Dun & Bradstreet data on minority

businesses (those minority businesses with $500,000 or more in

annual revenue and satisfying certain credit standards), Native

American firms are performing very well compared to other minority

businesses. While they represent just 5 percent of minority firms, they

make up 116 percent of the average minority firms’ sales volume,

have 123 percent of the average number of employees, and hire 112

percent of the average number of new hires among minority firms

(see Table 2). Native American business owners are most prevalent in

the wholesale trade industry, where 24 percent of these firms are

located (see Table 3).

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

There is a sizeable

disparity in revenue

earned per business

among the differing

ethnic groups.

■ ■ ■

Native American’s

make up 116 percent

of the average

minority firms’ sales

volume, have 123

percent of the average

number of employees,

and hire 112 percent

of the average number

of new hires among

minority firms.

7

Figure 5

Annual Revenue per Business
The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

8

Table 1

Minority-Owned Businesses: Number of Firms, Receipts, and Employment

1982, 1987, 1992, and 1997

Percent Change

1982 1987 1992 1997a 1987-1997b

ALL MINORITY-OWNED FIRMS

Number of businesses

All 736,064 1,211,017 1,979,056 3,245,127 168.0

Businesses with employees 119,232 247,678 313,031 522,942 111.1

Nominal annual receipts (thousands of dollars)

All 34,181,238 77,744,780 202,683,780 494,703,206 342.8

Businesses with employees 21,820,541 56,394,339 159,252,282 430,647,362 431.5

Employees 445,840 837,158 1,877,690 3,868,649 362.1

HISPANIC-OWNED FIRMS

Number of businesses

All 233,975 422,373 771,708 1,401,531 231.8

Businesses with employees 39,272 82,908 115,364 202,037 143.7

Nominal annual receipts (thousands of dollars)

All 11,759,133 24,731,600 72,824,270 183,799,941 416.8

Businesses with employees 7,435,664 17,729,432 57,187,370 160,408,831 529.2

Employees 154,791 264,846 691,056 1,492,773 463.6

BLACK-OWNED FIRMS

Number of businesses

All 308,260 424,165 620,912 881,646 107.9

Businesses with employees 37,841 70,815 64,478 89,686 26.6

Nominal annual receipts (thousands of dollars)

All 9,619,055 19,762,876 32,197,361 59,303,334 109.1

Businesses with employees 5,704,545 14,130,420 22,589,676 46,034,389 127.2

Employees 121,373 220,467 345,193 583,752 164.8

ASIAN AND NATIVE AMERICAN-OWNED FIRMS

Number of businesses

All 201,264 376,711 606,426 1,055,641 180.2

Businesses with employees 43,323 96,457 136,351 248,163 157.3

Nominal annual receipts (thousands of dollars)

All 13,148,315 34,035,605 99,709,460 275,106,075 462.5

Businesses with employees 8,900,741 25,104,127 81,083,845 245,293,007 580.0

Employees 174,179 360,301 860,408 1,917,244 432.1

a. 1997 numbers were estimated assuming a 1992-1997 growth rate equal to the average of the previous two five-year periods, 1982-1987 and

1987-1992. 

b. Growth rates for receipts are calculated using constant 1992 dollars; they are real growth rates, adjusted for inflation. Note: These numbers

exclude C corporations and businesses with less than $500 in annual receipts.

Source: U.S. Small Business Administration, Office of Advocacy, based on data from the U.S. Department of Commerce, Bureau of the

Census, Survey of Minority-Owned Business Enterprises, 1982, 1987 and 1992.
Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

9

Table 2

Minority-Owned Firms Breakdown

As Percent of Average of Minority Firms

Native All Minority 

Asian Black Hispanic American Businesses

Number of Firms 32.9% 6.5% 55.3% 5.0% 100.0%

Average Sales Volume 107.7% 117.8% 91.6% 115.7% 100.0%

Average Number of Employees 84.1% 152.0% 100.7% 122.8% 100.0%

Average Number of New Hires 85.2% 140.0% 102.8% 111.6% 100.0%

Source: Dun & Bradstreet Minority Business Data for firms with over $500,000 in annual revenue. 

Table 3

Minority-Owned Firms by Industry

Native 

Percent in Each Industry Asian Black Hispanic American

Accommodation and Food Services 3.1 0.8 2.3 2.5

Administrative and Support and Waste Management

and Remediation Services 4.9 9.1 6.0 5.8

Agriculture, Forestry, Fishing and Hunting 1.2 0.3 1.5 1.3

Arts, Entertainment, and Recreation 0.3 0.2 0.5 0.4

Construction 6.0 17.5 16.1 12.8

Education Services 0.3 0.2 0.2 0.2

Finance and Insurance 2.6 3.8 4.2 3.5

Health Care and Social Assistance 4.8 2.0 4.0 4.0

Information 1.0 2.4 1.1 1.2

Management of Companies and Enterprises 0.1 0.0 0.0 0.0

Manufacturing 11.5 10.6 10.9 11.3

Mining 0.1 0.2 0.4 0.2

Other Services (Not Public Administration) 1.9 2.8 3.3 2.7

Professional, Scientific, and Technical Services 9.7 18.6 8.9 9.7

Retail Trade 11.0 7.8 11.9 11.1

Real Estate and Rental and Leasing 1.5 1.4 2.1 1.9

Transportation and Warehousing 2.1 2.4 3.0 2.6

Utilities 0.0 0.1 0.1 0.1

Wholesale Trade 34.4 14.7 19.2 24.4

Not Classified 3.5 5.2 4.3 4.1

TOTAL 100% 100% 100% 100%

Source: Dun &Bradstreet Minority Business Data.
The Minority Business Challenge Milken Institute and the

September 25, 2000

10

Table 4

Minority Business Regional Breakdown

Percent of Minority Businesses by State

Native All Minority 

Asian Black Hispanic American Businesses

Alaska 0.13 0.15 0.03 3.54 0.25

Alabama 0.15 0.73 0.13 0.38 0.19

Arkansas 0.02 0.24 0.05 0.13 0.05

Arizona 0.96 0.39 2.19 1.90 1.65

California 49.95 15.86 24.28 61.08 34.04

Colorado 0.72 0.63 1.55 0.70 1.17

Connecticut 0.54 0.97 2.17 0.38 1.46

District of Columbia 0.34 2.09 0.25 0.00 0.38

Delaware 0.09 0.78 0.22 0.13 0.21

Florida 3.21 4.03 15.86 1.90 10.21

Georgia 1.88 6.35 1.15 0.82 1.71

Hawaii 6.56 0.05 0.09 1.39 2.29

Iowa 0.07 0.10 0.08 0.06 0.08

Idaho 0.09 0.00 0.09 0.19 0.09

Illinois 4.10 6.30 4.08 1.65 4.11

Indiana 0.61 1.94 0.90 0.13 0.83

Kansas 0.22 1.41 0.62 1.20 0.57

Kentucky 0.30 1.45 0.55 0.25 0.51

Louisiana 0.35 2.86 1.52 1.14 1.20

Massachusetts 1.61 1.36 3.75 0.38 2.72

Maryland 1.49 8.15 1.27 0.76 1.77

Maine 0.13 0.15 0.37 0.38 0.28

Michigan 1.84 5.14 2.34 1.46 2.31

Minnesota 0.33 0.44 0.33 0.89 0.36

Missouri 0.61 2.52 0.96 1.08 0.95

Mississippi 0.20 1.89 0.34 0.70 0.41

Montana 0.06 0.00 0.14 0.95 0.14

North Carolina 0.87 4.61 0.90 1.58 1.16

North Dakota 0.01 0.00 0.01 0.44 0.03

Nebraska 0.17 0.68 0.22 0.32 0.24

New Hampshire 0.13 0.05 0.47 0.32 0.33

New Jersey 4.54 3.73 6.13 0.70 5.18

New Mexico 0.10 0.05 2.01 1.14 1.20

Nevada 0.15 0.19 0.35 0.32 0.28

New York 10.23 8.54 8.25 1.33 8.58

Ohio 0.78 4.07 1.31 0.76 1.29

Oklahoma 0.25 0.82 0.60 4.56 0.70

Pennsylvania 0.06 0.05 0.03 0.00 0.04

South Carolina 0.22 1.50 0.21 0.06 0.29

South Dakota 0.02 0.05 0.04 0.19 0.04

Tennessee 0.19 0.92 0.22 0.25 0.26

Texas 5.53 8.73 13.60 4.30 10.15

Utah 0.19 0.05 0.28 0.13 0.23

Wyoming 0.03 0.00 0.10 0.06 0.07

TOTAL 100% 100% 100% 100% 100%

Source: Dun & Bradstreet Minority Business Data
Overall, more than 34 percent of the nation’s minority-owned firms

(approximately one million) are based in California17 (see Table 4).

Florida and Texas are the second and third largest minority business

states, each containing over 10 percent of all minority businesses.

A summary of the current statistics for minority-owned businesses

follows.

■ Of 3.25 million minority-owned, firms with total sales of $495

billion,

■ 1.4 million were Latino-owned firms with total sales of

$183.8 billion and average annual revenue of $130,000 per

business;

■ 1.05 million were Asian- and Native American-owned firms

with total sales of $275.1 billion and average annual

revenue of $250,000 per business;

■ 881,646 were black-owned firms with total sales of $59.3

billion and average annual revenue of $70,000 per business.

■ It is estimated that the decade 1987–1997 saw minority-owned

firms grow at a rate of 17 percent per year, with combined

revenue growth of 34 percent per year.

■ Latino-owned firms grew fastest, at a rate of 23 percent per

year, with revenue growth of 42 percent per year.

■ Asian– and Native American-owned firms grew at a rate of

18 percent per year, with revenue growth of 46 percent per

year.

■ Black-owned firms grew at a rate of 11 percent per year,

with revenue growth of 11 percent per year.

■ Minority-owned businesses represent approximately 12 percent

of all the nation’s businesses. 

■ Latino-owned firms represent 43 percent of all minority

firms and 36 percent of all minority firms’ revenue. 

■ Asian– and Native American-owned firms represent 30

percent of all minority firms and 53 percent of all minority

firms’ revenue.

■ Black-owned firms represent 27 percent of all minority

firms and 11 percent of all minority firms’ revenue.

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

More than

34 percent of the

nation’s minorityowned firms are

based in California.

■ ■ ■

1987–1997 saw

minority-owned firms

grow at a rate of 17

percent per year, with

combined revenue

growth of 34 percent

per year.

■ ■ ■

Minority-owned

businesses represent

approximately

12 percent of all the

nation’s businesses. 

11
THE SHIFTING MINORITY BUSINESS

INDUSTRY: NEW GROWTH SECTORS

The new generation of minority business entrepreneurs seeks not

only to target specific minority niches, but also niches within the

general population at large. Minority firms, particularly immigrantowned, have expressed their desire to enter breakthrough industries

such as high tech. Silicon Valley is incubating some of these

immigrant and minority dreams. In fact, in the fertile digital economy

of Northern California, someone of Indian or Chinese origin starts

one in four of every new business endeavors.18

Minorities seeking to enter high-growth industries such as

technology and communications are continuing to mature in their

expertise and skill levels. The number of minorities with professional,

administrative and technical skills has grown rapidly. This pool of

educated and experienced minorities represents a new source of

management. The number of Master of Business Administration

degrees conferred upon minority students annually has increased

from over 3,000 in 1977 to over 12,500 in 199519 (see Figure 6). This

means that more than four times as many well-schooled minority

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

The new generation

of minority business

entrepreneurs seeks

not only to target

specific minority

niches, but also

niches within the

general population at

large.

■ ■ ■

Minorities seeking to

enter high-growth

industries such as

technology and

communications are

continuing to mature

in their expertise and

skill levels.

■ ■ ■

This pool of educated

and experienced

minorities represents

a new source of

management.

12

Figure 6

Number of MBAs Conferred on Minorities

1977, 1985, and 1995
business owners are entering the workforce now than did so 20 years

ago.

Dun & Bradstreet data, for minority firms with over $500,000 in

annual revenue and that satisfied certain credit standards, shows that

the highest concentration of African American firms is in the

professional (e.g., business, medical, engineering and other services),

scientific and technical services industry. Asian, Latino, and Native

American firms are most prevalent in the wholesale trade industry20

(see Table 3). 

It is these non-traditional lines of business that have become the

fastest growing industry sectors for the changing minority

population. Areas such as finance, insurance, real estate, business

services, and the wholesale trade industries are experiencing the most

rapid growth. Communications, manufacturing and transportation,

and utilities are also growing at moderate rates. Meanwhile,

industries such as personal services (e.g., health, beauty and home

services), construction, and retail trade are no longer growing and are

even declining in some instances.21

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

Dun & Bradstreet

data, shows that the

highest concentration

of African American

firms is in the

professional,

scientific, and

technical services

industries.

■ ■ ■

It is these nontraditional lines of

business that have

become the fastest

growing industry

sectors for the

changing minority

population. Areas

such as finance,

insurance, real estate,

business services, and

the wholesale trade

industries are

experiencing the most

rapid growth.

13
THE MINORITY MARKETPLACE:

GROWING DEMAND

These changes within the minority business community will be

further impacted by the changing U.S. demographics. U.S. Census

B u reau projections of population growth reveal that the U.S.

marketplace will not serve the same clientele in 2050 that it does

t o d a y. The customer base of the future will be derived fro m

expanding racial and ethnic group populations and will see a

decrease in the non-minority population’s influence on consumer

preferences and purchasing decisions. 

Even today, the spending power of the minority population is a major

force in the marketplace. African Americans are estimated to control

$533 billion, Latinos $383 billion and Asians another $229 billion.22 The

minority influence on products and services is not likely to subside

and the emergence of a larger, more influential minority business

presence is expected. This projection is based upon figures that

estimate that the minority population will account for nearly 90

percent of the total growth in the U.S. population before 2050.23

Between 1995 and 2005, the minority population will increase from

77.6 million to 86.2 million at a growth rate of 11 percent. At the same

time, the non-minority population will increase from 197.1 million to

199.8 million at just a 1.4 percent growth rate. By 2010, Latinos will

become the second largest race/ethnic group in the U.S., surpassing

the African American population.24

By 2050, the overall population is expected to grow by 50 percent

from 263 million to 394 million, with minorities contributing 131

million. The minority population will increase by roughly 10 million

for each five-year increment while the non-minority population will

increase by roughly 2.5 million for the same periods until 2025. By

2040, the non-minority population will stop increasing and actually

begin a recession. After 2050, the minority population is expected to

surpass the non-minority population in the U.S.

Asians, Pacific Islanders and Latinos are the fastest growing of the

minority populations. By 2025, Asian populations will double in 46

states and Latinos will double in 44 states. By 2050, Asians will

increase their overall populations by 267 percent, followed by 258

percent for Latinos. 

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

Changes within the

minority business

community will be

further impacted by

the changing U.S.

demographics.

■ ■ ■

The customer base of

the future will be

derived from

expanding racial and

ethnic group

populations and will

see a decrease in the

white population’s

influence on

consumer preferences

and purchasing

decisions.

■ ■ ■

The minority

population will

account for nearly 90

percent of the total

growth in the U.S.

population before

2050.

14
BRIDGING THE CAPITAL GAP:

PRIVATE EQUITY AND

VENTURE CAPITAL

The growth of minority businesses and the concurrent demographic

changes will critically impact the demand for capital by minority

business enterprises. However, for minority businesses to grow and

develop the economic infrastructure necessary to support the U.S.

economy in its unprecedented expansion, new capital channels must

be directed to this market sector. Foremost among these channels

must be those that increase the equity investment available to

minority business entrepreneurs. 

While minority businesses have had some access to debt capital,

however limited, access to equity financing has been and continues to

be scarce. Yet as indicated below, companies that receive equity

financing grow sales at a faster rate, hire more employees and have a

much greater economic impact than firms that have not received such

investment. This section of the report will review the effect of venture

capital on business growth, discuss the business sectors that have

received the bulk of equity investments and recommend certain

strategies for increasing the amount of equity available to minority

businesses.

MEASURING BUSINESS FINANCE

Although small businesses represent over 40 percent of total assets,

debt and net worth, the small-business share of measurable business

financing is less than 10 percent (see Table 5). Small businesses

continue to rely primarily on their own internal resources. Despite

tremendous advances in the growth of the venture capital, mezzanine

debt and corporate bond markets, as well as asset-backed

securitization, the vast majority of small-business firms do not have

access to the financing technologies available to larger companies.

Bringing financial innovation to a broader section of the business

market remains an unfinished work. We are still in the early stages of

an era of entrepreneurial expansion dependent upon the transfer of

capital market financial technology to new growth sectors.

Although venture capitalists focus on small firms, these investors

have focused on very limited market sectors. Using California firms

as an example, we note that businesses in California have secured

nearly $17 billion in venture capital – 47 percent of all venture capital

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

For minority

businesses to grow

and develop the

economic

infrastructure

necessary to support

the U.S. economy in

its unprecedented

expansion, new

capital channels must

be directed to this

market sector.

■ ■ ■

Foremost among these

channels must be

those that increase the

equity investment

available to minority

business

entrepreneurs.

■ ■ ■

Companies that

receive equity

financing grow sales

at a faster rate, hire

more employees and

have a much greater

economic impact than

firms that have not

received such

investment. 

15
raised during 1999 (See Table 6), but Silicon Valley captured 80

percent of those funds. Underserved entrepreneurial markets abound

in California.

Looking at the category of firms that we have defined as emerging

domestic market firms (Asian American, African American, NativeAmerican, and Latino-American), the paucity of investment capital is

even more defined. Of the estimated $95 billion in the private equity

market in 1999, only $2 billion is managed by companies whose focus

is supplying capital to new entre p reneurs from traditionally

underserved markets.25

Despite the proliferation of specialty fund strategies, funds that

include gender and ethnic-specific entrepreneurs and markets have

remained relatively undercapitalized by the universe of institutional

investors.26 More targeted investment funds and instruments need to

be designed and built for underserved asset classes.

The absence of social and business network ties to mainstream

funding sources persists for minority business owners. Thus,

strategies that seek to increase the number and diversity of capital

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

Looking at the

category of firms that

we have defined as

emerging domestic

market firms (Asian

America, African

American, NativeAmerican, and LatinoAmerican), the

paucity of investment

capital is even more

defined.

■ ■ ■

Of the estimated $95

billion in the private

equity market in 1999,

only $2 billion is

managed by

companies whose

focus is supplying

capital to new

entrepreneurs from

traditionally

underserved markets.

■ ■ ■

More targeted

investment funds and

instruments need to

be designed and built

for this new asset

class. 

16

Table 5

Measurable Financing of Business

(Billions of Dollars)

Small Firm Large Firm

Commercial Paper1 0 Commercial Paper1 163

Commercial Mortgages1 66 Commercial Mortgages1 224

Commercial and Industrial Loans1 98 Commercial and Industrial Loans 1 418

Trade Debt1 233 Trade Debt1 638

Finance Companies1 91 Finance Companies1 272

Initial Public Offering1 10 Initial Public Offering1 117

Venture Capital Pool1 34 Venture Capital Pool1 0

Bond Market2 0 Bond Market2 1326

Stock Market2 0 Stock Market2 5828

Bank Loans1 98 Bank Loans1 418

Total 630 Total 9404

1 The Annual Report on Small Business and Competition (1996) SBA. pp.287,296. 1995 Data

2Federal Reserve Flow of Funds. 1995 Data

Note: Financing to small businesses represents only 7 percent of the amount of financing

received by large firms.
sources, particularly in the equity/mezzanine area of finance, would

be most beneficial. It was only recently that minority venture capital

funds first received capital from institutional funds and were viewed

as competitive private equity investment opportunities. To d a y,

minority businesses indeed offer competitive investment

opportunities – opportunities that will continue to grow alongside the

growing number of minority businesses.

THE IMPORTANCE OF VENTURE

CAPITAL FUNDING IN WEALTH

CREATION

In this context, the message to be gleaned from the ro b u s t

performance of companies from emerging domestic markets and the

lost opportunity if they remain underfinanced becomes clear. Job

creation parallels wealth creation in this story of the importance of

financing emerging domestic market assets as a new asset class. The

average venture-backed company employs nearly 100 workers within

five years, and these firms create almost twice as many jobs as their

nonventure-backed peers. Small venture-backed firms experience at

least 40 percent job growth each year as compared to a 2.5 percent

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

Strategies that seek to

increase the number

and diversity of

capital sources,

particularly in the

equity/mezzanine area

of finance, would be

most beneficial.

■ ■ ■

17

Table 6

Venture Capital Investment in California

(In Millions)
The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

18

Figure 7

Compounded Average Annual Growth

1992-1996

Figure 8

Average Number of U.S. Employees

by Age of Company
decline in jobs for Fortune 500 companies (see Figures 7 and 8). These

companies grew sales per employee twice as quickly as Fortune 500

companies, with total sales growing at an average 16.5 percent as

opposed to 7.9 percent for the largest firms (see Figure 9).

Expanding sources and access to venture capital could further

facilitate the process of job and capital formation in emerg i n g

domestic markets. Recent developments signal the re-emergence of

individual investors as sources of venture capital. Draper Fisher

Jurvetson, meVC, started a new publicly traded venture fund that is

targeted to individuals rather than institutions. Another firm is

organizing broker-dealer networks to syndicate venture capital deals

to small investors. By spreading risk among thousands of individuals,

these companies promise to make venture capital more appealing to

small investors and more available to young companies.

An equity guarantee system created by American Venture Resource

Association (AVRA) is another risk mitigation innovation that can

make investing in emerging domestic market firms safer and more

appealing to both individual and institutional investors. Under the

guarantee system, AVRA promises to buy investments in failed

portfolio companies at 50 percent of their original cost. The guarantee

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

Small venture-backed

firms experience at

least 40 percent job

growth each year as

compared to a 2.5

percent decline in

jobs for Fortune 500

companies.

■ ■ ■

These companies

grew sales per

employee twice as

quickly as Fortune 500

companies, with total

sales growing at an

average 16.5 percent

as opposed to

7.9 percent for the

largest firms.

■ ■ ■

Recent developments

signal the reemergence of

individual investors

as sources of venture

capital.

19

Figure 9

Compounded Average Annual Sales Per

Employee Growth 1992-1996
is structured so that reduced “downside” risk does not come at the

expense of diminished upside potential. This sort of guarantee

p rotection is likely to be particularly appealing to angel and

individual investors who cannot reduce venture capital risk by

investing in the sort of diversified portfolio that venture capital

partnerships typically assemble.

INITIAL PUBLIC OFFERINGS 

The capital structure of aspiring IPO-level companies has shifted in

the last five years and could provide an indicator of private equity

funds targeting minority business IPOs. When firms receive strong

v e n t u re capital funding, their success proves that the actual

investment risk is less than perceived by the institutional investment

c o m m u n i t y. Equity investors such as insurance companies and

pension funds ought to fund minority businesses on a large scale to

fuel the growth of emerging domestic markets.

While private venture capital investment funds focusing on minority

businesses have been emerging more frequently in the last few years,

data on venture capital’s contribution to minority IPO growth is still

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

When firms receive

strong venture capital

funding, their success

proves that the actual

investment risk is less

than perceived by the

institutional

investment community.

■ ■ ■

Equity investors such

as insurance

companies and

pension funds ought to

fund minority

businesses on

a large scale to

fuel the growth

of emerging

domestic

markets.

20

Table 7

Venture Capital-Backed IPOs
unclear. The National Venture Capital Association (NVCA) and the

Venture Economics Group of Thomson Financial Securities Data

monitor venture capital investment. They reported in January 2000

that 50 percent of all the 544 initial public offerings in 1999 were

venture-backed, up from 20 percent in 1998 (see Table 7). In 1999, 271

venture-backed companies went public, raising $23.6 billion. This is

up 288 percent from the 1995 amount of $8.2 billion. Total valuation

of those companies on the IPO date in 1999 was $136.2 billion.

Venture-backed companies today are raising more dollars and going

public at an earlier age. The median company age of venture-backed

IPOs was 4.0 years in 1999, versus 4.5 in 1998 and 5.5 years in 1997. 

Other significant observations indicate that in 1999, the average offer

size of $87.2 million increased 75 percent from the offer size of $49.2

million in 1998. In addition, post-offer valuations have more than

doubled to an average $502 million, up from $229.1 million in 1998.

PENSION FUNDS AND INSURANCE

COMPANIES AS CATALYSTS FOR

FINANCING CHANGE

Pension funds 

Another shift in venture capital backing has occurred through the use

of pension funds. In 1997, pension funds supplied 55 percent of new

funds for venture capital sources, corporations supplied 13 percent

and endowments contributed 10 percent (see Figure 11). Twenty years

earlier, in 1978, the share from pension funds was significantly lower

at 15 percent, with individuals and families supplying 32 percent,

followed by foreign interest with 18 percent and insurance companies

with 16 percent27 (see Figure 10).

Figures from 1998 indicate that minority private equity funds are also

benefiting from pension fund distributions, specifically public

pension funds, with 45 percent of minority private equity derived

from these sources (see Figure 12). The federal government holds the

next largest share with 17 percent.

For minority-oriented funds, the recent assistance from institutional

capital partners redefines the historical capital reliance on

corporations, banks and foundations. These familiar capital sources

circulating through the federal SSBIC program have been unable to

meet the capital gap that exists for minority-owned enterprises,

which in 1992 stood at $140 billion.28

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

Venture-backed

companies today are

raising more dollars

and going public at an

earlier age.

■ ■ ■

Figures from 1998

indicate that minority

private equity funds

are also benefiting

from pension fund

distributions,

specifically public

pension funds, with

45 percent of minority

private equity derived

from these sources.

■ ■ ■

For minority-oriented

funds, the recent

assistance from

institutional capital

partners redefines the

historical capital

reliance on

corporations, banks

and foundations.

21
The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

22

Figure 10

Venture Capital Sources: 1978

Figure 11

Venture Capital Sources: 1997
Insurance Companies

Insurance companies have long been important sources of

institutional investments. Insurance companies, along with pension

funds, are the primary sources of equity investments. As regulatory

p re s s u res on financial institutions and institutional investors

increased, insurance regulators were swept up in a wave of activity

that stigmatized entrepreneurial firms, reduced the role of insurance

companies in corporate finance, and created institutional biases and

restrictions in investing in growth opportunities. Changes in riskbased capital standards associated with new classifications reinforced

the reluctance of insurance companies to buy below-investment

grade securities or engage in private placement of debt/equity.

Insurance companies report the ratios of their book capital to levels of

capital that are adjusted for risk. As an insurer’s ratio progressively

falls below one, successively stronger regulatory actions are

triggered. Start-up companies, emerging domestic market companies,

and non-investment-grade companies generally carried risk weights

much higher than those on investment-grade bonds or other equities.

In short, these changes in risk-based capital standards associated with

the changes in classifications made it too expensive for insurance

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

Insurance companies

have long been

important sources of

institutional

investments.

■ ■ ■

As regulatory

pressures on financial

institutions and

institutional investors

increased, insurance

regulators were swept

up in a wave of

activity that stigmatized entrepreneurial

firms, reduced the role

of insurance

companies in corporate

finance, and created

institutional biases

and restrictions in

investing in growth

opportunities.

■ ■ ■

Changes in risk-based

capital standards

associated with new

classifications

reinforced the

reluctance of insurance

companies to buy

below-investment

grade securities or

engage in private

placement of

debt/equity.

23

Figure 12

Minority Private Equity Sources

1998
companies to invest in growth businesses. As insurance ratios fell and

strong regulatory action was triggered, the chilling effect upon

g rowth investment became apparent. Insurance portfolio

compositions changed radically in the ensuing flight to perceived

s a f e t y. This has put emerging companies at a substantial

disadvantage in raising necessary growth capital. Legislation could

begin to help correct this problem.29

MINORITY-FOCUSED VENTURE

CAPITAL FUNDS

Minority-led venture capital firms targeting the minority business

community have been operating successfully for many years and

provide a viable inroad into the minority business market. Still,

private equity funds targeting minority markets are minimal in

comparison to the entire private equity market. As of 1999, over $2

billion is managed by investment companies whose primary focus is

supplying capital to minority entrepreneurs. Though this amounts to

less than 1 percent of the total private equity capital managed by U.S.

private equity firms today,

30 corporations such as Enron (Enron

Economic Development Corp.) are realizing the potential profits

available from investing in emerging domestic markets. Through

venture capital investments in inner-city communities of at least $1

million per firm, expects their fund to generate returns of 18 to 20

percent. Yet, sufficient deal flow exists to justify investment in this

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

Changes in risk-based

capital standards

associated with the

changes in

classifications made it

too expensive for

insurance companies

to invest in growth

businesses.

■ ■ ■

Minority-led venture

capital firms targeting

the minority business

community have been

operating successfully

for many years and

provide a viable

inroad into the

minority business

market.

■ ■ ■

Still, private equity

funds targeting

minority markets are

minimal in

comparison to the

entire private equity

market.

24

Table 8

Domestic vs. International Markets
largely untapped market, a market that has much less risk than

popular emerging international markets and as noted in our earlier

discussion, is growing at a much faster rate than the mainstream

business community (see Table 8). 

The opportunity to fuel the growth of this emerging asset class – the

market that will drive the aggregate economy as it becomes the

majority market in the 21st century – exists domestically now.

The following is a discussion of several funds with an investment

focus on minority markets led by minority entrepreneurs. 

TSG Capital Group

The largest venture capital fund in the minority sector is TSG Capital

Group. Its history dates back to a MESBIC formed in 1970 called

Equico. Once facing bankruptcy, its senior leadership adopted a

strategy to drop smaller operations from its investments and

concentrate on equity investments in high growth potential

businesses serving minority markets. Although TSG faced deficits in

its first years of the strategy due to the loss of steady cash flow from

its portfolio, its dedication eventually paid off as TSG was able to

sustain itself from interest income in bank certificates of deposit

without capital infusions from its parent company.

31

Over the past 16 years, TSG’s return was more than 40 percent. Today,

TSG boasts $700 million in assets. Its equity investments typically

reach $100 million, leading TSG to take a very proactive role in the

direction their companies take. 

One of TSG’s most successful projects was its 1993 investment in

Envirotest. TSG engineered its buyout in 1998 for $600 million,

realizing a $44 million gain on a $2 million investment.

Syncom Capital Corporation

Syncom Capital Corporation is one of the most successful minority

venture capital firms in the nation. Led by its founder Herbert

Wilkins, Sr. and firm president Terry Jones, Syncom is seeking to raise

$300 million for its venture capital fund, Syncom III. 

Syncom began in 1977 as Syndicated Communications Inc., a media

investment company. Wilkins soon took control of the fund and set

up Syncom Capital Corp. This fund functioned as a MESBIC,

investing in minority-owned businesses in the media industry. Mr.

Jones helped raise $1 million to get Syncom off the ground in 1978.

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

Sufficient deal flow

exists to justify

investment in this

largely untapped

market, a market that

has much less risk

than popular

emerging

international markets

and is growing at a

much faster rate than

the mainstream

business community.

■ ■ ■

The opportunity to

fuel the growth of this

emerging asset class –

the market that will

drive the aggregate

economy as it

becomes the majority

market in the 21st

century exists

domestically now.

■ ■ ■

The largest venture

capital fund in the

minority sector is

TSG Capital Group. 

25
Syncom has experienced overall impressive results. Much of this

stems from both the rapid growth in the inner-city radio and cable TV

industries and the fact that Syncom shared its investments with other

funds, limiting its risk in any given investment. Jones also noted that

“the minority market is so underserved that we can take the cream.

We get the best deals, almost without competition.”32

Another reason the fund did so well was the advice and business

planning assistance that Wilkins and Jones provided to the business

owners in whom they invested. One of its most successful

investments came through Radio One, whose annual revenues today

exceed $40 million. Syncom invested $729,000 in the company and

now values its stake at $14 million.

Syncom was averaging annual returns of 20 percent until 1990, when

it decided to form Syncom II, which began operations with $35

million. In 1996, Syncom III began with $18 million. As it pursues its

goal of creating a $300 million fund, it is expected that Syncom III will

achieve over 25 percent in annual returns in the future.33

The U.S. Hispanic Chamber of Commerce Fund

The U.S. Hispanic Chamber of Commerce has created a fund to target

Latino businesses. Its initial funding in February 2000 stood at $5

million from Bank One Corp. of Chicago, but its founders have a goal

of $75 million. To assist the fund in reaching that goal, Bank One

Corp. has pledged to raise another $5 million from other investors.

Jeff Gaia, president of Bank One’s small-business banking group,

expects returns on their equity investments in the 25 percent to 35

percent range.

The fund, operating as a for- p rofit subsidiary of the Hispanic

Chamber of Commerce, is investing in businesses with annual

revenues of $4 million or higher. The businesses most likely to be

funded are in industries such as manufacturing, high-tech and

telecommunications.34

BankBoston Development Company

In addition to these funds, several other private ventures are

attempting to fill the capital access gap. BankBoston was able to

creatively operate through the Community Reinvestment Act to

finance a private equity fund known as BankBoston Development

Company (BBDC). BankBoston has authorized roughly $100 million

for investment purposes. While this amount was not exclusively

designated for minority businesses, it did infuse some critical equity

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

Syncom has

experienced overall

impressive results.

Much of this stems

from the fact that

Syncom shared its

investments with

other funds, limiting

its risk in any given

investment.

■ ■ ■

The U.S. Hispanic

Chamber of

Commerce has created

a fund to target Latino

businesses.

■ ■ ■

In addition to these

funds, several other

private ventures are

attempting to fill the

capital access gap.

26
funds into the capital stream. BBDC primarily backs low-tech, light

manufacturing, retail and services industries in urban centers.35

MINORITY IPOS

The Chapman Company, a private investment banking firm,

maintains an index to monitor Domestic Emerging Market IPOs,

which includes ethnic and racial minority-owned and women-owned

companies.42 The DEM Index is composed of 100 companies, of which

62.8 percent are in the technology sector. While not exclusively

composed of minority businesses, it provides a benchmark for the

performance of domestic emerging businesses in this new

marketplace.

The DEM index is regularly compared to other major financial

indexes to measure its strength. In 1999, the index has grown

considerably when compared to other indexes (see Figure 13). The

positive percentage change from 1998 for the DEM Index was 94.8

percent, compared to 19.5 percent for the S&P 500, 19.6 percent for the

Russell 2000, 43.1 percent for the Russell 2000 Growth, and 25.3

percent for the Morgan Stanley Europe Australia Far East Index. Its

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

While not exclusively

composed of minority

businesses, the DEM

Index provides a

benchmark for the

performance of

domestic emerging

businesses in this

new marketplace.

■ ■ ■

27

Figure 13

DEM Index vs. Major Indices
The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

28
Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

29
compound annual growth rate also exceeded the other indexes at 29

percent compared to 18 percent for the S&P 500, 16.1 percent for the

Russell 2000, 17.7 percent for the Russell 2000 growth, and 9.3 percent

for the Stanley Morgan Europe Australia Far East Index.

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

30

Table 10

Domestic Emerging Market Index - Market Sector Allocation

as of January 1, 2000
PROGRAMS SUPPORTING

MINORITY BUSINESS LENDING

AND INVESTMENT

In addition to the equity markets, which minority businesses have not

accessed, there are many programs that have supported the

development of minority business entre p reneurs. The following

section will review these programs and suggest possible strategies for

enhancement.

SBA data on business characteristics reveals that only 27 percent of

minority business owners use commercial bank credit.43 Of those

businesses, we also know that just 15 percent of black owners and 33

percent of Latino owners use commercial bank credit.44

The Minority Business Development Agency’s database of borrowers

paints a somewhat brighter picture of commercial lending to minority

businesses. Their sample shows that 47 percent of minority

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

SBA data on business

characteristics reveals

that only 27 percent of

minority business

owners use

commercial bank

credit.

■ ■ ■

Just 15 percent of

black owners and 33

percent of Latino

owners use

commercial bank

credit.

■ ■ ■

The Minority

Business

Development

Agency’s database of

borrowers paints a

somewhat brighter

picture of commercial

lending to minority

businesses.

31

Figure 14

Minority-owned Firms by Lender Type
businesses use commercial lenders to fund their firms45 (see Figure 14

& 15).

Still, federal policy remains confused on this issue. Banks are

expected to lend while rules against risky lending restrict them from

giving entrepreneurs a chance. Meanwhile, federal tax breaks and

subsidy programs are directed toward geographical places rather

than toward people – the business owners themselves. Out of 90

p rograms across 14 federal departments, $9 billion per year is

targeted at the inner cities, but only 9 percent of those dollars are

directed to capital structure development.46

COMMUNITY REINVESTMENT ACT:

CATALYZING INVESTMENT IN

EMERGING DOMESTIC GROWTH

The federal government initiated a response to this capital gap in

recent years through existing programs and new legislative

proposals. The Community Reinvestment Act (CRA) was enacted in

1977 to ensure that banks and thrifts met the credit needs of

underserved groups in their communities. Specifically, the Act is

intended to increase the amount of money lent to older, central city,

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

Federal policy

remains confused.

Banks are expected to

lend while rules

against risky lending

restrict them from

giving entrepreneurs

a chance.

■ ■ ■

Federal tax breaks

and subsidy programs

are directed toward

geographical places

rather than toward

people – the business

owners themselves.

■ ■ ■

The federal

government initiated

a response to this

capital gap in recent

years through existing

programs and new

legislative proposals.

32

Figure 15

Minority-owned Firms by Financial Type
low-income environments. As a result, about two-thirds of all smallbusiness loans and one-fifth of all small-farm loans are made by CRA

reporting institutions.

Thanks to the CRA, over $1 trillion in new investments and loans has

been made to underserved communities.47 California State Treasurer

Philip Angelides pointed out that due to the lending initiated by the

CRA, these lenders are now “two decades ahead of most other private

sector capital sources and pension funds in understanding the extent

to which there are solid risk adjusted returns in community

reinvestment.”48 The Brookings Institution notes that “conventional

businesses are currently in the position that conventional banks were

in two decades ago. They are undervaluing inner-city markets and

therefore under-serving the inner city.”49 According to CRA data,

lending accounts for nearly two-thirds of all capital provided to small

businesses by commercial banks and savings associations.50

LENDING INSTITUTIONS AND THEIR

SMALL-BUSINESS LENDING ACTIVITY

In 1996 and 1997, 91 percent of the institutions covered by the CRA

(this includes 99,136 insured commercial banks and 1,867 savings

associations) reported extending small-business loans. It is estimated

that for 1997 alone, the CRA reported over 2.5 million small-business

loans totaling $159.4 billion. That is up approximately 5 percent from

the previous year.

CRA findings also indicate that small-business lenders are among the

largest of CRA reporters. According to CRA data, in 1997, lending

institutions with assets of $1 billion or more originated approximately

three-quarters of reported small-business loans. This proportion is

higher than in 1996, when large institutions accounted for 60 percent

of small-business loans. In addition, larger lending institutions

accounted for 70 percent of the dollar amount of small-business loans

in 1996 and 74 percent in 1997.

In 1995, the CRA began requiring banks and thrift institutions to

report their small-business lending by geographic location. Although

there is extensive information available about the number and size of

businesses in a given area, there is no available data on the credit

history or credit needs of a particular neighborhood. Therefore, it is

difficult to determine the effect of racial or ethnic neighborhood

composition on small-business lending. 

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

Thanks to the CRA,

over $1 trillion in new

investments and loans

has been made to

underserved

communities.

■ ■ ■

These lenders are now

“two decades ahead of

most other private

sector capital sources

and pension funds in

understanding the

extent to which there

are solid risk adjusted

returns in community

reinvestment.”

■ ■ ■

“Conventional

businesses are

undervaluing innercity markets and

therefore underserving the inner

city.”

33
C R A data analyses show that small-business lending is mostly

concentrated in central cities and suburban areas. Studies have also

found, however, that neighborhoods with a large concentration of

businesses and higher median family incomes have greater access to

small-business lending. 

The CRA f i g u res show that when compared to non-minority

neighborhoods, minority neighborhoods receive a smaller amount of

business loans. The Woodstock Institute, analyzing a Federal Reserve

Board Study on this issue, discovered that there were indeed large

gaps between lending activity in low-and upper-income areas across

the nation. In Chicago, for example, the loan-per-firm rates were 50

percent higher in upper-income areas than in lower-income areas.51

Another concern about the present banking environment is connected

to the trend in bank mergers. Some small business advocates and

studies have indicated that large conglomerations decrease the

number of smaller banks, which results in reduced lending to small

businesses. The relational component of small-bank lending that is

lost in mergers with larger banks is an important characteristic in

small business lending, as it increases the availability of financing to

small businesses and slightly reduces the cost of borrowing. 

Small community bank loan officers often rely on the character of the

borrower more than on standardized requirements of a financial

portfolio. There is evidence that banks that have a long relationship

with a firm offer lower loan rates to that firm and there is less

likelihood that collateral is required for loans. Lenders also are more

likely to extend credit if preexisting relationships exist.52 There are

fears, then, that as larger banks swallow up the smaller community

banks, this relational form of lending will die out, further reducing

access to capital for minority-owned small businesses. 

THE SMALL BUSINESS

ADMINISTRATION

The Small Business Administration (SBA) offers loans and loan

guarantees for small businesses across the country. The SBA has

increased its share of total guaranteed loans going to minority

businesses from 15 percent in 1992 to 24 percent in 1998. Minorities

share of the SBA’s 504 program, which provides long-term fixed-rate

financing for major fixed assets, also increased from 9 percent in 1992

to 15 percent in 1998.53 The total number of SBAloans made to Latinoowned businesses and black-owned businesses have tripled since

1992 and quadrupled for Asians businesses.54

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

Neighborhoods with

a large concentration

of businesses and

higher median family

incomes have greater

access to smallbusiness lending. 

■ ■ ■

When compared to

non-minority

neighborhoods,

minority

neighborhoods

receive a smaller

amount of business

loans. 

■ ■ ■

There are fears, that

as larger banks

swallow up the

smaller community

banks, relationship

lending will die out,

further reducing

access to capital for

minority-owned small

businesses.

34
The overall value of SBA loans outstanding to A s i a n - o w n e d

businesses in 1992 was $9 billion. The amount of new loans made to

Asian businesses has increased from $586.5 million in 1992 to $2.13

billion in 1998. The total value of SBA loans outstanding to Latino

businesses in 1992 was $4.25 billion. The amount of new loans made

to Latino businesses has increased from $285.7 million in 1992 to $751

million in 1998. The total value of SBA loans made to black-owned

businesses 1992 was $1.9 billion. The amount of new loans made to

African American businesses has increased from $132 million in 1992

to $383 million in 1998. 

Overall, the SBA guaranteed almost 49,000 small-business loans in

1999. Those loans were valued at $12 billion, with 7(a) loans whose

maximum loan amount is generally $1 million, comprising $10 billion

of that total. 55

The 7(a) loan guarantee program is the SBA’s largest program. With

7(a) loans, small businesses are able to take out a loan after they have

failed to gain financing through normal lending channels. Lenders

(usually banks) are able to make loans under $100,000 with an SBA

guarantee of 80 percent and loans up to $1 million with an SBA

guarantee of up to 75 percent.56 Minority businesses received 28

percent of the 7(a) loans in 1999. This $3.4 billion went to more than

12,000 minority businesses. 

Small Business Investment Companies 

In addition to small business loans, the SBA administers the Small

Business Investment Company (SBIC) program, created by Congress

in 1958. Individual SBICs are privately organized and privately

managed investment firms licensed by the SBA. SBICs provide

lending and venture capital to both start-up and already established

small independent businesses in the range of $300,000 to $5 million.

Two types of SBICs exist – regular SBICs and SSBICs, or Specialized

Small Business Investment Companies. SSBICs are specifically

targeted toward minority and women entrepreneurs who may have

been denied the opportunity to own and operate a business because

of social or economic disadvantage. Of the total SBIC financing, just

$128 million, or 3 percent, was distributed to minority-owned

businesses.

SBA financing to SBICs offers a benchmark by which to judge the size

of the overall investment pool to small businesses. In 1999, the total

amount of financing to all SBICs, including SSBICs, was $4.22 billion

(see Table 11). While the main focus of this program is on equity

investments, over 27 percent, about $1.2 billion, of all SBIC

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

The SBA guaranteed

almost 49,000 smallbusiness loans in 1999.

Those loans were valued

at $12 billion, with 7(a)

loans whose maximum

loan amount is generally

$1 million, comprising

$10 billion of that total.

■ ■ ■

Small Business

Investment Company

SBICs provide lending

and venture capital to

both start-up and

already established

small independent

businesses in the range

of $300,000 to $5 million. 

■ ■ ■

Specialized Small

Business Investment

Companies SSBICs are

specifically targeted

toward minority and

women entrepreneurs

who may have been

denied the opportunity

to own and operate a

business because of

social or economic

disadvantage. 

35
investments involve debt to some extent, either straight debt or debt

mixed with equity.

Of the regular SBICs, financing to minority businesses was nearly $76

million, representing only 1.83 percent of the $4.16 billion total (see

Table 12). SSBIC investments, financing to businesses with 50 percent

or more minority ownership, amounted to $52 million. This

represents 88.67 percent of the $59 million in SSBIC money, with

women-owned businesses comprising the rest (see Table 13). 

The largest percentage of SSBIC financing was distributed to blackowned businesses, which received 37 percent of SSBIC investment

dollars. Asian Pacific-owned businesses followed with 25.89 percent,

and Subcontinent Asian-owned businesses received 14.51 percent.

Latino-owned businesses received 11.32 percent of the SSBICs

financings, with Native American-owned businesses receiving 0.39

percent. 

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

Of the regular SBICs,

financing to minority

businesses was nearly

$76 million,

representing only 1.83

percent of the $4.16

billion total.

■ ■ ■

SSBIC investments,

financing to

businesses with 50

percent or more

minority ownership,

amounted to $52

million.

36

Table 11

Demographics of Total SBIC Program-Financed Small Businesses

Financing Recorded from October 1, 1998 through September 30, 1999

SBIC PROGRAM TOTAL

Number of Percent of Amount of Percent of

Investments Total Investments Total

50% or more

Black-Owned 194 6.27 55,469,535 1.31

50% or more

Latino-Owned 73 2.36 15,679,482 0.37

50% or more Native

American-Owned 4 0.13 3,230,000 0.08

50% or more

Asian Pacific-Owned 124 4.01 17,615,391 0.42

50% or more

Subcont-Asian-Owned 133 4.30 36,397,767 0.86

Total 528 17.05% $128,392,175 3.04%

Total SBIC Program Financing 3,096 $4,220,913,888

Non-SBIC

Venture Capital Firms 1,824 $12,500,000,000

Percent Change from Fiscal Year 1998 (10%) 30%

Source: Small Business Administration
Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

37

Table 12

REGULAR SBIC 

Number of Percent of Amount of Percent of

Financings Total Financings Total

50% or more

Black-Owned 101 3.65 33,854,982 0.81

50% or more

Latino-Owned 22 0.79 8,987,392 0.22 

50% or more Native

American-Owned 1 0.04 3,000,000 0.07

50% or more

Asian Pacific-Owned 14 0.51 2,312,781 0.06

50% or more

Subcont-Asian-Owned 97 3.50 27,823,229 0.67

Total 235 8.48% $75,978,384 1.83%

Total Regular SBIC Financing 2,770 $4,161,805,480

Percent of Change (2%) 33%

Source: Small Business Administration

Table 13

SPECIALIZED SBICs

Number of Percent of Amount of Percent of

Financings Total Financings Total

50% or more

Black-Owned 93 28.53 21,614,553 36.57

50% or more

Latino-Owned 51 15.64 6,692,090 11.32

50% or more Native

American-Owned 3 0.92 230,000 0.39

50% or more

Asian Pacific-Owned 110 33.74 15,302,610 25.89

50% or more

Subcont-Asian-Owned 36 11.04 8,574,538 14.51

Total 293 89.88% $52,413,791 88.67%

Total Specialized SBIC Financing 326 $59,108,408

Average Loan Size

SBIC Program Total $1,363,344

Regular SBIC $1,502,457

Bank-Owned SBICs $3,598,144

Debenture SBICs $572,191

Participating Securities $761,369

Specialized SBICs $181,314

Source: Small Business Administration
NEW MARKETS INITIATIVE

The newest federal proposal is the New Markets Initiative (NMI)

included in President Clinton’s 2001 budget. This economic program,

which involves SBA, HUD and Treasury support, aligns with existing

SBA programs, but seeks to expand business opportunities in lowand moderate-income areas. The core of the NMI package includes

tax credits, venture capital investments, technical assistance and

mentoring programs.

The SBA’s expansion into the venture capital market will be

structured around the SBIC model. Federally subsidized companies

called New Markets Ve n t u re Capital Companies (NMVCs) will

combine equity venture capital financing and technical assistance to

smaller businesses in designated low-and moderate-income areas. In

2000, $6 million in funds were allocated, subject to authorization, to

provide for $40 million in SBA-backed funds. Technical assistance for

these companies would be supported with an additional $9 million

appropriation. The 2001 request would increase this amount to $21.66

million in credit subsidies to provide $150 million in SBA-backed

funds.57

The key difference between SBICs and NMVCs will be the size of

businesses targeted for investment. NMVCs will service the lower

spectrum of the equity market businesses just above the start-up

phase, where community development would be the prime objective

rather than profit optimization alone. These finance vehicles are

encouraged to invest in very small operations whose owners have

little business expertise in the financing process and limited financial

resources. In contrast to the $300,000 to $5 million investments made

by SBICs, an initial NMVC investment is expected to range from

$50,000 to $300,000.

The technical assistance component of NMVCs is expected to

strengthen the human capital of the business owners while providing

community benefits. Technical assistance for the New Market

Initiative Companies would be provided through the BusinessLINC

p rogram, which is a partnership between the SBA, the U.S.

Department of Treasury and the business community. Through this

partnership, large businesses are encouraged to mentor smallbusiness owners in rural areas and inner cities. The President’s

Budget for 2001 requests $6.6 million for this program. Native

American outreach is considered an essential part of this program

and $1.25 million has been earmarked for the request.

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

The newest federal

proposal is the New

Markets Initiative

(NMI) that seeks to

expand business

opportunities in lowand moderate-income

areas. 

■ ■ ■

The core of the NMI

package includes tax

credits, venture

capital investments,

technical assistance

and mentoring

programs.

■ ■ ■

New Markets Venture

Capital Companies

(NMVCs) will

combine equity

venture capital

financing and

technical assistance to

smaller businesses in

designated low and

moderate-income

areas. 

38
The potential financial success of NMVC must be examined,

however, in light of research and evaluation of the federal experience

with Minority Enterprise SBICs (MESBICs), the forerunners of the

current SSBICs.58 Successful MESBICs did not typically invest in

smaller firms, but ones with employees and those earning a median

sales level exceeding $500,000. Profitable MESBICs were discerning

in their investments and based decisions on collateral, home

ownership, strong business cash flow and the applicant’s business

experience – none of which are strictly required for the NMVCtargeted firms. The successful MESBICs were not willing to take risks

on firms that demonstrated no clear indication of management

talent, ability to tap into growing markets or the potential to become

a high-grossing firm.

Mandating funding exclusively to inner-city small businesses on a

geographic basis is a limiting strategy. Research tells us that

transactions of scale are more prudent for job creation – a core

economic objective.59 Another concern for investment firms serving

small, inner-city operations is high loan default rates. Recent

research found that two types of MESBICs were generally more

successful: asset-based lenders and high-end venture capital

companies investing in minority business enterprises with

sophisticated, highly experienced business managers. 60 A f i r m

capable of growth potential and investment return for a MESBIC

would most likely have:

■ A strong management team

■ A proven product/service

■ Annual sales exceeding $1 million

■ A profitable operation in the past year

■ Strong internal accounting and financial controls

■ Audited financial statements

■ Strong personal credit ratings of top managers

■ A written business plan of three to five years

Once the NMI program begins operations, two other federal agencies

will become involved in the overall program. First, the U.S.

Department of Housing and Urban Development will administer

investment companies called (APICs). APICs, America’s Private

Investment Companies, will provide private capital and government

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

Mandating funding

exclusively to innercity small businesses

on a geographic basis

is a limiting strategy.

■ ■ ■

Transactions of scale

are more prudent for

job creation – a core

economic objective.

■ ■ ■

Two types of

MESBICs were

generally more

successful: assetbased lenders and

high-end venture

capital companies

investing in minority

business enterprises

with sophisticated,

highly experienced

business managers.

39
backing to finance equity capital investments for the creation or

relocation of large-scale businesses in inner cities and rural areas.

In addition, the U.S. Department of Treasury will administer the New

Markets Initiative Tax Credit that will be worth up to 25 percent of

investments by entities serving designated New Markets. This

includes NMVCs, APICs, community development banks and other

targeted investment funds. The Clinton administration is seeking $3

billion in the 2001 budget to be allocated towards these credits. This

is up from the $1.2 billion over five years that was initially requested

in the 2000 budget. The tax credits could boost investments by $15

billion in these New Markets areas. This should have a positive

impact on the growth and development of minority businesses.

FEDERAL PROCUREMENT CONTRACTS

Another area where small businesses are directly involved with the

federal government is through government procurement contracts. In

1998, small businesses contracted to provide $41 billion dollars worth

of work to the U.S. government.61 This represents 21 percent of the

$195 billion in procurement money awarded to all businesses in 1998.

Minority-owned businesses were awarded just 5.8 percent of all

procurement, receiving $11.3 billion in procurement money for that

year. This amount is nearly the same as the 5.5 percent of the total

procurement amount that minority businesses were awarded in 1996. 

Of the $11.3 billion in federal procurement money that minority firms

received in 1998, about 60 percent of those dollars came through the

SBA’s 8(a) program.62 The total 8(a) prime contract level in 1998 was

$6.3 billion. In California alone, 537 8(a) contract awards worth $270

million were made that year.

63 

Receivables securitization offers another important area of policy and

p rogram development. The figures above re p resent potential

securitization of 8(a) loans worth $270 million in California and $6.3

billion nationwide. If all of these loans were securitized, an additional

$6.3 billion would be made available to lend to other minority

businesses through the 8(a) program. 

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

APICs, America’s

Private Investment

Companies will

provide private capital

and government

backing to finance

equity capital

investments for the

creation or relocation of

large-scale businesses in

inner cities and rural

areas.

■ ■ ■

The U.S. Department of

Treasury will administer

the New Markets

Initiative Tax Credit that

will be worth up to 25

percent of investments

by entities serving

designated New

Markets.

■ ■ ■

The tax credits could

boost investments by

$15 billion in these New

Markets areas. This

should have a positive

impact on the growth

and development of

minority businesses.

40
MARKET-BASED PUBLIC VENTURE

CAPITAL POLICY

The Case for CAPCOs (Certified Capital Companies)

An enormous number of experiments in economic development have

taken place since the 1980s, as they became increasingly important in

state-level public policy. State-assisted venture capital programs have

ranged from those that are publicly funded and managed, to those

that are publicly funded but privately managed, to those created by

the public sector through enabling legislation for private sector

v e n t u re capital institutions, minimizing state control and state

financial risks and rewards (see Table 14). In each case, the common

goal is to encourage business creation and expansion alongside job

c reation and retention. Geographically isolated regions and

traditionally disadvantaged populations (rural or minority) are also a

target. Increased supply of venture/mezzanine capital can fill gaps as

a means of retaining and growing businesses within the state. Table

14 is based on case studies of these various approaches.64

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

State-assisted venture

capital programs have

ranged from those that

are publicly funded and

managed, to those that

are publicly funded but

privately managed, to

those created by the

public sector through

enabling legislation for

private sector venture

capital institutions,

minimizing state

control and state

financial risks and

rewards.

41

Table 14

State Economic Development Model: Venture Capital
After 10 years of experimentation with more state-directed programs,

CAPCOs have become increasingly popular as a method of allocating

tax credits to encourage and leverage investment in private venture

capital firms certified under the legislation. CAPCOs are essentially

insurance companies that set up venture capital funds. In the case of

California, this mechanism could build out the geographical and

demographic diversity of the state’s venture capital infrastructure.

There are a number of advantages to this privately managed, publicly

supported approach to leveraging and diversifying the venture

capital community. No current state budget expenditures or bond

sales are required. The actual cost (present value) of a CAPCO

program is reduced by the allocation of tax credits over time.

Investments can be insulated from political pressure and limitations

inherent in more government directed programs. Finally, the ability to

leverage other private funds and increase syndication appears to be

improved in this type of program. A number of policy options are

available in this legislation. Careful consideration of its

implementation will optimize the impact of bridging the capital gap

for emerging domestic firms in California and insuring the

sustainability of its economic growth.

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

CAPCOs have

become increasingly

popular as a method

of allocating tax

credits to encourage

and leverage

investment in private

venture capital firms

certified under the

legislation.

■ ■ ■

There are a number of

advantages to this

privately managed,

publicly supported

approach to

leveraging and

diversifying the

venture capital

community.

■ ■ ■

Careful consideration

of its implementation

will optimize the

impact of bridging

the capital gap for

emerging domestic

firms and insuring

the sustainability of

economic growth.

42
MEZZANINE FINANCING

Trends in the private equity market suggest an increasing number of

public to private transactions in which have evidence little

participation. This ownership change process could be enhanced

through minority manager/owners’ participation. As in the case of

both venture equity and senior bank debt, the technology and

innovations of the mezzanine market remain largely underdeveloped

for the emerging domestic market segment. A mezzanine security

represents the layer of capital between senior debt and equity. It is

generally structured as subordinated debt or preferred stock with a

common equity component provided through the use of warrants or

a conversion feature. The availability of mezzanine capital introduces

much needed flexibility in the capital structure of firms that are or

could become minority-owned.

Ordinarily, mezzanine market security types (subordinated debt with

warrants, convertible subordinated debt, and preferred stock) have

longer terms, higher coupon rates and expected returns between

those of equity and senior debt. In general, their covenants are more

flexible than senior debt and enable the firm to withstand greater

economic variability in market conditions and staying power to

execute competitive strategies. 

Privately managed, public purpose equity/mezzanine funds could

target business and project financings in inner cities among emerging

domestic market firms, and on or adjacent to Native American lands.

By bringing private management to public assets or to investments

with a significant public benefit, i.e., jobs and community investment,

such mezzanine level funds could structure transactions that deal

with the risks unique to these investments and the constraints of

management capacity and debt service capacity could be structured.

Uniting private and public subsidies with private financing, allows a

mezzanine fund to take a risk position and leverage other sources of

financing.

A potential structure for this type of mezzanine fund could be like

that illustrated in Figure 16. The liability side of the fund could be

comprised of equity investors seeking not only a market return but a

social investment purpose, e.g. foundations, banks and financial

institutions seeking to better satisfy CRA re q u i rements, the

government (directly or through a government sponsore d

enterprise), Native American tribal investors and/or insurance

companies and other institutional investors seeking business

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

The availability of

mezzanine capital

introduces much

needed flexibility in

the capital structure of

firms that are or could

become minorityowned.

■ ■ ■

In general,

subordinated debt

covenants are more

flexible than senior

debt and enable the

firm to withstand

greater economic

variability in market

conditions and

staying power to

execute competitive

strategies. 

■ ■ ■

Uniting private and

public subsidies with

private financing, a

allows a mezzanine

fund to take a risk

position and leverage

other sources of

financing.

43
development in these emerging markets. Additional funding would

be raised by an investment grade (Single A) issuance at Treasury plus

an additional 150 basis point return and a high yield issuance (BB-) at

600 basis points above Treasury yields. The asset side of the balance

sheet of such a fund could include senior debt issued at 8 percent

returns (about 50 percent of the assets); mezzanine investment

yielding 18 to 22 percent returns (30 percent of the fund’s assets); and

direct equity at yielding 25 to 30 percent returns and comprising 20

percent of the fund.

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

44

Figure 16

Mezzanine Fund Model
SECONDARY MARKET

SECURITIZATION

In addition to private equity funds, securitization models for

secondary markets are being considered as alternative avenues to

capital for minority-owned businesses. Legislative initiatives such as

the Riegle Community Development and Regulatory Improvement

Act of 1994 removed regulatory restrictions on the securitization of

small-business loans. This relaxation of restrictions cre a t e d

investment opportunities through federally regulated banks, thrifts,

credit unions and pension plans. 65

The securitization process involves the pooling and purchase of

individual small-business loans from their lenders and packaging

these loans into a security, or a Collateralized Loan Obligation (CLO),

which is then sold to a third party (see Figure 17). This converts

illiquid individual loans into more liquid, marketable securities.66 The

purchaser of the CLO is thus able to hedge against the risk of default

on any one of these loans as they own just a small percentage of each

loan in the security.

67 

Information deficiencies have led to hesitation in investing in the

secondary market for small business loans, both for small businesses

in general and for minority businesses specifically. A Brookings

Institution report said, “America’s inner cities have vastly

undervalued assets that are largely unseen by conventional business.

The resulting underinvestment reflects a serious information gap

affecting neighborhood markets. In today’s information age ... little

reliable accessible data or knowledge is available about emerging

markets.”68

Minority CEOs from the Inner City 100 listed negative perceptions as

another factor that affects investment opportunities for minority

businesses. These CEOs, whose companies had annual compound

growth rates of 44 percent, “cite negative perceptions about their

neighborhoods – especially in regard to crime – far more often than

they cite actual crime rates or an inadequate labor pool”69 a s

competitive disadvantages. A report to CalSTRS, the California State

Teachers Retirement System Board, agreed on both points. This study

noted, “Due to market inefficiencies and negative perceptions, it

appears that urban areas have been largely overlooked by

m a i n s t ream investors ... despite being attractive investment

opportunities.”70 

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

In addition to private

equity funds,

securitization models

for secondary markets

are being considered

as alternative avenues

to capital for

minority-owned

businesses.

■ ■ ■

The securitization

process converts

illiquid individual

loans into more

liquid, marketable

securities. 

■ ■ ■

Information

deficiencies have led

to hesitation in

investing in the

secondary market for

small business loans,

both for small

businesses in general

and for minority

businesses

specifically.

45
The introduction of credit-scoring models is anticipated to help

promote the securitization process by mitigating these issues. Credit

scoring is “an automated method that analyzes a large sample of past

borrowers in order to calculate the probability that a loan applicant

with certain specific characteristics will default.”71 These models

adopt standardized lending terms, documentation and underwriting

guidelines, which should result in more refined estimates of lossp robability distributions, allowing for greater potential for

securitization.

T h e re is concern, however, that relationship-based lending will

become extinct due to credit scoring and that credit scoring can

negatively impact loans made to minority business entrepreneurs.

Specifically, critics have stressed that banks’ relationships with small

businesses are “especially important for firms that do not have formal

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

46

Figure 17

Minority Business Finance Model

There is concern, that

relationship-based

lending will become

extinct due to credit

scoring and that credit

scoring can negatively

impact loans made to

minority business

entrepreneurs. 

■ ■ ■
business plans or audited financial statements typically used in

traditional underwriting of commercial loans.”72

Private companies, such as CFI ProServices Inc. of Portland and

C o m m e rcial Redevelopment Associates Inc. have attempted to

extend the availability of capital to small-business development

through secondary markets. 

The potential market for securitized small-business loans is sizable,

judging from loans made by commercial banks alone (see Table 15).

As of June 1998, these banks held $370 billion in small-business loans

in original amounts less than $1 million per loan. The growth rate for

this volume of loans has been about 6 percent annually since 1994.73

Yet, between 1992 and 1998, only $2.6 billion of these loan dollars has

been offered either publicly or privately and only $700 million has

been marketed74 (see Table 16).

The slow growth of small-business loan securitization is attributed to:

■ lack of standardized lending terms

■ lack of uniform underwriting guidelines

■ the lack of “relationship lending”

■ lack of historical data on credit performance

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

The potential market

for securitized smallbusiness loans is

sizable, judging from

loans made by

commercial banks

alone.

■ ■ ■

Yet, between 1992 and

1998, only $2.6 billion

of (of $370 billion)

loan dollars has been

offered either publicly

or privately and only

$700 million has been

marketed.

■ ■ ■

The slow growth of

small-business loan

securitization is

attributed to lack of

standardized lending

terms, lack of uniform

underwriting

guidelines, the lack

of “relationship

lending”, and lack of

historical data on

credit performance.

47

Table 15

Growth of Small Business Loans at U.S. Commercial Banks1

(Billions of Dollars)

Non-farm, NonTotal Business Commercial and Residential Real

Year Loans Industrial Loans Estate Total

1993 295.0 157.2 137.8

1994 294.2 154.5 139.7

1995 315.9 165.3 150.7

1996 333.1 175.8 157.3

1997 357.6 196.1 161.5

1998 370.8 197.2 173.6

1Business loans of $1 million or less at U.S. domestically charted commercial banks, excluding

U.S. branches and agencies of foreign banks. U.S. branches and agencies of foreign banks held

approximately $178 billion of commercial and industrial loans on June 30, 1998, almost all of

which were greater than $1 million.

2Estimate

Source: June 30 Call Reports; Board of Governors of the Federal Reserve System, 1998, p. 37
An issue of increasing concern to community banks – and small

businesses in turn – is a growing liquidity shortage due to shrinking

deposits. Banks’ average assets grew 6 percent each year as opposed

to 4 percent for core deposits (defined as total deposits less time

deposits greater than $100,000 and brokered deposits). The loan

deposit ratio at commercial banks hit an all time high at 88 percent up

from 65 percent 20 years ago. Community bank assets are funded by

as much as 72 percent of core deposits as compared to 43 percent at

large banks.75 Securitization offers a means of escaping this liquidity

trap.

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

An issue of increasing

concern to community

banks – and small

businesses in turn – is

a growing liquidity

shortage due to

shrinking deposits.

■ ■ ■

Securitization offers

a means of escaping

this liquidity trap.

48

Table 16

Rated Offerings of Securities Backed by Small-Business Loans1

(Volume in Millions of Dollars)

Year Number Volume

1992 2 574.0

1993 3 376.3

1994 3 201.9

1995 4 211.9

1996 7 530.0

1997 8 489.1

1998 4 212.9

Total 30 2,596.1

1Excludes securities backed by guaranteed portions of SBAloans.

2Through July 1998

Source: Moody’s SBA; Board of Governors of the Federal Reserve System, 1998, p. 38
CALIFORNIA SECURITIZATION

PILOT PROJECTS

CALCAP SECURITIZATION

Another pilot securitization project is currently underway in

California involves California Capital Access Program (CalCAP)

loans and further securitization of SBAloans to enhance liquidity and

growth of banking in emerging domestic markets. Sparked by our

original policy brief on this subject in 1999, CalCAP is a loan portfolio

insurance program whereby banks making CalCAP loans set aside a

portion of each loan in a reserve fund matched by the state to be

tapped in the event of a loan default. This fund allows banks to make

riskier loans than would otherwise be justified.

In this first California securitization demonstration project, it is

planned that $75 million to $100 million in CalCAP loans will be

p u rchased from banks making these loans. Collateralized Loan

Obligations (CLOs) will be created by pooling these loans together

and then dividing them up into separate securities. The risk of loss

from default on any given loan is therefore minimized and spread

across many different CLOs. The CLOs will then be sold on the open

market as investment grade securities. The likely investors in these

CLOs include pension funds, insurance companies and foundations.

Salomon Smith Barney, the leading underwriter, will determine the

credit enhancement methods. The likely methods include private,

government and foundation insurers. The State Treasurer’s office

oversees this project.

COMMUNITY DEVELOPMENT LOAN

SECURITIZATION

Another pilot project being contemplated involves community

development loans. The securitization process here would be very

similar to that of the CalCAP project. Over $50 million worth of loans

made by community development organizations will be purchased,

pooled, divided and sold as securities on the open market.

The benefit of this form of financing is that the community

development lenders are able to use the income from the sale of their

loans to increase the amount of community development loans they

can make to other minority business enterprises, thereby decreasing

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

CalCAP is a loan

portfolio insurance

program whereby

banks making

CalCAP loans set

aside a portion of

each loan in a reserve

fund matched by the

state to be tapped in

the event of a loan

default. This fund

allows banks to make

riskier loans than

would otherwise be

justified.

■ ■ ■

Community

development lenders

are able to use the

income from the sale

of their loans to

increase the amount

of community

development loans

they can make to

other minority

business enterprises.

49
the capital access gap to minority firms. Whether these proceeds will

be subject to the same lending restrictions as are their original sources

of capital is of concern to community development lenders. 

OTHER SECURITIZATION

POSSIBILITIES

Securitization can also be applied to other forms of small-business

lending. $3.4 billion went to minority businesses in 1999 through the

SBA’s 7(a) program, with about $1.4 billion of those loans going to

minority firms in California. Another $6.3 billion is available for

securitization through the SBA’s 8(a) loan program, with $270 million

available in California. A Native American Securitization program,

called a CALBIDCO, would specialize in long-term SBA loans and

sell the guaranteed portion of those loans.

EXISTING SECURITIZATION MODELS

Community Reinvestment Fund (CRF)

The Community Reinvestment Fund (CRF), established in 1988,

p u rchases loans from community and economic development

lending organizations and pools them as collateral for market-rate

securities sold to investors. Typical lenders from which the CRF

purchases loans range from rural community development nonprofits to large state agencies. These organizations are then able to use

the income from the sale of these loans to increase the number of

community development loans they are able to make in any given

period of time. The CRF receives support from foundations and

individuals interested in community development. 76

Revolving Loan Fund

Revolving Loan Funds (RLFs) are “community based financial

institutions that promote business development and job creation.

They provide loans to local businesses that cannot attract private

financing on their own. The funds recycle the loan repayments by relending the capital to other businesses in the community.”

It is estimated that RLFs need a capital base of $3 million to $3.5

million with an active loan portfolio of at least $2 million to operate

effectively. Currently, the median capital base of RLFs in California is

less than $500,000. Thus, these institutions require subsidies and

support for training and technical assistance services. A model that

securitizes these RLF loans into special purpose vehicles (SPCs) is

provided in Figure 18.

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

The CRF purchases

loans from

community and

economic

development lending

organizations and

pools them as

collateral for marketrate securities sold to

investors.

■ ■ ■

Revolving Loan

Funds (RLFs) recycle

the loan repayments

by re-lending the

capital to other

businesses in the

community.

50
RLF Statistics (as of March 1998 with 68 percent of RLFs reporting):

■ RLFs represent over $375 million in capital.

■ Less than 15 percent of RLF loans are delinquent or

defaulted.

■ The total value of RLF loans made is $208 million.

■ The total number of loans made is 2,827.

■ The median loan size is $48,000.

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

51

Figure 18

Revolving Loan Fund Securitization
Barclays Capital

Barclays Capital has introduced a securitization model based on

market issuance of Trust Preferred Securities (TPS). Under the TPS

structure, a bank sells its junior subordinated debt to a Bankruptcy

Remote Trust, which also receives interest on the debt. This trust sells

a TPS to investors in the capital market who receive dividends from

the repayment of these loans.

Barclay’s Capital takes this securitization method one step further in

order to provide this same capital market access to small community

banks with low credit rating. To accomplish this, Barc l a y s ’

securitization model pools together a diversified portfolio of

community banks and adds an element of internal cre d i t

enhancement. The new investment-grade pooled securities are called

Credit Enhanced Pooled Trust Securities (CEPTs). The sale of these

loans to the securitizer again allows the community banks to make a

new wave of loans to needy businesses that would not otherwise

have been made. A CPET Securitization Model is shown in Figure 19.

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

52

Figure 19

Barclays Capital’s

Credit Enhanced Pooled Trust Securities (CPETs)

Barclays’

securitization model

pools together a

diversified portfolio

of community banks

and adds an element

of internal credit

enhancement called

Credit Enhanced

Pooled Trust

Securities.

■ ■ ■
CEPT Statistics:

■ The pool consists of at least 30 banks.

■ Bank asset sizes range from $100 million to $10 billion.

■ The banks have been in existence for at least 15 years.

■ The pool size is at least $300 million.

■ CEPTs will be issued with 30-year maturity callable after 10

years.

Bank of Yorba Linda

The Bank of Yorba Linda (BYL) is a California commercial bank that

provides SBA loans to small and medium-sized businesses. BYL has

developed a securitization structure that offers SBA loan-backed

adjustable rate certificates. These include AAA rated, A rated and Not

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

53

Figure 20

Bank of Yorba Linda Securitization
Rated certificates. BYL c redit enhancement on these issues is

provided by the subordination of the lower-rated certificates. The

lowest rated certificates are enhanced by an 8 percent reserve fund

that BYL maintains on the unguaranteed portions of its SBA loans.

The BYL securitization model is provided in Figure 20.

SBA 7(a) Loans

In addition to the guaranteed portion of SBA 7(a) loans, it is now

possible to securitize the non-guaranteed portion of SBA loans. Most

recently, Small Business Loan Source has issued nearly $100 million in

securities backed by the non-guaranteed portion of these SBA loans.

The private placement was conducted online through the Westwood

Capital web site, a first for asset-backed securities.77

SECONDARY MARKET LEGISLATION

California is at the forefront in adopting legislation to establish a

secondary loan market. Senate Bill 661 was approved by the state

Assembly and signed by the governor in October 1999. The bill

requires the California Industrial Development Financing Advisory

Commission to establish a secondary market for community and

economic development loans. The lieutenant governor as well as the

Department of Insurance’s California Organized Investment

Network endorsed this bill which would allow private, public or

quasi-public economic development lenders to participate. The bill is

currently awaiting a funding source to become active.

The mechanics of this particular secondary market would allow these

designated loans to serve as collateral for State Treasury-issued bonds

that would be sold at a private or public sale. The bill excludes the

issuance of industrial development bonds based on this collateralized

method.

An original $5 million appropriation would have supplied dollars to

fund this plan, but the amount was subsequently deleted in an

amendment. If the fund survives its current period of uncertainty, it

will be called the Community and Economic Development Fund.

There is also a bill under consideration in New York that establishes

a small-business loan secondary market program to be administered

by the state’s Business Development Corporation. This program

would permit secondary market securities to be legal investments for

state pension funds, banks, insurance companies and other

fiduciaries. It would also direct the NY job development authority

and the NY State Urban Development Corporation to guarantee

timely payment of these loans. 

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

If established

California’s secondary

loan market would

allow designated

loans to serve as

collateral for State

Treasury-issued

bonds that would be

sold at a private or

public sale.

■ ■ ■

There is also a bill

under consideration

in New York that

establishes a smallbusiness loan

secondary market

program to be

administered by the

state’s Business

Development

Corporation. This

program would

permit secondary

market securities to

be legal investments

for state pension

funds, banks,

insurance companies

and other fiduciaries.

54
CONCLUSION

The nation’s current business growth cycle can only be sustained if

institutional investors recognize the imperative to invest in emerging

domestic markets. To this end, numerous financial models have been

proposed to close the current capital gaps in equity, mezzanine and

senior debt financing. Failure to invest in this asset class will further

increase existing labor and capital shortages and act as a brake on

overall economic development.

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

55
REFERENCES

0 Michael Harrington, Glenn Yago, “Mainstreaming Minority Businesses: Financing Domestic

Emerging Markets,” Policy Brief, Milken Institute, February 1999.

1 Small Business Administration (SBA), Office of Advocacy, “Minorities in Business,” 1999,

http://www.sba.gov/advo/stats/min.pdf.

2 SBA, Office of Advocacy, “Small Business Economic Indicators, 1998,” March 2000,

http://www.sba.gov/advo/stats/sbei98.pdf

3 Small Business Administration News Release, “SBA Lending to African American-Owned Small

Businesses Triples Since FY 1992,” Feb. 29, 2000.

4 Small Business Administration News Release, “SBA Lending to Latino-Owned Small Businesses

Tripled Since FY 1992,” April 25, 2000.

5 Alan Greenspan, “Economic Challenges in the New Century,” Speech before the Annual

Conference of the National Community Reinvestment Coalition, Washington D.C., March 22, 2000.

6 Philip Angelides, “The Double Bottom Line: Investing in California’s Emerging Markets,”

California State Treasurer’s Office, May 2000, p. 3.

7

Initiative for a Competitive Inner City (ICIC) and PriceWaterhouseCoopers “Inner-City Business

Development: Benchmarking Federal Spending and Guidelines for Action,” May 1999, p. 10.

8 Glenn Yago and Michael Harrington, “Mainstreaming Minority Business: Financing Domestic

Emerging Markets” Milken Institute, February 1999.

9 SBA, “Minorities in Business.” 

10 Ken Cavalluzo, Linda Cavalluzo, and John Wolken, “Competition, Small Business Financing, and

Discrimination: Evidence from a New Survey,” Federal Reserve Board of Governors, 1999. See also,

Ken Cavalluzo and Linda Cavalluzo, “Market Structure and Discrimination: The Case of Small

Business,” Journal of Money, Credit, and Banking, Vol. 30 No. 4, November 1998.

11 Ibid. Cavalluzo and Cavalluzo also note that black owners are more than twice as likely to be

denied credit and Asian business owners were over 10 percentage points more likely to be denied

credit than white male business owners. Latinos paid nearly 70 percent more for lines of credit in

heavily concentrated lending markets.

12 Ibid.

13 See Glenn Yago, “The Jobs/Capital Mismatch: Financial Regulatory Chokeholds on Economic

Growth,” Policy Brief, No. 7, Milken Institute, November 17, 1999

14 Percentages derived from data from the Bureau of Labor Statistics, U.S. Department of Labor and

the U.S. Census Bureau, U.S. Department of Commerce.

15 1992 Survey of Minority-owned Business Enterprises, U.S. Department of Commerce.

16 Ibid. 

The Minority Business Challenge Milken Institute and the

September 25, 2000 Minority Business Development Agency

56
17 Ibid.

18 “Survey: The United States, Who Gains?” The Economist, March 11, 2000, p. 10.

19 Fairview Capital Partners, Inc. “The Marketplace: A Fairview Perspective,” Presentation at Annual

Meeting, New York, March 1999, p. 20.; U.S. Department of Education and American Council on

Education publications.

20 Dun and Bradstreet Minority Business Database.

21 Timothy Bates, “The Changing Nature of the Minority Business Community: 1960–1995,” Paper

prepared for the White House Conference on Small Business, 1994.

22 “Selig Center for Economic Growth, University of Georgia College of Business, “Studies and

Forecasts, Total Buying Power.” Note: Because the Selig Center’s estimates are based on disposable

personal income data obtained from the U.S. Department of Commerce, rather than money income

values for the U.S. as a whole issued by the U.S. Bureau of the Census, the result is significantly

higher estimates of buying power. http://www.selig.uga.edu/forecast/totalbuy/total/total.htm

23 “The Emerging Minority Marketplace,” Minority Business Development Agency, U.S. Department

of Commerce, September 1999, p. 1.

24 Ibid. 

25 This is also true for new industries. Recycling, remanufacturing, composting, biomass and other

environmental businesses often have a difficult time obtaining patient capital. See A.C. Broughton,

“Venture Capital Financing for Sustainable Companies,” BioCycle, 9/1/99, 40/9: 53. 

26 Private Equity Analyst, December 1998; Forbes, August 25, 1998.

27 Fairview Capital Partners, Inc. p. 28. 

28 A New Chance for SSBICs. March 1992. Venture Capital Journal. 

29 See Cara Lown, Stavros Peristiani, and Kenneth Robinson, “Capital Regulation and Depository

Institutions,” in J. Barth, D. Brumbaugh, G. Yago (eds.), Restructuring Regulation and Financial

Institutions, (Santa Monica: Milken Institute Press, 2000); Diana Hancock and James A. Wilcox, “The

Credit Crunch and the Availability of Credit to Small Businesses,” Conference on Economics of

Small Business Finance, New York University, May 23, 1997.

30 Fairview Capital Partners, Inc. p. 22.

31 Bates, “The Changing Nature of the Minority Business Community: 1960 – 1995,” p. 23. 

32 Jeffrey A. Tannenbaum, “Where the Money Isn’t: Minority-Owned Firms Often Struggle to Get

Venture Financing. Syncom Wants to Change That,” Wall Street Journal Interactive Edition, May 21,

1998. http://www.wsj.com/public/current/articles/SB895675196950682000.htm

33 Ibid.

34 Paulette Thomas, “Hispanic Chamber of Commerce Creates Venture Fund,” The Wall Street

Journal, Feb. 22, 2000, p. B2. 

35 Debra Lau, “BankBoston Development Company Strikes a Chord in Urban America,” Venture

Capital Journal, May 1, 1999. 

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

57
36 Seeks control and minority equity positions in companies serving fast growing, underserved ethnic markets (African-American, Latino, and Asian). TSG works with managers to develop strategy,

build infrastructure and made add-on acquisitions.

37 Direct investments in businesses that are: 1) ethnic minority owned 2) serve ethnic minority consumer base 3) majority-owned with central city operations. Currently has an alliance with Hicks,

Muse, Tate & Furst.

38 Focus on companies that serve, operate in, or are owned by residents of U.S. inner cities. Fund

likely to serve fast-growing ethnic markets and involve minority entrepreneurs. Currently has an

alliance with American Securities.

39 Targets investments in middle-market companies that are owned by minorities and women, companies that serve minority consumer markets and mainstream companies that can be converted to

minority or female-owned status.

40 Seeking to invest in African-American-owned companies with $10 million to $100 million in revenues. Currently has an alliance with Travelers.

41 Invests in minority and women-controlled businesses.

42 Other information on the DEM Index is available at The Chapman Company’s website at

www.chapmancompany.com. 

43 “Minorities in Business,” Table 11D.

44 “Minorities in Business,” p. 4.

45 Minority Business Development Agency (MBDA) “Performance” Database of Minority Businesses.

46 Initiative for a Competitive Inner City (ICIC) and PriceWaterhouseCoopers, “Inner-City Business

Development: Benchmarking Federal Spending and Guidelines for Action,” May 1999, p. 10.

47 Angelides, p. 11.

48 Ibid.

49 Christopher Berry and Robert Weissbourd, “The Market Potential of Inner-City Neighborhoods:

Filling the Information Gap,” The Brookings Institution, March 1999, p. 1.

50 Glen B. Canner , “Evaluation of CRA Data on Small Business Lending,” February 10, 1999.

Prepared for the “Conference on Business Access to Capital and Credit,” sponsored by the Federal

Reserve System.

51 Daniel Immergluck, “Intrametropolitan Patterns of Small Business Lending: What Do the New

Community Reinvestment Act Data Reveal?” Woodstock Institute, 1998.

52 Rebel A. Cole, Lawrence G. Goldberg and Lawrence J. White, “Cookie Cutter Versus Character:

The MicroStructure of Small Business Lending by Small and Large Banks,” December 3, 1998, p. 5.

53 “Minorities in Business,” p. 19 

54 Small Business Administration news releases mentioned in note #1. 

55 SBA. http://www.sba.gov/financing/fr7aloan.html 

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56 Ibid.

57 “The New Market Initiatives Overview.” The Small Business Administration. Accessed from

http://www.sba.gov/aboutsba/2001budget/nmi-sbatps.doc on May 10,2000.

58 See Timothy Bates, “Financing the Development of Urban Minority Communities: Lessons of

History,” College of Urban, Labor, and Metropolitan Affairs, Wayne State University, Occasional

Paper Series, September 1999; and Timothy Bates, “Rejoinder to Sheryll Cashin: Programs as Token

Gestures,” Wayne State University, February 2000.

59 Ibid.

60 Ibid.

61 SBA, Office of Advocacy, “The Facts about Small Businesses, 1999,”

http://www.sba.gov/advo/stats/facts99.pdf

62 Ibid.

63 Milken Institute California Demonstration Securitization Project Meeting, May 1999.

64 David L. Barkley, Deborah M. Markley, and Julia Sass Rubin, “Public Involvement in Venture

Capital Funds: Lessons From Three Program Alternatives,” Rural Policy Brief, PB99-2, November

1999

65 Zoltan J. Acs, “The Development and Expansion of Secondary Markets for Small Business Loans,”

Feb. 1999, prepared for a Federal Reserve System Conference, March 8-9, 1999, Arlington, VA., p. 4.

66 Acs, p. 6 

67 For a further explanation of the securitization model, see “Mainstreaming Minority Business:

Financing Domestic Emerging Markets,” Milken Institute, February 1999.

68 Berry and Weissbourd, Abstract.

69 Porter and Habiby, p. 50; see Angelides, p. 10. 

70 Pension Consulting Alliance, Memorandum on Urban Investment programs to Investment

Committee of the California State Teachers’ Retirement System, November 3, 1999, p. 3.

71 “Credit Scoring in Small Business Lending: Bane or Blessing?” Financial Update Vol.12 No.2

(2000).

72 Ibid.

73 Ibid, p. 10 

74 Lori Mae: CFI ProServices Inc. along with TIS Financial Services Inc. created an avenue to bundle

small-business loans from the nation’s community banks and sell them to institutional buyers such

as mutual funds. Modeled after lending structures in the mortgage, auto lending and credit card

industries, the bundled loans were marketed as a “Lori Mae” security.

75 These securities were targeted toward community banks with business loans under $250,000. No government backing was

included in the original proposal. CFI ProServices, which developed and serviced a credit scoring

software package for banks, was hopeful that the standardization of terms applicable to its 5,000

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customers would help facilitate the bundling of loans. The pilot project was designed to secure

small-business real estate loans secured by land assets. The program was suspended, however, in

1998.

76 Currency, Grant Thornton’s National Financial Services Committee, Vol. 13, No. 1, Spring 2000

77 http:\\www.crfusa.com.

78 http:\\www.westwoodcapital.com

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ABOUT THE AUTHORS

Glenn Yago, Director of Capital Studies at the Milken Institute,

specializes in financial innovations, financial institutions and capital

markets. His work includes extensive analysis of public policy and

its relationship to high-yield markets, initial public offerings,

industrial and transportation concerns, and public and private

sector employment.

Yago’s most recent projects include Emerging Domestic Markets —

U.S. markets whose entrepreneurs belong to groups such as

minorities, immigrants and women, and whose access to capital to

grow their companies has traditionally been limited. His Capital

Studies group established the Milken Institute Capital Access Index.

He is also engaged in projects researching and implementing

financial innovations to promote peace in the Middle East through

economic development. He is a co-author of the recently published

Restructuring Regulation and Financial Institutions. Yago received his

Ph.D. from the University of Wisconsin, Madison.

Aaron Pankratz is a Research Assistant at the Milken Institute. He is

a part of the Emerging Domestic Markets (EDM) team, working on

issues of access to capital for minority and women-owned businesses. 

Milken Institute and the Minority Business Challenge

Minority Business Development Agency September 25, 2000

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For further information or additional copies from the MBDA, contact:

Kwame R. Brown

Acting Chief

Office of Financial Access

U.S. Department of Commerce

Minority Business Development Agency

Washington, DC 20230

202.482.1940 

or visit MBDA’s website at: www.mbda.gov

For further information or additional copies from the Milken Institute,

please visit the Institute’sweb site at www.milkeninstitute.org. You

may also request copies by e-mailing publications@milkeninstitute.org,

calling (310) 998-2600, or writing us at:

Milken Institute Publications

1250 Fourth Street

Santa Monica, California 90401-1353

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1250 Fourth Street • Santa Monica, California 90401

Phone (310) 998-2600 • Fax (310) 998-2627 • E-mail info@milkeninstitute.org

www.milkeninstitute.org