Investing in America’s new human capital

The demography of America is changing — more quickly than most people realize. And the implications for the long-term growth of the American economy are far-reaching.

According to a recent Census Bureau report, groups that historically have been considered ethnic minorities in this country — principally African Americans, Hispanics and Asian Americans — are expected to account for more than 50 percent of children under the age of 18 by as early as 2023 — and a majority of working-age Americans by 2039. Nearly 90 percent of the 13 million people entering the U.S. labor force between 2006 and 2016 will be members of ethnic minorities.

This emerging reality drives home a crucial point: The next generation of human capital on which the United States will depend for its economic growth and strength will be increasingly composed of people who today live in economically underserved communities and work for economically underserved businesses.

For that reason, it is critically important that public policy goals reflect this shift to encourage private investment today in these underserved communities and businesses, which together comprise what we call America’s emerging domestic markets, to secure America’s economic prowess tomorrow.

At its annual meeting in Washington this week, the National Association of Investment Companies, which represents minority-owned and managed private investment funds, is examining the role that these emerging communities and businesses will play in driving America’s economic future — and the impact that private investment can have on awakening opportunities in this unique marketplace.

The focus of the discussion is a study conducted for the NAIC by the Boston Consulting Group. The study’s findings are thought-provoking: America cannot maintain its global economic leadership in the decades ahead unless we invest now in the markets and businesses that will train and nurture our future workforce.

Our most important conclusion: Capital is king. While many businesses in the emerging domestic market have the opportunity to be successful, most are vastly undercapitalized, have limited networks of relationships with potential business partners and customers, and are in need of additional strategic guidance. We found that private capital — in the form of private equity — was uniquely suited to provide all of these essential missing elements.

Our detailed study of seven investments made by NAIC firms in minority-owned or -operated businesses, businesses located in minority communities, or businesses that serve minority consumers demonstrated that private investors help in important ways beyond offering much needed capital. These investors serve as advisers, help the companies hire talented managers, provide strategic and operational guidance, and play a huge role in growing these companies.

Companies in emerging domestic markets that had access to private capital investment reaped enormous benefits. There was a 34 percent overall increase in jobs — two-thirds of those new jobs went to minorities. On average the companies paid wages that were 15 percent higher than the average national income and their revenue grew at an annual rate of 35 percent.

This success is reflected in these companies’ individual stories. One, for example, is the Samy Company in Miami, which markets hair products to the Hispanic population in South Florida. In the four years following private equity investment in their company, the company grew from 17 employees to 60.

More than 80 percent of Samy’s employees are ethnic minorities.

Given the clear link between investment and growth, how can policymakers encourage the flow of capital into our nation’s emerging domestic markets so that other businesses can benefit? The short answer is that everyone must play a role.

First and foremost, federal and state governments should refocus their efforts to promote development of larger minority-owned businesses and should avoid adopting tax policies that increase the cost of making investments in emerging domestic markets.

Public pension funds should encourage the firms with which they invest to seek out investment opportunities in emerging domestic markets.

Mainstream investment funds, including large private equity funds, should find ways to partner with smaller, minority-owned investment funds to make investments in emerging domestic markets.

Minority-owned businesses should make greater efforts to identify sources of private capital and make the case that they represent a profitable investment opportunity.

America’s emerging domestic markets will be the engine that drives our nation’s future economic growth. Policymakers — particularly those who represent EDMs, have a crucial responsibility to ensure that these markets are nourished today for growth tomorrow.

Lowry is a senior adviser at The Boston Consulting Group. Boyd is president of the National Association of Investment Companies.

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