Bret Keisling shares an excerpt from next week’s EsOp Podcast with Jack Moriarty of Ownership America, who discusses the thinking and analysis that led to the recent introduction of the Employee Equity Investment Act (EEIA).
If enacted, the EEIA will empower the Small Business Administration (SBA) to license Small Business Investment Companies (SBIC’s) to make equity investments in ESOPS and worker co-ops, sharply reducing cost of — and access to — capital.
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Mini-cast 236 Show Notes
We gave an overview of the EEIA on Mini-cast 229: The Employee Equity Investment Act.
Mini-cast 236 Transcript
[00:00:00] Bret Keisling: Welcome to the EsOp Mini-cast. Thank you so much for listening. My name is Bret Keisling, and as it says on my business cards, I'm a passionate advocate for employee ownership. On our primary EO/ESOP podcast, we are in the midst of an excellent two-part conversation with Jack Moriarty, founder and CEO of Ownership America.
[00:00:29] Last week, in Episode 251, Jack and I discussed the Employee Ownership Ideas Forum held earlier this summer and Jack gave an overview of exciting and important legislation in the state of Washington. Next week on Episode 252, Jack and I will go deep on the very exciting Employee Equity Investment Act, or EEIA, which was recently introduced in both houses of Congress.
[00:00:55] So, for today's Mini-cast, I'm bringing you an excerpt from Episode 252, where Jack gives background on how the EEIA came about.
[00:01:05] Here's Jack Moriarty.
[00:01:07] Jack Moriarty: I'll start, Bret, by rewinding a bit, a few years; back in 2018/2019 advisors of ours, Dick May and Christopher Mackin, along with a Cornell academic Robert Hockett, sat down and started penciling together this idea actually on the way back from a Rutgers conference, and they asked the question, well, how could we deploy the full faith and credit of the United States to grow employee ownership?
[00:01:34] The question was, well, how do we see more employee ownership? Why don't we see more ESOPs, more worker co-ops, et cetera? Given that we know, right, the silver tsunami, we know that all the demographics should be pointing in the direction of more employee ownership. And yet, as you and I have discussed, we've seen stagnant growth, right? We're actually losing more ESOPs year over year than we are seeing new ones.
[00:01:57] And so how do we arrest that trend and really go on offense? And what they looked at was the history of credit policy in the United States, which is the history of how did we extend guarantees for families to buy home mortgages? How did we use the same playbook to enable the acquisition and ownership of agricultural land and farms? How do we do this with small business loans originally, right?
[00:02:24] And so it, it's a long tradition of public policy that, well, how can we use federal credit to enable citizens, families to purchase an asset that they wouldn't otherwise be able to?
[00:02:39] And so, that insight was really the core insight that inspired this idea, well, why don't we use a credit enhancement program to accelerate the growth of employee ownership?
[00:02:49] And in this case, we all felt that there was an imperative to bring more institutional investment into the employee ownership field. We know that we have a 3.2 trillion private equity market, right? This is institutional capital that's chasing acquisitions. How do we elevate the profile of an ESOP and make the economics work so that it's sufficiently attractive for investors, for sellers, and ultimately, of course, for workers?
[00:03:18] And in particular, the core problem that we set out to address was, well, how do you reduce the reliance on seller financing as a way to finance an ESOP transaction? And so, as you know, Bret, you know, oftentimes a lender will come in and lend, let's call it 30% of the transaction. And there may be some subordinated debt available, but oftentimes the typical ESOP transaction- and this is also true for worker co-ops, it's a shared problem- the seller will have to finance a substantial portion of that transaction with a long-term note.
[00:03:50] And so, that's worked very well for the segment of sellers that aren't necessarily looking to exit the business right away, that are comfortable with a longer-term payback period. But it hasn't appealed to those that are looking for a true exit that really want their liquidity at closing and intrinsically, might want to go into the employee ownership direction, might like to sell to an ESOP or co-op, but the economics are prohibitive because of this absence of liquidity.
[00:04:17] And so, the policy problem to be solved is, well, what tools do we have available from a policy perspective to mobilize private investment to either replace or at least substantially reduce the need for a seller zone? How can we lower the opportunity cost to a seller to do this by providing liquidity and create more employee owners?
[00:04:38] And so, we really landed on an existing program at the Small Business Administration called the Small Business Investment Company Program. It's a program that's been around since 1958. It's actually credited with catalyzing the venture capital industry in the country. And what it does is it actually licenses private investment funds and provides them with low-cost debt to go invest in small businesses.
[00:05:04] And so the theory being, well, small businesses can be difficult to invest in. They may not have as an attractive return profile as larger businesses, as other businesses. We're going to enhance that return profile so that there is sufficient investment in the small business ecosystem. And that's something that's worked very well, again for decades.
[00:05:24] And the idea was, well, how could you extend the capabilities of that program and that existing infrastructure to catalyze a new segment, a new niche in the marketplace of employee ownership focused investment companies?
[00:05:38] And so that's really the crux of the bill is this Employee Equity Investment Act.
[00:05:43] Bret Keisling: With that, we'll wrap up today's episode of the Mini-cast. I hope you'll join us on Tuesday for the second part of my full conversation with Jack Moriarty, you can find Episodes 251 and 252, along with all of the episodes in our archives, at www.EsOpPodcast.com.
[00:06:02] Thank you so much for listening. This is Bret Keisling. Be well.
[00:06:08] Bitsy McCann: We'd love to hear from you. You can find us on Facebook at EO Podcast Network and on Twitter @EsOpPodcast. This podcast has been produced by Bret Keisling for the EO Podcast Network, original music composed by Max Keisling, branding and marketing by BitsyPlus Design, and I'm Bitsy McCann.
Standard Disclaimer: The views expressed herein are my own and don't represent those of my own firms or the organizations to which I belong. Nothing in the podcast should be construed as guidance or advice of any kind in any field and the fact that I mentioned an organizational website or an advocate or a company on a podcast does not reflect an endorsement, but if you've heard your name or your group's name mentioned on this podcast, I'd love to have you come on and talk about it yourself.
A note on the transcript: This transcript was produced by Descript, an automated transcription service. While it has been reviewed by The EsOp Podcast, we cannot guarantee the accuracy of the transcription. Please refer to the original audio when citing sources.